Penalty Free Money to Diversify Your LifeFebruary 5, 2019 3:54 pm
Retire Smarter | Penalty Free Money
To paraphrase Ed Rooney, the principal in Ferris Bueller’s Day Off, “We give good kids, bad ideas.” We tell them to go to school, study hard, and get good grades. And if you do, you will get out into the workforce and get a good, secure job. Then, after about 40 or 50 years you’ll have enough savings and benefits to retire and live out the golden years of your life with your penalty free money.
It’s a quaint idea really, given that a staggering 50% of the people in this country have zero savings. The majority of Americans have no pension coverage from their employers, and recently the Social Security Administration said that the average monthly benefit check was going to be just a little more than $1,300 per month. Not much comfort if you plan to live in a city like Chicago.
On top of that, we're living longer. Much longer.
A couple of years ago, a major life insurance company unveiled a billboard that said the first person had been born who would, by all statistical accounts, live to be 150 years old.
Under that scenario, within the workforce, you could be an intern at age 50, and at 70 years of age learn you’re only halfway to retirement. Unfortunately if savings and investing trends continue for most as they have, a trip to the financial planner at that time will be met with a good news-bad news scenario. “The bad news is you don’t have enough to retire on. The good news is, you still have thirty more years to get there.”
In all seriousness, all of us anticipate retiring one day. We dream about the things we will do; travel, spend more time with our children and grandchildren, enjoy our hobbies – fishing, hunting, gardening, and many more activities we did not have enough time for when we were part of the workforce. But are we really financially prepared to live the remainder of our lives in comfort and without worry? Do we have enough penalty free money to enjoy?
The reality is, we are entering into an era where most people in this country will no longer be able to retire by choice, but instead will be required by necessity to work well into their 70’s, 80’s and possibly beyond.
It’s happening right now. A rapidly growing segment of our aging workforce are delaying their retirement, not because they want to continue working, but because they can’t afford not to. They’re beginning to reinvent themselves in their 60’s, just to have a shot at their golden years.
At the same time, there is a rapidly growing trend in this country of individuals who are finding new answers and alternatives to traditional employment and retirement, so much so, that there has been an explosion of people escaping the nine-to-five.
Today’s millennials are utilizing technology and connectivity among people to have a better shot at the economics they need and the flexibility of schedule they want.
If this is the new reality we live in, how can you ensure that you will be able to live out the golden years of your life, rather than dedicating the entirety of your life to your work?
One possible answer is to reinvent and redefine what retirement means as well as the path to get there.
Instead of waiting until the final chapter of your life to retire, imagine if you could take one or two smaller interim retirements during your life, giving yourself the opportunity to refresh, re-energize, and reinvent yourself.
This is not a suggestion that you should stop saving for your ultimate retirement. Don’t do that. And this is not to suggest that you should quit your job and hop on a plane to Tahiti. (Although that does sound like a pretty great idea). What this is suggesting, is that there is value in starting to think about your life story and looking at your work and your life a bit differently, and not as a guarantee.
To do so however while remaining financially focused, does require a solid understanding of all your options, as well as the risks and penalties to be avoided. That is where a professional financial advisor comes in. And who better to assist you on your road to retirement than Tranel Financial who can guide you in the right direction.
We Can Get You There…Sooner Than You Think.
There are two milestones you will hit on your journey to retirement. The first one is age 50 where you will become eligible for the catch-up provision for retirement contributions. The second is age 59.5. This is the big one. It will allow you to access retirement funds without penalty - penalty free money.
Are you aware that there are penalties on your 401(k) money if you withdraw early, prior to the age of 59.5?– you could be penalized up to 10%. In addition, traditional IRAs and 401(k)s are pre-tax accounts and they would always carry a federal taxation. You can take a loan of up to $50,000 without penalty before retirement, but if you lose your job, become unable to work, or leave your job for another one, your employer may want it totally repaid all at once which could be a hardship. It is recorded that in 2010 (only a little over 8 years ago) Americans paid an estimated total of 5.8 billion in penalties on their retirement account withdrawals (in addition to regular taxes owed on the withdrawals).
Let’s talk about “penalty free money". Is there such a thing? Congress has created more than a dozen different tax-advantaged retirement savings accounts, each having its own set of rules on contribution loans and when you can take money out without paying the 10% “early withdrawal” penalty on the portion distributed. As mentioned above, you can borrow from your own 401(k). The law allows $50,000 or half of your vested balance, whichever is less and take up to 5 years to pay back to your account. Of course, interest will be due on this amount.
At any age or for any reason, you can begin equal periodic “payments” from an IRA. The rule here is you must continue taking the payments for 5 years or until you reach the age of 59.5 (the age when you can under normal circumstances start taking from an IRA penalty free), even though you might no longer need the money.
You can take a penalty-free distribution from either and IRA or a 401(k) to cover out of pocket medical expenses that are greater than 10% of your adjusted gross income. But the expenses must be paid in the same year you take the distribution.
Another suggestion is to convert your traditional IRA to a Roth IRA as much as possible when you are in your lowest tax bracket. With new tax laws, the standard deductions you can take could be high enough that you might not have to pay any taxes at all.
One of the best options is to stay with the company until you turn 59.5 years of age at which point you could roll it into a traditional IRA which could provide more investment options.
Ultimately, the responsibility for refreshing, re-energizing and reinventing yourself throughout your life falls to you. Don’t wait to diversify your life portfolio. You do not have to become one of the 70% of today’s workforce that is not engaged in their job. With smart investing, and the guidance of a knowledgeable financial partner, you’ll quickly discover that your golden years are not that many years away.
Your golden years…are right now.
Set up your free consultation with a Tranel Financial Advisor to create your path to your first retirement. We are here to help you organize and plan. Call us today at (847) 680-9050 or fill out our Contact Form and we’ll reach out to you shortly.