Have you heard of the FIRE movement? It stands for financial independence, retire early. And people who’ve joined have retired in their 50s, 40s, and even earlier to travel for leisure and pursue passion projects.
With the FIRE outlook in mind, you’ll get to decide when, how, and for whom you work, if you even want to work at all. It’s ironic that planning for early retirement requires a lot of work, but it pays off in the end, making it worthwhile. Here are a handful of key strategies that can make early retirement an attainable reality rather than a pipe dream.
Make some adjustments to your current budget
Reduce your budget as soon as possible. Consider whether you can live on half of your income, and place the rest of your earnings in a savings account. Pay off your debt, and look at your expenses to see which ones you can get rid of entirely. Make time for a part-time gig or a freelance side job. Instead of spending the money you earn, put all of the money you earn in a retirement fund or other savings account.
Calculate your annual retirement spending
Create a retirement spending estimate. Look at your current monthly spending and think about how it may change. What can cause it to go up or down? How can you add to your savings or eliminate certain expenses altogether? Add up your final monthly expense estimates, and multiply that number by 12. That’s your magic number — your annual retirement needs. Now increase it by 10% to 20% to give yourself wiggle room.
Pay special attention to health care. If leaving your job early means letting go of your policy, you have some options when it comes to replacing it. If you’re married and your partner still has a job, join his or her plan.
Think about purchasing private insurance. You can also look for a plan through the Affordable Care Act marketplace. Since the loss of existing coverage counts as a qualifying life event, this means you are likely eligible to enroll in an insurance plan even if the annual open enrollment period has already ended. You can also search for a part-time job that offers health insurance. Consider looking into industry associations that offer group coverage as well.
COBRA is a costly way of continuing your workplace policy for up to 18 months by covering all of the premiums yourself. While this is an option for you, we recommend that you view this as a last resort.
Minimize taxes
There are many tax-advantaged retirement accounts, such as 401(k)s and IRAs, each of which has its own rules regarding when to take qualified distributions. In most cases, the age requirement is 59.5 years old, so taking money out of your retirement account prior to this age can result in higher taxes and penalties.
However, Roth IRAs are an exception. They allow you to distribute your contributions, though not your earnings, at any time. You’ll also have the option to enact a series of substantially equal periodic distributions, which the IRS permits, provided you follow a specific protocol. Work with a financial professional to develop a strategy to do so.
Take a close look at your money
Estimate your total savings and consider these two calculations:
The Rule of 25: It is advisable to save 25 times the amount of money you anticipate spending in your first year of retirement before you actually retire. If you expect to spend $35,000 in your first year of retirement, then it is wise to save $875,000 before you retire. While this is a lot of money to save, knowing about the Rule of 25 years in advance can help you prioritize saving money over time. The 4% Rule: This rule suggests that you should withdraw only 4% of your savings within the first year of your retirement. It’s a great way to ensure that you don’t overspend early on and spend your savings too quickly. As you approach your planned retirement date, shift your savings and put your money toward liquid assets. This way, you can prevent having to sell your investments at a loss. When your money grows for you, your odds of returning to work later on in life are greatly reduced.
If you want to live your life on your own terms and provide yourself with not only the freedom but also the security of retiring early, then planning ahead is key. Before you can plan for your future, you will need to identify what gives life meaning for you and establish a purpose for yourself.
That way, your early retirement will add value to your life instead of being a stressful, work-free time. For more insight into how you can retire early, reach out to financial professionals and advisers who can help you get to where you want to be.
You are heir to a house — hurray! But wait! There’s a mortgage on the property. What are your options? You have three options in this situation, two of which are relatively simple: You can sell it to pay off the mortgage and keep the rest of the money as your inheritance or you can keep it and pay off the mortgage with a lump-sum payment.
The third option is more complex, although not nearly as complex as financing a home on your own. You can take over the loan and become responsible for the mortgage payments. You do not have to go through an application process to do this. As an heir, you can be named the borrower without having to go through the normal loan approval process, which would require you to get your own financing.
