How to Retire Debt-Free

Dept is a problem that has reached epidemic proportions in the US.  A 2009 study conducted by the public policy research group Demos, showed that the average American aged 65 or older carries a credit card balance of $10,235, this is up by 26% compared to four year ago.  If you are pushing retirement but you have a lot of debts to settle, here are some strategies you should be adopting:

Don’t spend above you means -  We all want to retire in that beautiful beach house or that rustic log cabin by the lake, with enough tucked away to keep us comfortable.  The reality is most of us just can’t afford it, and if you can’t afford it, you shouldn’t buy it, no matter what the credit card companies tell you.

Throw away your credit cards – The numbers don’t lie; the surest road to retirement debt is maxed-out, high interest credit cards.  By spending only cash, it is much easier to keep your spending within sane limits.

Make some extra money – If you can handle it, take on an extra job, or work extra hours at your existing job.  A part time job, an online job, or even a side business can be great for earning some extra cash.  It may seem difficult now, but you will need the additional cushion in the future.

Sell what you can – Websites like Craigslist and eBay now make it much easier to sell stuff that would not have been possible to move 10 – 15 years ago.  An old car or two, even ones that don’t run, a boat you never use anymore, antique furniture, toys, anything of value that you don’t really need.  If you are intimidated by computers, you can have a relative help you out, or you can even have an old fashioned garage sale.

Start saving up – Most people simply prefer to spend money recklessly on things they want now rather than plan for the future.  This mentality is probably the single biggest cause or retirement debt.  Start saving a portion of your income, and invest it wisely.  Bankrate.com has a savings calculator to help you figure out how best to budget your money to prevent retirement debt.  You’ll find that if managed correctly, you will probably be pleasantly surprised at just how much you have saved when you do retire, and how much your investments have earned for you.

When can I take money out of my 401(k)?

A 401k is a tax deferred retirement savings account which allows an individual to save for retirement on a pre-tax basis.  Not only are the contributions tax free, but as the account balance grows, the interest income is also tax free.  The 401k balance is not taxed until the owner of the account begins to withdraw funds, which in theory will be in retirement when the owner’s tax level is much less.  Most 401k plans are employer sponsored and to further encourage their employees to save for retirement, many employers offer their employees a 401k match.  This match is normally between 2% and 5% of the employee’s income.

Technically, someone can begin withdrawing from their 401k at any age.  However, since 401k plans come with significant tax benefits and are designed to help save for retirement, early withdrawal, which is any withdrawal prior to being 59 and a half years old, often comes with a severe penalty.

One significant penalty is imposed by the employer who provides the 401k benefit to their employees.  To discourage their employees from withdrawing funds early many employers charge a 10% fee for all premature withdrawals.  However, many employers allow hardship withdrawals that are penalty free.  Examples of hardship withdrawals include death of the employee, excessive medical expenses, or temporary or permanent disability.

While they do not want their employees withdrawing from their 401k, many employers do provide their employees with the option to take out a loan against their 401k without penalty.  The loan can be used for just about anything, but is often capped at a certain dollar amount or 50% of someone’s vested balance.  This loan normally comes with a low interest rate and requires repayment over a few years.  If the loan is not repaid, then the employer will charge the 10% fee.

Another penalty of withdrawing from a 401k prior to turning 59 and a half years old are income taxes.  When someone withdraws funds from their 401k, they will have to pay taxes on the amount they withdraw.  The withdrawal will be taxed at the same levels as someone’s highest marginal tax bracket.  For most people, withdrawing funds earlier than 59 and a half is disadvantageous because their tax bracket is bound to decrease after entering retirement.  In most situations, when a 401k withdrawal takes place, the 401k servicer will hold back a certain portion of the funds which will be paid to the IRS when the account owner files their taxes.

Once a person reaches 59 and a half years of age, they can begin to withdraw from their 401k penalty free.  However, it is highly advised that 401k distributions not be taken until the account owner has stopped working and their tax level decreases.

Once an individual reaches 70 and a half years of age, they are required to start making minimal distributions from their 401k.  The minimum distribution is different for every individual and is based on current life expectancy tables that are held by the IRS.  If the 401k account owner fails to withdraw the required amount, the IRS will charge a very high fee of 50% of the required distribution.  However, the required distribution law does not apply to individuals who are still working.

Six ways to save money as a employee in 2010

Since the beginning of the new year, employee benefits have maintained or increased and should continue to do so as the year rolls out. Taking advantage of these benefits can keep money in your bank and out of the hands of bill collectors.

Perhaps the most notorious benefit of being an employee are premium HMO, POS, PPO plans you have available.

Usually, you’ll get to choose from more than one health plan, or qualify for a particular health plan. Most insurances plans are simply deducted from your paycheck, eliminating you yet another bill to pay every month.

Insurance rates can differ depending on the plan, but usually the more expensive the plan, the lower co-pays, prescriptions, visits to specials you will have.

