5 Ways to Fund Early Retirement

Senior couple reading newspaper and having breakfast in bed
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By Joe Udo

Early retirement is a dream for many people. The hard part is actually funding an early retirement. The typical working-age household has only $3,000 in retirement account assets, according to the National Institute on Retirement Security. However, it is possible to save regularly over many years and accumulate a comfortable nest egg. Such diligent savers might want to retire before they are 59½, and will need to take steps to avoid paying the 10 percent penalty for early retirement account withdrawals. Here are five ways to pay for an early retirement:

Passive income. Passive income is a great way to fund your early retirement, but it takes many years to build up. Many retirees receive income from rental properties, dividend stocks and other investments. The best way to build a passive income is to do it over many years so you will become an expert at that particular field. Rental properties usually generate more income as rents increase and mortgages are reduced. The right dividend stocks will also keep raising their dividend every year, and eventually can pay out a substantial amount every year.

Substantially equal periodic payments. If your retirement account is very large, then you may want to use IRS rule 72(t) to avoid the 10 percent early withdrawal penalty. %VIRTUAL-article-sponsoredlinks%Once you start the SEPP, you will have to continue these withdrawals for at least five years or until age 59½, whichever is later. There are three methods to calculate how much you need to take out. You will need to talk to a qualified tax professional to make sure the withdrawal process is done correctly.

Retire after 55. You can access your 401(k) penalty free at age 55 if you retire at any time during or after that year. This exception only applies to 401(k) and other ERISA-qualified plans, including the federal Thrift Savings Plan, but not IRAs. Contact your 401(k) plan administrator to see if this option is available. You have to leave your retirement fund at your employer's plan if you intend to take advantage of this. If you roll over your 401(k) to an IRA this exception to the early withdrawal penalty no longer applies.

Roth IRA ladder. Another way to avoid the 10 percent early withdrawal penalty is to take advantage of the Roth IRA and build a ladder:
  1. Convert one year of living expense to a Roth IRA. You will have to pay tax when you do this.
  2. Wait five years. Roth IRA conversions can be withdrawn without penalty after five years.
  3. Withdraw one year of living expense from the Roth IRA.
  4. Repeat every year until 59½.
The downside of this plan is the five-year waiting period before the first withdrawal. Advance planning is required to make this work.

Part-time work. Withdrawing from your retirement fund before you are 59½ isn't always a good idea. Most of us have a difficult time funding our retirement already. The earlier you withdraw from your retirement fund, the more difficult it will be to make your savings last. A better idea is to work part time until you are 59½, and let your nest egg compound. Some early retirees work only a few months to accumulate some cash, and then take the rest of the year off.

Generally, early withdrawals are not a good idea because your retirement fund will be reduced. Your nest egg is meant to provide a comfortable lifestyle when you are older, meaning you are able to pay for basic necessities without much worry. At 50 or 55, most of us still have the ability to work, and staying in the workforce is often a better way to go. If you reduce your expenses and work only part time, then you can gradually make the transition into retirement. Continuing to bring in income on a part-time basis will lower your stress level and give you more time to figure out what to do in retirement.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.

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7 Myths of Long-Term Care
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5 Ways to Fund Early Retirement

While the only sure things in life are death and taxes, it's worrying about the quality of life that can really be a buzzkill.

Roughly 70 percent of Americans over 65 will need some form long-term care at some point in their lives, according to a study by the U.S. Department of Health and Human Services.

Once you hit 65, you have a 35 percent chance of entering a nursing home. The odds that you'll have to stay there for five years? About 20 percent.

With statistics like these, it's no wonder that the idea of purchasing long-term care insurance keeps popping up. Unfortunately, if you don't purchase coverage when you're in your 50s, it may be too expensive to buy once you're in your late 60s or early 70s. And if you suffer from certain illnesses, the truth is that long-term care insurance coverage may not be available to you.

The first hurdle is getting past the hype so that you can evaluate whether you need coverage -- not everyone does. Here are seven commonly held myths about long-term care.

The fact is, the vast majority of Americans will need some sort of long-term care services as they age, particularly help with Activities of Daily Living (ADLs), including getting in and out of bed, walking, bathing, dressing, and eating.

Even if you're healthy, the aging process unfortunately includes a natural decline in eyesight, hearing, balance and mobility.

It's easy to confuse "long-term care planning" with long-term care insurance, but they're not the same. In fact, making that mistake could literally send you into bankruptcy in your senior years.

Long-term care planning means developing a personal strategy and making decisions now about how you want a range of things to be handled when you or a loved one needs long-term care services down the line.

Insurance is just one of many options people consider for covering the costs of long-term care. If you buy an insurance policy but don't plan appropriately, your care could be compromised. If you develop a plan but never buy the appropriate insurance coverage or execute an advanced care directive, living will, and powers of attorney for health care and financial matters, you could wind up leaving all of your care decisions to others without the means to pay for them.

I lost my father when he was just 49 years old. But his mother lived to be 98 and was fairly vibrant and lived alone until the last year of her life.

There's no telling when you'll need your fully-realized long-term care plan to kick in, so the sooner you plan the better off you'll be.

If you're over 50, the best time to plan is now. It will make you a more informed consumer of long-term care services and will help you stay in control of tough decisions.

Nothing could be farther from the truth. Medicare does not cover the custodial services that help with ADLs. It will cover rehabilitation, home health care and durable medical equipment as long as they're deemed "medically necessary."

Medicaid may pay for your long-term care, but you need to meet strict eligibility requirements, which differ by state and often involve extensive documentation of assets. And don't think you can simply transfer all of your funds to your heirs and then apply. There's a five year "look back" rule that will require you to document where all of your money has gone.

There may be some government help if you're a veteran suffering from a service-related disability. To check your eligibility, go to VA.gov for details.

Have you priced long-term care costs lately? They're pretty darned expensive, and even with long-term care insurance, you'll be responsible for paying for some or all of the care you need.

Go to http://longtermcare.gov/costs-how-to-pay/costs-of-care-in-your-state/ to estimate what your costs could be. Then, think about the different ways you'll be able to meet that cost, either through an insurance policy, annuity, reverse mortgage, savings, pension benefits, social security benefits, or other personal income.

If there's a shortfall, long-term care insurance benefits could kick in.

Have you tried to be a 24/7 caregiver? It's pretty hard work, even for a devoted family member who loves you. No one person can be there for you every hour of every day and provide all of the care you'll need.

As part of your long-term care strategy, look into caregiving services in your area, including in-home providers, elder daycare centers, elder shuttles, meals on wheels, and other low-cost services offered in your area.

Managing a rotation of 24/7 caregivers is itself nearly a full-time job. You'll want your unpaid family members to spend their energy helping you manage your way through your need for assistance rather than resenting your lack of planning.

Really? What does your home look like?

Stairs, narrow doors, steps in odd places, low bathtubs, showers without handholds are the kinds of architectural obstacles that won't work if you have limited mobility or failing eyesight. And living alone won't help if you slip and fall and no one checks on you regularly.

At some point in time, living in a community or facility may make sense, and as part of your long-term plan, you'll want to consider it sooner rather than later.

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