Many wills contain standard language requiring all debts to be paid at death. This does not normally include any mortgage held by the decedent, but the provisions can be complex and there may be exceptions. Work with qualified professionals to make sure the law applies in your situation.
Another common situation is inheriting a house with a reverse mortgage. You’ll need to pay off the reverse mortgage if you want to keep the property, although the heirs often just sell the property to pay off the reverse mortgage and keep what’s left over.
What’s right for you?
To be sure that you’re making the right decisions, start by figuring out both the home’s value and the outstanding mortgage. If you inherited the home along with other heirs, all the homeowners should get together to discuss options. Would everyone be happy keeping the home as a rental or vacation property? Or do one or more heirs want to get the equity out of it without spending funds on the mortgage?
What if the mortgage is more than you can afford? You can consider the possibility of refinancing at a lower rate and longer term if your credit and financial situation allows you to do so. After all, you may also have a mortgage on your primary residence.
There are other expenses you’ll need to take into account to make sure keeping the house is financially feasible:
Any renovations that might be necessary.
Yard upkeep.
Roof and exterior maintenance.
Replacing or repairing appliances and other systems in the house.
Property taxes.
Heating and air conditioning.
Insurance.
On the other hand, there may be assets that go with the house, such as jewelry, art and furniture, that no one wants and that can be turned into cash to help pay off the mortgage. Once you’ve taken a full accounting of the finances, you’ll be in a better position to make a decision.
It is irresponsible enough that absent-minded parents occasionally manage to leave their children behind when they leave the park or get off the bus. Even so, it seems far more incomprehensible that parents could possibly forget to include one or more of their kids when they are in the process of drafting their wills and allocating their estates.
However, believe it or not, this happens often. Conscientious parents might draft their wills after the birth of a child or when the rest of their family is still relatively young.
But sometimes, another child will be born later on, and the parents will simply forget to update their wills after the fact. While it is not always a fatal omission or an intentional act, there are unlucky consequences that can arise as a result.
That said, many states will consider the child who was born later to be a beneficiary. This is because states will often revert to relevant intestacy rules, which are the default guidelines that govern situations where parents die without a will in the first place.
So, the courts have ways by which they can rectify an inadvertent omission or a clerical mistake. This should remedy the problem unless the wills left behind by parents have specifically excluded the omitted child on purpose.
How to leave a token bequest
Disinherited heirs may initially be shocked to find out that their parents left them either a very small amount of money or even nothing at all. Children may regard a situation such as this to be insulting, leading them to question the relationship they had with their deceased parent or guardian.
It makes sense to interpret such a situation as adding salt to the wound. Many estate lawyers suggest that testators leave at least a nominal amount of their estate to an heir whom they wish to cut off rather than simply failing to mention them by name.
At a bare minimum, this alternative offers some sort of closure to the child being excluded or omitted. That said, the bequest does not need to be in the form of money.
People often leave sentimental heirlooms with very little financial value as a gesture of affection. If you wish to bequeath your old, cracked teapot instead of allocating any of your money to your child, you could do just that while accomplishing the goal of including everyone in your will.
In all fairness, William Shakespeare left his wife his second-best bed in his will, and while beds were indeed much more valuable 400 years ago than they are today, the point still stands. You may also want to write a memo to yourself and state your decision to only leave a trivial amount to your child.
The document can serve to reinforce that your choice was not impulsive nor was it conceived as a result of external pressure. That said, be careful with your wording.
Try not to attempt to come across as being overly emotional or critical when drafting your justifications. If your will is ever challenged in the future, any circumstances you originally cited might no longer be true.
For example, if you describe your good-for-nothing son and state that he has never done a day of honest work in his life, he might be holding down a well-paid job when it comes time to challenge the contents of your will.
Less is more
While certain people will encourage testators to leave something small for all potential heirs, other experts will discourage people from even offering the tiniest of bequests. Those with this mindset would contend that it is more cost effective to merely acknowledge the relationship and leave it at that.
The real goal is to at least mention the disinherited person in a brief fashion so that you can address their existence while eliminating the possibility of them believing they were accidentally overlooked. Moreover, those who contest wills might latch onto situations, such as a one-dollar bequest, deeming it a cruel provocation that is out of character in regard to the testator.
