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5 Strategies To Make the Dream of Early Retirement A Reality

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Many Americans dream of retiring early. Who wouldn’t want to leave work when they still have the time and energy to truly enjoy the rest of their life?

Unfortunately, for most, this remains just a dream – many Americans struggle to even retire by standard retirement age, which ranges from 59 ½ to 67. But early retirement is possible with some hard work and the help of the right financial strategies.

5 strategies for early retirement

Make your retirement dreams a reality using the following time-tested tactics:

Save, and then save some more

To have any chance of retiring early, you need to save more aggressively than you would otherwise. An early exit from the workforce means you have less time to build your retirement nest egg, and you’ll need that money to last longer than the average retiree. This means you need to set aggressive monthly savings targets, higher than you’d set if you were planning a more traditional timeline.

Here’s an example: If a 30-year old needs to save $1,000 a month to reach their retirement savings goal at 65, they would need to save $2,000 a month to reach that same goal at 55, assuming a 7% return on their investments.

To get an idea of exactly how much you need to save, you should contact your financial advisor so they can build you an estimate based on your age, retirement target, and current salary.

Find other sources of income

Making the transition to zero income is a tough adjustment. Building up extra sources of new income will help reduce the pressure on your investments after you retire. Some people start an online business or freelance part-time. While your new venture may not always add up to a lot of money, it still supplements your retirement savings and can also keep you from getting bored – a common problem of early retirees.

Real estate is another great way to build a new income stream. Investment properties generate regular rent checks and, once your portfolio is large enough, you may be even to live entirely off your rental income. Self-directed IRAs use the tax benefits of an IRA to allow you to grow your estate portfolio more effectively, even before you retire.

Invest outside of retirement plans

IRAs charge a 10% early withdrawal penalty if you take money out before the age of 59 ½ (regardless of whether you are still working or not), while 401k accounts do not allow penalty-free retirement withdrawals until you are at least 55. If you want to retire early, you should think about investing some of your money outside retirement plans in a taxable investment account. Depending on your needs, you may be able to live off that money until you are old enough to start making penalty-free withdrawals from your retirement plans.

Pay off all your debt

Debt is a huge drain on your income. Between mortgage payments, car loan payments, credit cards, and student loans, it is not uncommon for 50% or more of your monthly income to go towards debt. If you take these payments out of the equation, you will be able to meet your needs on a much smaller monthly income. Set a goal to pay off all your existing debts before you retire and commit to staying debt-free from that point on.

Keep your work options open

While early retirement is a decision you should consider very carefully, it helps to think about a safety net, should you need to go back to work. Talk to your employer about the prospect of returning in a few years and make sure to never burn any bridges with your former employers (this is sound advice in any context).

Some early retirees also discover that they are not well-suited for the retirement lifestyle. All that spare time can leave you feeling bored. Perhaps what you actually needed was just a temporary break to travel and recharge. You may find yourself eager to get back to work, so make sure that remains an option.

Retiring early may seem like an impossible fantasy, but the right mindset and financial plan can get you there.

Four Common Retirement Fears – And How Self-Directed IRAs Can Help

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Four Common Retirement Fears – And How Self-Directed IRAs Can HelpRetirement is no longer as easy as it once was, and there is no shortage of reasons to be worried about your retirement. Most people do not have pension plans and it’s hard to know what while the government programs like Social Security will look like 10 years from now. At the same time, previously trusted assets like the stock market seem riskier and more volatile.

Smart investors are looking at how they can protect their future plans today. Self-directed IRAs are one strategy gaining popularity – and for good reason. This type of retirement account allows you to invest in a much broader range of assets – like real estate, precious metals, and business partnerships – which can restore peace of mind about your retirement.

Read on to discover how self-directed IRAs can address some of the most common retirement fears:

“I’m going to lose everything in a stock market collapse.”

The stock market collapse of 2008 was one of the worst in history, with the market losing about 50% of its total value in just one year. For many Americans, that meant losing a huge chunk of your life savings as well.

It’s no surprise then, that investors today are still worrying about the next big downturn. But it is important to remember that while 2008 was an extreme case, downturns are a regular occurrence, happening about every ten years. How much will you be impacted by these downturns? That depends on the state of the markets when you retire, and it’s impossible to know exactly when these downturns occur. Unfortunately, in many traditional retirement plans, market-based assets are the only investment option.

