1. 401(k) and Pension

Many government agencies and successful companies offer a 401(k) or Pension plan for their employees, which are generally approached in three ways. A company can provide full funding to a plan as long as the employee works for the company for a particular length of time. Another option is for you to contribute fully to your plan, and the employer actively searches for the best sources so you can get the greatest return for your contributions. The third is a matching program a lot of employers do; you simply add what you desire to your plan and the employer will match a certain percentage of your contributions. Even if your employer uses the first option, it is always a good idea to contribute money to the 401(k) plan yourself, as that will help it accrue much more interest over time.

2. Roth IRA

Because a Roth IRA relies solely on your contributions, much like a savings account, it is the best deal for you. This is because the income you place in a Roth IRA is already taxed, so when it gets distributed upon your retirement, those funds will not be taxed. On top of that, Roth IRA accounts are insured by the federal government for up to $100,000.

You can easily contribute money from your paycheck or money you make on the side to your Roth IRA account. A lot of people can find easy side work to do for small amounts of money that can be held in a Roth IRA. Consider offering your talents or hobbies as a service, or take paid online surveys at SurveyHead.com. Though the money is not comparable to your income, it is nice to have that little extra to put away.

3. Stock Market

The stock market is a risky venture, but is an opportunity for everyone to get integrated into the American economy. Investing in the right stocks is a guaranteed way to get you on the fastest route to earning money, especially in a slowly recovering economy. Even if you are on a budget, you can still invest money in penny stocks or other low-priced stocks on the market.

4. Equity

Not many people are aware that they can make money simply by being consistent with their mortgage payments for an extended period of time. Paying off your mortgage on time each month will build up your home’s equity, which you can later bank on. Once you reach the age of retirement, your children will most likely have moved out, leaving you with more extra space than you need. Because your home has built up equity, you can sell your home for a better price than what you paid, and move into a smaller home with a suitable amount of space.

Planning for your retirement should not be stressful, as there are plenty of easily accessible opportunities to save and invest to ensure that you have a steady and healthy retirement income.

Hair Highlights

I give up getting my hair highlighted. Annual price tag cost savings: $1,120. I was a normal blonde in my youth. As my hair naturally darkened, I began highlighting my hair in salons when I used to be 19 (I lived in Texas with the time – it was rather very much a requirement). It became a vicious cycle to break because I usually had to retain up with my ‘roots.’ Previous year at 36 I decided to end the madness. I received a good colorist to match my natural color, and I got several high-quality haircuts to do away with people fried ends. I adore the independence!

Dropping the Manis and Pedis

Annual cost financial savings: $480. For any brief time (once more, even though living in Texas) I received sculptured nails. But I will not likely even handle that expense. That fad ended for me soon after a number of a long time. After that madness, I’d frequent the inexpensive nail salons in all those strip purchasing centers to get a monthly mani/pedi. At any time my toenail polish would commence to chip, I felt the should head back again into the salon. I cherished the feeling of becoming pampered in this sort of a girly way. But I recognized two points: initial, there’s no cause my nails can’t appear wonderful and presentable without nailpolish and second, there is no reason I cannot do it myself. I invested in a good manicure set, and now I do my very own nails every week although watching my preferred present, Nova, on PBS. I in fact take pleasure in carrying out my nails, I do a better career than the salons, and I get instant gratification.

No More Make Up

Estimated annual price tag cost savings: $200. I don’t put on a lot makeup – just blush, eyeliner, mascara and lipstick. I use to get a victim of individuals cosmetics present sets that are supplied while in the division retailer should you devote a particular level of cash. I would acquire points I failed to need to have just to obtain the present set. Converse about consumerism at its very best. Due to this fact, I had a drawer stuffed with ugly lipsticks. I ended that madness by switching to drug retailer brands and effortlessly, I can’t tell the difference in my cosmetics in any respect. I no longer acquire unnecessary products, and I can affordably replace my mascara every 3 months not having taking out a 2nd home loan.