The second employee benefit is the ability to maintain healthcare spending accounts that are convenient for your spending budget. There are a few types of employee savings account packets. The FSA dependent care plan has a $5,000 annual cap, and the health care FSA plan is a $3,000-$5,000 flexible limit. Both allow employees to save their “pretax dollars” to be used for expenses.

Third, your employer can pay for your health expenses with health reimbursement accounts. These accounts pay for your health problems only while you are employed. They are no longer funded if you are no longer working at the specified business.

Of course, there are always the 401(k) plans open to full time employees. Planning for the future is never too
late or too early. Any percentage of your annual salary that is put into a 401(k) is not taxed. A great way to save now and later.

Another way of saving money on unforeseen medical expenses or medical emergencies are having HSAs or health savings accounts. Any money that accrues from premiums can be used as this “pretax” dollar and put into a health savings account for such expenses.

The last way to save you money as an employee are health incentives. Doing weight-loss programs and fitness
plans can knock down your health insurance costs. Some companies even offer cash bonuses or discounts to employees who participate in health fitness programs.

Age-Weighted Retirement Plan

An age-weighted retirement plan is a relatively new innovation that alters the process of calculating contributions to a retirement plan. The current age of the employee is taken into consideration when calculating his contributions. Financing this plan involves profit sharing among eligible employees, as each involved in this specific program have a say in how it functions. They have discretion in their investments and can allow Social Security integration. These plans essentially reward the older employees for the benefit of their collective expertise and service, as a model allows for more profits to go to their individual plan. A company will factor in the employee’s age, resulting in employees 55 or over receiving retirement plan contributions of 18% of their annual gross salary, whereas a 30 year old making the same annual gross salary would receive contributions of only 1%.

The greatest advantage of age-weighted retirement plans is that they encourage long-time employees to stay at the firm. The company gets to keep the expertise and experience of the employee, which is an important company resource. Companies have recently begun taking advantage of this plan because more and more realize that the skills an older employee brings to a group are a desired commodity. Of course, the employee benefits as well as his salary can increase and thus the percentage going to his retirement plan will increase as well. This is a great incentive for the employee to stay with the group.

Top Hat Plans
Top hat plans are not offered to most of the general employees of a corporation. Instead, only a limited number of individuals within a larger group of employees – for example, key executives – are offered these retirement plans. Top hat plans differ from standard retirement plans. There is no tax-qualified status that other retirement plans possess. Also, being a key executive is not necessarily enough to participate, as there may be other provisions that restrict otherwise qualified applicants.

There are two types of top hat plans. The first, the Non-qualified Deferred Compensation Plan, is a non-qualified retirement plan that allows participants to defer any amount of income annually; however, employers generally do not put in matching contributions. Second, the Supplemental Executive Retirement Plan mandates the employer provide the funding for annual contributions, and there are some limits such as annual salary that determine the exact amount of funding.

Top hat plans, unlike other retirement plans, do not have to comply with the same governmental regulation, which means the interest rate may be higher than with a traditional 401K. There may also not be penalties should the executive leave the company prior to retiring. It is also possible to bundle the actual cost of the plan in with the costs of other retirement plans offered by the company; as such, shareholders may not be able to identify the assets of the top hat plan.

Contributing to your 401(k)

A 401K is a popular savings plan that accumulates money towards retirement. Most consider a 401K to be a straightforward way to save for retirement, and it is ideal for individuals who do not want to make risky investments. These long term plans are generally available only through an employer. The employee must indicate how much money should be taken out of his paycheck; the money then gets invested in funds that accumulate value over time such as index based stock funds, growth funds, and money market funds. Generally, an employee can contribute no more than $16,000 annually to this fund.

401K plans, like any other financial plans, can face risks should they be put into risky investments; additionally, the Pension Benefit Corporation does not protect these funds. However, many choose to utilize the 401K because the employers often agree to match employee contributions. Should an employee contribute 5% of his salary every month to the plan, an employer may do the same, thus doubling the amount. 401K plans are also easy to understand and partake in and a person can choose different investment options, including those that are either safe or risky. Participants may also change both the percentage of their contributing salary but also the investments that the money is allocated.

Employees may also borrow money from their 401K plan. There are no restrictions with this money and these loans will not appear on credit reports; however, the employee may have to pay charges and fees, not to mention his losing the employer matching contributions when paying the loan.

Solo 401K
A Solo 401K is a retirement plan for business owners who are not only the sole owners of business but also do not have any staff presently. Employers who anticipate hiring staff in the future are also not eligible for the Solo 401K Plan. Should he have $100,000 in the plan, he can apply for a $50,000 loan. The employer may also deduct the Solo 401K contributions from his taxes. The tax savings are substantial as the Solo 401K investment will build on a tax-deferrable basis. One can contribute up to $40,000 a year and, beginning at age 50, an employer can also contribute a $2000 catch-up contribution.

This is a relatively new retirement plan and not offered by many financial establishments. Businesses that offer the service have annual maintenance fees and a one-time fee for setting up the account. There will be other charges if the financial business handles the employer’s accounts and bookkeeping as well. Additionally, a trustee is designated to hold the employer’s assets, though with careful planning it is possible for an individual to act as his own trustee. This requires meticulous planning with rules and guidelines clearly explaining how the plan will work.