Self-directed IRAs allow you more investment options so that you can expand your portfolio to different asset groups. A diversified investment approach protects your savings by thereby reducing risk—some assets will probably decline in value at some point, but it’s unlikely that every investment will lose money at the same time. Thus, losses from an inevitable market downturn are less likely to impact your overall savings as much as they would if they were all in one place. For example, investing in precious metals such as gold can be viewed as complementary to stock market assets – since data from the past 10 years shows “little to no” correlation between the two.

“Inflation will wipe out my savings.”

Inflation occurs when the purchasing power of your money decreases – in other words, each dollar become less valuable and can buy less. Historical data demonstrates that some amount of inflation should be expected and factored into your retirement plan. However, it is harder to anticipate, and therefore harder to compensate for, sudden and dramatic spikes in inflation, without anticipating this possibility ahead of time.

Traditional IRA investments like stocks, bonds, and money market accounts typically lose money when inflation is high. On the other hand, physical assets like precious metals and real estate tend keep their value when inflation is high. By diversifying to physical asset investments through a self-directed IRA, you can help protect your savings against inflation.

“I will not have enough income during retirement.”

Protect your savings with a Self-Directed IRA Once you retire, your savings need to generate enough income to meet your needs for the rest of your life. Traditional investments, like bonds and CDs, may have the advantage of carrying low risk, but they produce very little income. Stocks are more volatile, so you could see some windfalls, but you are also subject to a downturn that could wipe out your source of future income.

But there are alternatives under a self-directed IRA. Real estate can be one good option for post-retirement income streams. Investment properties generate steady, reliable rental income that is often higher than what you would earn from “safer” choices like bonds/CDs. Plus, you don’t have to worry about stock market volatility.

Of course, the real estate market is also subject to its own downturns, so remember that creating multiple sources of income is your safest bet. While one income source might run into problems, it’s very unlikely that they would all stop producing revenue at the same time.

“I don’t fully understand my investment plan.”

Plan for retirement with a Self-Directed IRAStocks and bonds are not the most intuitive topics. It can take years to truly understand how markets work, what you’re actually buying, and what red flags to look out for. Indeed, even among financial experts there’s disagreement on what is good or bad for the market. When it comes to most types of investment, it’s very easy to make costly mistakes, or end up paying hidden, unnecessary fees (and it’s always good to do your research!).

Real estate investments, on the other hand, are much easier to understand. Everyone has dealt with real estate issues – whether renting or buying – at some point in their life. With a self-directed IRA, you can move your money out of complicated financial assets into something that you understand, providing greater confidence in, and more control over, your investments – and your retirement.

Retirement should be something you look forward to, not fear. To learn more about self-directed IRA investment opportunities, click here and here.

So Your Employer Stopped Matching Your 401(k)- Should You Keep Contributing?

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In today’s tough economy, many employers have had to cut back on worker benefits. Some companies have started to reduce the amount they match on 401(k) accounts, while others have stopped matching contributions altogether. Once your employer stops matching, your 401(k) plan becomes significantly less useful as a retirement tool. If you find yourself in this situation, you have a few options to consider.

1. Switch to a Traditional IRA

A Traditional IRA is set up just like an unmatched 401(k), but it may give you access to a wider range of investments or a lower annual fee than your existing work plan. With a Traditional IRA, you receive a tax deduction for your contributions and taxation on your investment gains is delayed until you make a withdrawal. Switching to this type of plan may be a good option for you if your current plan does not meet all your investment needs or charges high fees.

2. Switch to a Roth IRA

Another good alternative is a Roth IRA, which allows tax-free investment gains as long as you do not make a withdrawal before retirement at the age of 59 ½. Often investors do not have enough money to contribute to both a 401(k) and a Roth IRA, so they stick to their company plan to get the match. Once the match goes away, a Roth IRA can be a much better choice to reduce your future tax bill. The downside of a Roth IRA is that the benefits are delayed until after retirement – you do not receive a tax deduction for contributions.

3. Consider a self-directed IRA

The self-directed IRA is an often underused investment tool that allows you to expand your portfolio beyond stocks and bonds. This account allows you to invest in real estate, personal loans, business partnerships and other so-called alternative investments, which are not available under company 401(k) plans. There is both a Traditional and Roth version of the self-directed IRA so you can pick the tax arrangement that best suits your investment goals.