Going Classic on Clothing

Annual charge cost savings: $800. I use to purchase many outfits products each and every period from outlets like Aged Navy and Target. I believed I was getting thrifty by purchasing there. They’ve cute designs, but needless to say the outfits don’t final over a year or two. As I entered my mid-30s, I recognized that currently being fashionable wasn’t as important to me anymore. Now I favor traditional styles and I only acquire quite great high quality products from stores like Brooks Brothers and Harold Powell. I shop a lot much less typically and just maintain the apparel that I private. My winter season work wardrobe consists of a couple of turtlenecks, a few cashmere sweaters, and three pairs of pants. Every thing mixes and matches and I often really feel great in my clothes. Following the preliminary investment in garments, I find I only have to purchase underwear and socks on an ongoing foundation.

This almost funds an IRA!

Asset Accumulation

This phase is the starting up stage in the economical journey. It usually commences whenever a particular person enters the workforce, involving the ages of 20 to 25. The starting of this phase is characterized by restricted money for investing, a quite higher volume of financial debt, along with a very low net worth. The debts could come from college loans, automobile loans, credit card financial debt, or all three and much more. Considering that there aren’t a large level of assets owned by the individual, there’s normally not significantly imagined offered to economical pitfalls that exist.

But as a man or woman progresses through this phase, additional cash is accessible for investing, the quantity of debt like a proportion to their assets decreases, and their net worth rises steadily. Two with the most typical assets men and women wish to accumulate with this phase are a vehicle plus a property. This phase usually lasts until finally the age of 50.

Conservation and Safety

This phase begins after the person has acquired a number of assets, when the man or woman reaches their late 30′s or 40′s. For the duration of this season, the particular person has additional enhanced their net worth and lowered their proportional use of financial debt. Now, as people assemble up more assets, they usually develop into much less tolerant of risk. Alternatively, they are more involved about losing what they’ve gained than on getting much more. They are additional concerned with pitfalls that they could not have thought to be for the duration of the asset accumulation phase. These include, but will not be restricted to, the dangers of untimely death, unemployment, and long-term disability. As such, they start to take into consideration the should protect themselves from these hazards by buying the appropriate forms of insurance coverage.

Some people may possibly truly nonetheless be inside the asset accumulation phase as well, attempting to accumulate far more although hoping to not get rid of what they’ve obtained. This phase typically lasts for your entire time that the individual remains while in the workforce. And for many people, this phase may well previous for his or her whole lifetime.

Distribution and Gifting

This is the last of your 3 phases, and starts whenever a particular person has recognized that they can manage to devote on points that they’ve in no way believed achievable. Heading with the two preceding phases productively can make this phase feasible. For some, this phase may start as early because the late 40′s.

Sizable investments, reduced debt, and also a high net well worth characterize this phase. Folks in this period commence to feel monetary pressures declining, and look to get pleasure from their lives additional. Life insurance coverage premiums could be dropped and other deductibles could be raised. With their built-up prosperity, these people could contemplate paying for his or her grandchildren’s college tuition and going on expensive vacations. They could also go to more generally with the estate planner to plan the last decades of their lives and the subsequent transfer of their prosperity.

So what period have you been in right now? Do you’ve any desire to achieve the next phase? In that case, what actions are you taking to produce this take place?

Retirement Benefits

This is the one that most people are aware of. Full benefits are available at full retirement age – while reduced benefits can be taken at age 62 – to those born in 1929 or later who have earned 40 Social Security credits. Because of a change to Social Security law in 1983, full retirement age began to rise from age 65 for people born in 1937 or earlier, increasing in two-month increments to age 67 for people born in 1960 or later. Those who delay retirement beyond full retirement age will get an increase in their benefit when they retire.

Disability Benefits

Recipients of this benefit must have a medical condition that is expected to prevent them from doing “substantial” work for at least a year, or result in death. For 2010, earnings of $1,000 (if not blind) and $1,640 (if blind) or more per month are considered substantial. The number of credits you need in order to qualify depends on your age when you become disabled, and is separated into three age ranges: before age 24, between 24 and 30, and age 31 or older. This program has incentives to smooth the transition back to the workforce, including continuation of benefits and health care coverage.

