Are You Really Ready to Retire?

So you’re approaching the tail end of your career and hopefully you’ve done your self the favor of investing in a 401k or other type of IRA, perhaps coupled with a portfolio of mutual funds, stocks and other investments, you may even be one of those lucky few who have a pension. I am sure that you may have some very well thought out day dreams about what your retirement will look like, but if you are in a state of debt those ideas are just that; fantasies. Keep in mind that your wealth is determined by the value of your assets minus the cost of your liabilities.

If you are 55 and have elephant debt (debt that is at least more than half of your net income) you are in a world of hurt. Here are the facts about your situation, you are debt heavy and your working years are numbered, now assuming you are not one of those tragic figures who currently finds himself unemployed you have a window of opportunity to salvage your retirement outlook and bring your retirement fantasies closer to fruition. Your first step on your escape from retirement limbo is to zap all unnecessary weigh-downs. Weigh-downs are avoidable expenses that are holding you back from becoming fiscally sound before retirement; cable or satellite bills, phone bills, smart phones, buying bottled water instead of getting a filter for your faucet, taking vacations, buying new cars instead of repairing your current ones, frivolous purchases, etc.

By now you are thinking that I’m telling you that you that you have to downgrade your lifestyle; the truth is that I am only telling you to take into account the many leaks that are in your financial boat and attempt to plug them up.

Instead of paying $30-$200 a month for cable or satellite get Netflix or Hulu for less than $10 a month do this and you save yourself $180-$2,280 a year. Instead of buying cases of bottled water for $4-$6 a case buy a faucet filter and save dramatically each year. Instead of paying for a redundant land line consolidate your phone service to just your cell phone, secondly unless you truly need a Smartphone for your work than just get a normal cell phone that does what it is supposed to do; make and receive phone calls, do these two steps and save your self at least $1,000 a year, if not far more. Hold off on taking a vacation for the time being and instead put the money towards saving you financial future, this will save you at least $1,200-$5,000 a year.

Assuming that your elephant debt was not caused by buying a luxury car, you have a yet another way to pay off your elephant debt; don’t buy a new car! Instead of buying a new car drive the one you have and keep up with regular maintenance, literally drive it till it dies and you will instantly generate a net savings for your self of at least $5,000 a year. Do all of these things and you will have at least $6,588 on the low end and up to $12,592 at the high-end.

Keep in mind that you probably have other weigh-down expenses that only you could know about and so I leave it to your judgment what your course of action should be regarding them. For some people cutting off weigh-down expenses alone will put them on the right track towards being financially solvent by the time they retire, the rest of us probably face dramatic changes to our operating procedure. If you own a boat or even a plane it may be the time to liquidate those assets in order to free up cash flow towards paying off debt. Now chances are that your kids have moved out and you no longer need as big of home as you have, you could capitalize on this situation and either rent out rooms or down size to a smaller home. Keep in mind that I only recommend down sizing in extreme cases when no other alternative is readily available. Remember your goal is to be in a position to actually achieve your dreams when you retire, you can’t hope to do that if you are weighed down by debt.


Why You Shouldn’t Tap Into Retirement Accounts

Individuals must learn how to manage their finances in a way that takes into consideration short, mid and long term goals.  A short term goal might include building an emergency fund in a savings account to which you have instant access.  Mid term goals might include saving for a car or down payment for a house.  Long terms goals of course involve saving money for your retirement years.

As you might guess with each goal, different savings strategies must be considered.  If you fail to use the right strategy you may end up losing a significant portion of your savings.  This is the case when you invest money in your future via a retirement plan and then tap into those resources for financial needs that arise before you retire.  Since most retirement plans are by design intended for long term investments, the penalties and consequences of taking your money early can be significant.  Here we look at a few of the negative consequences that go hand-in-hand with early distribution of retirement funds.

Why You Should Leave Your Money in Retirement Accounts

  • Early withdrawal penalties.  With any retirement savings plan that limits withdrawals to those who have reached age 59 1/2, it is important to avoid taking money before that age.  If you do, you will be slapped with an early withdrawal penalty of 10%.  If this was the only penalty, one might be willing to take the hit to their finances in order to access their cash early, however it is only the beginning of possible penalties.
  • Pay attention to loan provisions. You might be tempted to access the money in your account due to the ease at which you can do so.  As a general rule, companies do not set restrictions to how you can use your own retirement money as long as you are willing to repay the money as set forth by the plan.  In most cases you can borrow up to half of your contributions (not to exceed $50,000) with five years to repay the money. Since you are basically paying yourself back, this might seem like an viable alternative to a traditional loan, especially considering the attractive interest rates.  The downside of this option is the fact that should you lose your job your loan must be paid back in full immediately.  In this struggling economy where no job is safe, this is a risk best avoided whenever possible. See these articles for more information about 401k loans and TSP loans.
  • Loss of growth opportunity. Regardless of how or why you might tap into your retirement account, one of the biggest negatives is the loss of growth opportunity.  What many people do not think about when borrowing from their 401k is how much that money could be working for them if left alone in the account.  For this reason you should really consider the bigger picture before taking money from your retirement account that could be of better use right where it is.

Most people will agree that while accessing money in a retirement account could certainly help improve their personal finances in the short term, in almost all situations it is better to leave that money in the account and look for alternatives to borrowing from your retirement.  What seems like a great idea today might not be such a good idea in the long run.