401K Contribution Limits
401K contribution limits are set by an employer and the government. They determine how much the employee will contribute to his retirement plan. While these limits do not limit how much can be contributed, they limit some of the benefits such as tax deferments and employee contributions.

A Look at Fixed Investments

Fixed investments are an important component of an investor’s portfolio, both while they are building wealth and while they are generating income from their investment portfolio. Some of the primary forms of fixed investments include fixed annuities, individual bonds, bond funds, CDs, and investment certificates and each of them fulfill an important role when developing an investment portfolio.

Fixed Annuities

The two primary forms of fixed annuities that are important to become familiar with are deferred fixed and immediate fixed. A deferred fixed annuity is one in which the investment value contributed into the annuity will grow on a taxed deferred basis over time, upon which a fixed payment stream will be designated at a later date. The withdrawal periods may be designated as 5 years, 10 years or even lifetime. An immediate annuity is a contract in which the investor will contribute an amount, upon which they will gain a fixed payment stream for the designated time frame immediately, unlike the deferred fixed annuity which will begin paying in the future.

Individual Bonds

A bond in its simplest terms is a debt instrument issued to raise capital for a corporation or organization. The bond will have a fixed payment rate, a payment date and a maturity when they are purchased. There are a variety of bond types, including municipal, international, corporate, and mortgage to name a few. Investors often purchase individual bonds as a way to generate current income or to provide stability within their portfolio. CDs are rated by individual agencies based upon their overall risk, making it easier for investors to select the best individual bonds for their investment objectives and risk tolerances.

Bond Funds

Bond funds are professionally managed funds, comprised of individual bond securities. Many investors turn to bond funds for their simplicity and their professional management. Bond funds, similar to individual bonds, can be found in virtually every asset class. This flexibility allows investors to build their ideal portfolio, in alignment with their personal financial goals and objectives.

CDs

A CD is a certificate of deposit, paying a fixed interest rate at its maturity to the owner. CD rates will often vary based upon their length to maturity, their issuers and the current interest rate market. In most cases, the CD rates for longer term CDs will be greater than those of CDs with shorter maturity dates. CDs are most commonly issued by banks and are insured by FDIC.

Investment Certificates of Deposit

In addition to traditional CDs offered by banks, there are also alternative forms of investment certificates offered by investment institutions. These certificates have an annual interest rate tied to things such as the S&P 500 Index, other indexes, or even a conglomeration of CDs that are put into what resembles a mutual fund. Investment certificates are attractive to investors who are interested in a cash investment with liquidity that pays a greater rate of interest or return than a standard CD, checking or savings account.

Creating Income in Retirement

If you are preparing for retirement, one of the largest adjustments that you will face is that your regular paycheck will stop, causing you to rely on other income sources. While you will not being paid from your employer, you will have the opportunity to create your own paycheck from investments. Understanding some of the basic rules and concepts for creating retirement income will make this transition easier.

Understanding Asset Classes

The first thing to grasp a full understanding of for creating retirement income is that of how to allocate your investments by asset class. Asset classes refer to how an investment is classified and how it behaves in relationship to other types of asset classes. Asset class examples are large cap, mid cap, small cap, international, municipal bonds and cash. There are 22 asset classes in total, of which a portion will appear in your portfolio based upon your risk tolerance and investment objectives. Spend time to evaluate your own personal income needs, your risk tolerance and your time frame with a portfolio generator or with a financial professional to develop your own ideal asset class breakdown.

One of the most significant things that you will notice when creating your retirement income portfolio is that your ratio of equity to fixed income investments will shift. Most investors when they are in retirement are more concerned with generating income and preserving capital rather than generating capital returns on an annual basis. You will likely have over 50% of your portfolio in fixed investments such as CDs and bonds. You will be concerned with filling these percentage allocations with the best CD rates and best paying bond rates within each asset allocation category.

Understanding When to Take Withdrawals

Once you have developed the ideal portfolio mix, you will need to determine when and where to take your income withdrawals from. The perfect scenario would be to establish an automatic method where the income or dividends from the different asset classes would be deposited into your cash account. Then, on a quarterly basis, you could withdrawal the cash portion without disrupting the other portions of your portfolio.

Make Portfolio Adjustments

You will need to adjust your portfolio either semi-annually or annually as it changes or as your personal income needs change. For example, some asset classes will outperform others. When this occurs, an asset class will end up at the end of the year having a higher percentage weighting that you desire. You will need to take those earnings and redistribute to the asset classes that did not do as well, causing their weighting to decline. Making these adjustments will help to give you the best possible annual returns possible.

You will also need to made adjustments to your income stream as needed. If your portfolio does not generate the projected return, you may need to adjust your income downwards until the portfolio rebounds. And, if your portfolio is showing a return in excess of your projection, you will be able to take a large income stream for the year than originally projected, giving yourself a raise.