Family Benefits

This is provided to certain family members of workers who are eligible for retirement or disability benefits. Such members include spouses age 62 or older, spouses under age 62 who are caring for a child under age 16, unmarried children under age 18, unmarried children under age 19 who are full-time students in a secondary school, and unmarried children of any age who were disabled before age 22.

Survivors’ Benefits

This benefit applies to members of the deceased worker’s family, if the worker earned enough Social Security credits. The members who are entitled to this benefit include those listed for family benefits, and may also include the worker’s parents if the worker was their primary means of support. In addition, a one-time payment of $255 may be made to the spouse or minor children upon the death of a worker covered by Social Security.

Medicare

The two major parts of Medicare provide hospital insurance (Part A) and medical insurance (Part B). Workers who have reached full retirement age, or who have been receiving disability benefits for at least 2 years automatically qualify. Others must fill out an application.

The other parts of Medicare include a prescription drug coverage plan (Part D), and a plan to receive all health care services through one provider organization (Part C).

Supplemental Security Income Benefits

This is another benefit that provides monthly payments to those who reach full retirement age or are disabled. However, workers must have a low income and few assets to qualify. Generally, those who receive SSI also qualify for other governmental assistance such as Medicaid and food stamps.

This post was included in the Carnival of Personal Finance during the week of July 12, 2010. Check out Funny About Money’s blog for a variety of great articles!

Just because the government suggests that you work until age 67, it doesn’t mean that you absolutely must follow their suggestion. In this book, Clyatt shows us that with disciplined saving, a detailed examination of your expenses, and the drive to stay focused, semi-retirement can become a reality.

What is Semi-Retirement?

Simply put, it’s transitioning out of the full-time careers that many of us currently in, so that we’ll have more free time. With this new found time, you could pick up new interests, find a more fulfilling avocation, or just look for other ways to be more fully engaged in living your life.

Why Semi-Retirement?

Today, American workers take fewer paid vacation days than workers in any other developed country, at an average of only 10 days per year. Contrast that with the Chinese, who take 15 days per year. Or the Japanese, who take 17 days per year. If that’s not discouraging enough for you, the top ten European countries take an average of 29 days (almost 6 weeks!) of paid vacation every year.

According to Clyatt,

“Most career-track professional employment requires 55 or more hours a week of sustained in-the-workplace effort, along with more labor at home or on the road checking email and catching up on relevant business news. The average American worker logs nearly 48 hours a week on the job.”

So why semi-retire? Think about all the work-related stress that you’ll no longer have to go through. Or the fact that you’ll no longer have to stay late at the office. Or that you’ll no longer be chained to your blackberry.

The bottom line is that a lot of us are overworked. Do you want to stay on this cycle for the remainder of your working life?

How Do You Do It?

First of all, you need to decide why you want to semi-retire. To be quite honest, this is the challenging part for me. I’m not exactly sure what I’d actually do with all of my free time. With such a tremendous resource as more time, I feel like I would want to use it wisely.

Do you want more time so you could exercise more, take better care of your health, or nourish deeper relationships with your family and friends? If you had all the time in the world and no financial worries, what would you do?

Semi-retirement isn’t something that many people currently pursue, or even think is possible for that matter. So in reality, you may not find a lot of encouragement in your pursuit. Therefore, defining the “why” will help you push through weariness, obstacles, self-doubt, or any other difficulties that may arise.

Once you figure out the “why”, the “how” isn’t rocket science. It should come as no surprise that it involves aggressive saving, a certain detachment from the high-end lifestyle, and disciplined investing. However, Clyatt does remind us that moderation is key. You don’t want to overdo the saving and penny-pinching, work hard, yet burn out quickly. Semi-retirement is about savoring life and living it fully.

How Do You Know When You’re Actually Ready?