For instance, the disinherited individual might use the minimal bequest as evidence of mental incapacity on the part of the testator. The less you give the disinherited individuals to work with, the more likely your requests will be upheld.
Another danger of leaving even a single dollar is that any amount of money will automatically make the child a beneficiary. Adding a beneficiary to the list can affect the protracted probate process.
Once you have officially transformed someone into a beneficiary of your estate, the executor will be obliged to distribute accounting documents, pleadings and administrative records to them as they must do for all beneficiaries. This costs money, and even the most mundane administrative tasks can take away from the estate’s assets while also delaying probate resolutions.
If you ultimately decide against a bequest, you can achieve similar results with the help of straightforward language. Your attorney can draft words to the effect that after thoughtful and careful consideration, you have decided not to include Junior.
There are a number of ways to phrase your intentions or state your preferences. For instance, you could include a clause such as “I am intentionally disinheriting Junior as well as Junior’s descendants for reasons I deem to be sufficient.”
It is always recommended you consult with a lawyer as you work to prepare your will. Seeking expert advice is imperative, especially if you are contemplating the idea of making a token bequest.
A premium tax credit is designed to lower the total cost of health insurance plans that are already relatively expensive in the United States. You can either apply the premium tax credit on a monthly basis to your insurance bill or choose to receive your premium tax credit in the form of a refund that is put toward your federal income taxes.
The premium tax credit is only an option if you purchased an insurance plan directly from a state or federal health insurance marketplace. Furthermore, eligibility for the tax credit is typically determined when you initially apply for your health insurance plan either through a state or federal health insurance marketplace.
The credit, which was originally implemented under the Affordable Care Act, exists for the sake of assisting eligible families and individuals with low or average incomes that find it difficult to afford health insurance on their own. Additionally, the amount of health insurance tax credits that are made available is dependent on a decision by the federal government.
This means the dollar value of the tax credits will be the same amount nationwide, no matter which state you call home. If you are interested in receiving this premium tax credit, you will need to meet certain requirements related to your income level and the number of people in your family and file a tax return alongside Form 8962: Premium Tax Credit.
If you decide to itemize your deductions in the Schedule A section of Form 1040, then you might be able to deduct any and all money that you put toward medical and dental care for yourself, your spouse and your dependents over the course of that taxable year.
That said, of your total medical expenses, you will only be able to deduct the amount that surpasses 7.5% of your total adjusted gross income. Additionally, another key detail to keep in mind is that people who sign up for catastrophic coverage automatically do not qualify for tax credits related to health insurance.
What is covered?
“Medical expenses” is a very broad term, but typically, these expenses will include any type of payment that has been put toward curing, diagnosing, mitigating, preventing or treating health-related concerns, ailments or diseases. Essentially, payments pertaining to any type of treatment that aims to heal, improve or care for the body are considered medical expenses in most cases.
In that line of thinking, medical expenses that can be deducted often include the following, though this list is not all inclusive:
Acupuncture.
Admission to receive medical care.
Chiropractors.
Contact lenses.
Crutches.
Dentists.
Doctors.
False teeth.
Glasses, both for reading and prescription-based lenses.
Hearing aids.
Inpatient care.
Insulin assistance.
Medical conferences.
Practitioners.
Prescriptions.
Psychiatrists.
Psychologists.
Rehabilitation centers.
Residential nursing homes.
Service animals.
Smoking cessation programs.
Surgeons.
Transportation related to medical care.
Weight loss programs.
Wheelchairs.
When considering which medical expenses can be deducted for the taxable year, you are only permitted to include medical expenses that you paid for during said taxable year. You are also required to reduce the total amount of deductible medical expenses for said taxable year by applying reimbursements that you received.
This is relevant whether you directly received the reimbursement yourself or the reimbursement was applied on your behalf to the total amount of medical expenses that you owe. If you are trying to figure out whether a specific expense of yours is deductible, refer to the official IRS website and contact a professional who has experience deducting medical expenses.
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