4. Keep using the old 401(k)

Depending on your personal goals and circumstances, keeping your company 401(k) might be your best bet, even without the match. If you stick with the plan, you would continue to receive the tax deduction for your contributions and taxes on your investment gains would be delayed until retirement. In addition, you are able to invest more per year through a 401(k) than through an IRA, which leads to a larger tax deduction. If the fees on your 401(k) are reasonable and you are happy with your employers investment selection then there is nothing wrong with continuing to use the unmatched plan. Just make sure that you fully consider other options to be sure this is the best way forward.

How to transfer money to your new plan

If you decide to open a new retirement plan, you should stop contributing to your unmatched 401(k) plan and put that money towards the new plan.
But keep in mind that it will not be easy to transfer your old 401(k) savings to the new plan as long as you are an employee for the company that set up the original plan.

Companies often restrict 401(k) withdrawals while you are still an employee and, even if you are able to make a withdrawal, it’s usually not a good decision. You would owe income tax on any money you take out, as well as a 10% penalty if you are younger than 59 ½. The taxes and penalties would likely cancel out any financial benefit you would get from the new retirement plan.

The best time to transfer your money is when you either leave the job or your employer terminates the 401(k) plan. In this case, you can roll over your 401(k) balance to another retirement plan without paying the 10% penalty. If you roll over to a Traditional IRA, you won’t owe any taxes on that amount. However, if you roll over to a Roth IRA, you will need to pay income tax on the money transferred. Either approach would get your savings out of your 401(k) into another, more effective retirement plan.

The match benefits of an employer 401(k) are often the most rewarding part of the plan. Once that benefit disappears, you would be wise to consider other options to get you on the path to your retirement goals.

Starting A Business? Your Retirement Plan Can Help

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Raising enough money to start a new business is always a difficult feat, especially as banks continue to tighten lending standards. You might need to get creative when looking for funding sources. Enter, your retirement plan.

There are a few different ways you can use your retirement fund to finance your new company, and each one comes with its own pros and cons. Read on to find out if these approaches might work for you and your entrepreneurial pursuits.

401(k) loan

Using a work-sponsored retirement plan, like a 401(k) or 403b, for a loan is an approach that might work for you if you plan to run a business part-time, while keeping your current job. Note that not all work-sponsored plans allow loans – it depends on how your employer set up the plan.

If your plan does allow loans, you are usually able to borrow up to 50% of your account balance, up to a maximum of $50,000. The IRS does not charge taxes (or the 10% early withdrawal penalty) on money taken out for a loan, even if you are younger than 59 ½. There are also no spending restrictions, so you can have full discretion on how to use the money to fund your business.

But there is a downside. You are required to repay the entire loan within 5 years, with interest. In addition, if you leave your job before the five-year mark – say, to run your business full-time – your employer may ask that you repay the entire loan at that time. If you fail to repay the loan, the money will count as a withdrawal, meaning you will owe income tax on the full loan amount, plus a 10% early withdrawal penalty.

Self-directed IRA

Another way to fund your business is through a self-directed IRA. This type of account allows you to invest in “closely-held” businesses, including ones you own.

In order to use this approach, you must first set up your new business so that investors are able buy shares. A C-Corp or LLC structure will work for this. You can then roll over your old IRA or 401(k) balance into the self-directed IRA (if you don’t already have one), and use that money to buy shares of your new business. The business entity will receive the cash to fund operations, while your shares of the business will be held in the self-directed IRA. You will not owe any taxes on the transfer of funds. When the business starts distributing profits to shareholders, your share of the profits will go directly into your self-directed IRA.

The downside of this approach is that there will be restrictions on how you can run the business. For example, you cannot own more than 50% of the business yourself and you cannot personally guarantee any loans for the business. To avoid prohibited transactions, the self-directed IRA approach is best for situations in which you are not taking an active role in running the business, for example, when investing in your friend’s company, or a company run by a hired managed.

Early withdrawal

Another option for new business financing is the early withdrawal. This is a costly approach – especially if you are younger than 59 ½, and thus subject to the early withdrawal penalty – but can still work for some. (While there are some situations that allow you to avoid the early withdrawal penalty, starting a new business is not one of them).