To know when you’ll be able to semi-retire, you have to determine the amount that you need to accumulate to meet your annual expenses during those years. Depending on your circumstances, this could be $30,000, $50,000, or more. Clyatt offers a few ways to figure this out. One method is through taking your annual pay, and subtracting expenses you’ll no longer need, such as savings, work-related expenses, and paid debts. Then you’ll add to this figure the new expenses you will incur, such as lower income taxes, fund management fees, and home and car repair costs. And this should go without saying, but when you are gainfully employed full-time, it may be sometimes necessary to take advantage of payday loans from wonga.com and other lenders. However, you should be entering retirement without need for any kinds of loans whatsoever.

Once you have this number, an easy way to get a rough estimate of the total amount you need is to multiply your annual expenses by 25. So if you need to live off $30,000 per year, you’ll need to accumulate $750,000 before you can semi-retire comfortably.

How Do You Invest To Earn That Much?

By allocating your money into various asset classes (stocks, bonds, real estate, etc.), you can create a portfolio that has achieved historical returns between 8-10%. Clyatt lays out three examples of such portfolios that you can choose from.

If you want to put your investments on autopilot, you can simply select a single balanced mutual fund. But if you’re a more of a hands-on investor, you can select several mutual funds to create a more diversified portfolio with less volatility.

So if you’d like to retire in 20 years with $750,000, and you assume an 8% annual return, you’ll need to save about $15,200 every year.

Where Do You Invest?

Generally speaking, there are two types of savings accounts that you’ll need. One of them is a tax-advantaged plan such as an IRA, 401k, or 403b. The other is a taxable bank and brokerage account that doesn’t have favorable tax treatment.

The reason for having these two types of accounts has to do with accessibility. Since the tax-advantaged plan limits your ability to withdraw money before you reach age 59 1/2, it helps to have a taxable account that you can access in your 40′s and 50′s.

How Much Can You Withdraw?

Clyatt uses a term called the Safe Withdrawal Rate, which is 4% every year. Here’s how the math works:

If your portfolio grows at an average rate of 8% interest per year, you’ll need to subtract an assumed inflation rate of 3% a year, subtract portfolio management fees of roughly 0.5% a year, and state and federal taxes of around 0.3% a year.

After doing this, you’re still left with enough interest to withdraw 4% each year, while keeping the inflation-adjusted value of your portfolio constant every year. So with this method, you won’t have to withdraw any of your principal, and you should be able to live off of just the interest for the rest of your life.

What About Taxes?

When you semi-retire, your tax situation should be a lot better than it is now. This is because the highest tax rates are on earned income. Since you’ll be living off of interest, dividends, capital gains, and maybe some income from part-time work, you’ll be left with a more manageable tax bill.

While interest income is taxed at the same rates as earned income, qualified dividends and capital gains are taxed at just 15% in 2010, and at 0% if you’re in the lower two tax brackets. However, tax rates are subject to change in the future.

Final Thoughts

I suppose the challenge most of us will face is saving the required amount each year to reach our goal. To help with this, there are tips in this book on ways to save on both smaller and larger expenses.

Nonetheless, if you want to reach semi-retirement bad enough, and have some clear ideas of what you’d like to do with all the free time you’ll gain, then you should check this book out.

Do you want to semi-retire before you turn age 67? Are you willing to make some sacrifices to do this?

This post was included in the Carnival of Personal Finance for the week of April 19, 2010. You can find it at Debt Ninja’s blog, along with many other excellent posts related to the world of personal finance.

There are two basic steps to determining your monthly benefits. The first step is computing your average indexed monthly earnings, or AIME. The second step, which incorporates the AIME, is to determine your primary insurance amount, or PIA. The PIA is the basis needed to calculate social security benefits that are paid to you when you retire.

Average Indexed Monthly Earnings

The purpose for indexing your earnings is to reflect the change in wage levels that occurred during your working years. This ensures that your benefits will reflect the rise in the standard of living that occurred during your working lifetime. Out of your entire earnings from age 22 to 62, your highest 35 years of indexed earnings are used in the AIME computation. If you work and are age 25 or above, you can find your specific earnings in the social security statement that is mailed to you annually.

Indexing your earnings depends on the year in which you are first eligible to receive retirement benefits, which is age 62. So if you reach age 62 in 2011, then that is your year of eligibility. However, your earnings are always indexed to the average wage index two years before your year of eligibility, or when you reach age 60. So if you reach age 62 in 2011, then earnings from your prior working years would be indexed to the average wage index for 2009, which is 40,711.61. You can find the wage index for a specific year here.

Following this example of a worker whose earnings are indexed to the wage index for 2009, earnings in each year before 2009 would be indexed by multiplying the earnings for that prior year by the indexing factor for that prior year.

The indexing factor for a prior year is determined by dividing the wage index for the year the person reaches age 60 by the wage index for that prior year. In our example, the person reaches age 60 in 2009. So if you want to determine the indexing factor for 1980, you would divide 40,711.61 (the index for 2009) by 12,513.46 (the index for 1980), and get an index factor of 3.2534. So if you made $12,000 in 1980, you would multiply this amount by 3.2534 to get and indexed amount of $39,041.

Earnings in the year you reach age 60 and later would not be indexed, but rather are taken at face value.

Once each year’s earnings from age 22 to 62 are indexed, your highest 35 years of indexed earnings are added up. This sum is then divided by 420 to determine your average monthly amount of such earnings. This is your AIME.

Primary Insurance Amount

Once you have your AIME, the next step in determining your monthly social security benefit is calculating your PIA. The PIA is the sum of three separate percentages of portions of AIME. These portions, known as bend points, depend on the year you reach age 62. If you reach age 62 in 2010, your PIA is the sum of

1. 90% of the first $761 of your AIME,
2. 32% of your AIME between $761 and $4,586, and
3. 15% of your AIME over $4,586.

This amount is rounded down to the next multiple of $.10. For example, if your AIME is $5,521, your PIA would be calculated as:

0.9(761) + 0.32(4,586 – 761) + 0.15(5,521 – 4,586) = 2,049.15, which is rounded down to $2,049.10.

If you reached age 62 before 2011, the bend points for earlier years can be found here.

These benefits were never meant to provide full financial support upon retirement. The result of these bend points is that lower wage earners receive a larger percentage of their preretirement income, while higher wage earners receive a lower percentage of their preretirement income.

Early Or Delayed Retirement

Once your PIA is calculated, you now have the basis of determining your estimated monthly benefit amount. This amount, however, also depends on the actual age that you retire. The earliest that you can retire and receive benefits is age 62. But the downside to early retirement is that your benefits are reduced for each month that you retire before your normal retirement age.

The normal retirement age is the age that you receive the full benefits as indicated by your PIA, and it depends on the year you were born. You can find your specific retirement age here, but for most people reading this, the normal age is now 67. Conversely, if you delay your retirement beyond your normal retirement age, you will receive a certain percentage increase for each month that you delay retirement beyond your normal age. Here are the specifics:

If you were to retire early, your benefit would be reduced by 0.555% for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 0.416% per month for each month thereafter. This result is then rounded down to the next dollar to arrive at your reduced monthly benefit.

So if your normal retirement age is 67, and you retire at 63, you’d be retiring 48 months early. Your benefit reduction is calculated as 36 months multiplied by 0.555%, plus 12 months multiplied by 0.416%. Therefore, your monthly benefit would be reduced by 25%, and you’d only receive 75% of your PIA. If your PIA were $1,983.10, your reduced benefit would be $1,487.33, which is then rounded down to $1,487.

On the other hand, for most of us reading this, if you were to delay retirement beyond your normal retirement age, you’d receive an increase in your PIA of 0.666% per month of delayed retirement, or 8% a year. The specific percentage of your increase, which is based on your year of birth, can be found here.

So these are the steps to calculate social security benefits.

Do you know how much benefits you’ll receive?

First photo by Aric Riley