If you just need a small amount of money and do not want to go through the trouble of the other funding methods listed above, then an early withdrawal might work for you. Also, note that withdrawals from a Roth IRA are less problematic than other accounts because you will not have to pay taxes or a penalty. But keep in mind that your investment earnings in the Roth IRA will still get hit by a tax and penalty.

Is My Retirement Plan Safe From Lawsuits?

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The temptation of moneyFinancial lawsuits can be a nightmare in more ways than one. One potential result with long-term consequences is a full or partial seizure of your retirement plan. If you end up losing a lawsuit, the creditor may be able to go after most of your assets for payment, including certain retirement plans.

While some plans are fully shielded from lawsuits under federal law, others are not. Depending on your plan and your state of residence, the assets in your retirement plan will have varying levels of protection. Of course, most people never intend to be involved in a lawsuit, but it is always better to be safe than sorry. Here is a quick explainer on retirement plan asset protection, and how you can keep your money as secure as possible.

ERISA work retirement plans

Large employer-sponsored retirement plans like 401k’s, profit sharing plans, and pensions offer the best protection against lawsuits. These plans fall under a federal law known as the Employee Retirement Income Security Act, or ERISA, which stakes out important protections and standards around retirement plans. As part of the law, your benefits under an ERISA-eligible retirement plan can never be taken away by another party, meaning it is safe from collections stemming from most lawsuits. In addition, since it is a federal law, ERISA protections apply no matter where you live in the United States.

However, there are a few special types of lawsuits in which the creditor could still take some of your retirement savings. For example, if you get divorced, your ex-spouse could receive some of your retirement plan value as part of the divorce settlement. Or, if you do not pay the taxes you owe to the IRS, the agency could force payment through your retirement plan. if you are facing a fine from a federal criminal judgment. In this example, the government may be able to seize funds from your retirement plan.

Non-ERISA retirement plans

Not all retirement plans fall under federal ERISA standards. IRAs and small business employer plans like SEPs and Simple IRAs are excluded from ERISA protection, so each state sets its own rules and the level of protection for these plans varies across the country.

Some states, like Ohio, offer very strong protections that could potentially shield your entire account from lawsuits. Others, like Nevada, set a protection cap, so that a maximum of $500,000 of your balance is safe from seizures, leaving anything above that threshold potentially open to creditor seizures.

Still other states, like California, do not offer pre-set limits. Instead, the court reviews your personal financial situation on a case-by-case basis to decide whether you can afford to lose the IRA money. If you have a large amount in your IRA and are relatively young (and thus able to replace any lost funds), you are more likely to have your IRA savings taken through a court decision. You should review the creditor protection laws in your state to better understand your exposure to potential lawsuits.

Even if your plan is protected against normal creditors under state law, there are still situations in which you could be forced to make a withdrawal- for example to settle a divorce or pay back taxes to the IRS.

Strategies to protect your IRA

If you want to invest through an IRA plan without ERISA protection, but are worried increased exposure to lawsuits, a rollover could be a good option. If you transfer money from an ERISA-covered plan to an IRA, those transferred funds retain the same ERISA protection against lawsuits. This could be a useful move if you want to take advantage of the expanded investment options in a self-directed IRA, without sacrificing legal protection.

If you are currently facing a lawsuit and already have money in a Traditional IRA, you could make a Roth IRA conversion in an attempt to protect more of your savings. Because many states set a minimum balance as a threshold to decide whether the creditor will receive any of those funds, it is in your interest to minimize the funds in that account. Lowering your IRA balance through a conversion could push you below that threshold, thus leaving your assets whole.

Note that when you make a Roth IRA conversion, you first need to pay income tax on the money in your Traditional IRA, but your investment earnings are income-tax free from that point forward. Generally speaking, it is better to pay the taxes on a Roth conversion rather than losing that money to the creditor.

If you ultimately lose your lawsuit and your financial position is irreparably harmed, you could consider declaring bankruptcy in order to protect your IRA. You are able to exempt up to $1 million in an IRA from creditors during bankruptcy, which would be useful if you live in a state that offers minimal IRA protection.

Before taking any action, you should always first consult with a legal expert who understands the creditor protection rules and your particular situation.

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