Taking Early Retirement - I Retired Early

March 4, 2010
by Jeremiah
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What Is a Variable Annuity?

The Variable Annuity is a Contract

A variable annuity is a financial instrument between you and an insurance company, where the insurance company agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments made monthly or annually.

Investment Choices

A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. This is an important point as you are making the investment choices and are making gains or losses based on your choice of investment funding vehicles. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

Differences Between a Variable Annuity and Mutual Funds

Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:

First, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Second, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.

Third, variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.

Be Careful!

Other investment vehicles, such as IRAs and employer-sponsored 401k plans, also may provide you with tax-deferred growth and other tax advantages. For most people considering early retirement, it will be advantageous to make the maximum allowable contributions to IRAs and 401k plans before investing in a variable annuity.

In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401k plan or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity’s other features, such as lifetime income payments and death benefit protection. The tax rules that apply to variable annuities can be complicated – before investing, you may want to consult a tax adviser about the tax consequences to you of investing in a variable annuity.

Keep This In Mind

Variable annuities are designed to be long-term investments, to meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. Variable annuities also involve investment risks, just as mutual funds do.

TER

Jeremiah John

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March 2, 2010
by Jeremiah
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What Is An Annuity?

An annuity is a financial instrument where a lump sum is made in advance and money is paid out over a set number of years (ten years certain, for example) or a lifetime of one of more individuals; either immediately or at some future date. This payout is known as a single life or joint life annuity. Many state lotto offices will pay either 50% of the total in cash or they will pay it all if you take a monthly check. The instrument is most often offered by an insurance company but can be offered by large companies or state lotto offices. It is often referred to as the opposite of life insurance.

Life Insurance vs Annuity

Life insurance is a financial instrument where you pay so much a month or annually, and if you die, your beneficiaries receive a lump sum amount. An annuity is where you pay a lump sum amount and you and or others (joint account) receive so much every year or every month.

Usually, large companies offer annuities, to employees as part of a defined benefit retirement package. The defined benefit plan is often called a pension plan. The defined benefit plan takes your current age, your salary or hourly wage and the length of time you have worked at the company to arrive at a formula and determine that you will receive so much money every month when you retire. This is the defined benefit part of the plan = (age) x (annual income) x (years at the company).

Which is Better for Older People?

These defined benefit plans tend to favor older employees who make a good annual income that have worked at the company forever. Because it is not favorable to younger, lower income employees, companies now offer some sort of 401k plan where younger employees are more in control of their retirement.

401k Advantages for the Young

The advantage of a 401k plan for younger people are the 401k plans are portable. That means that you do not have to work for 20, 25, 30 or more years at a company to collect. Some companies will let you take the 401k immediately no matter how long you work for the firm. Others will make you work for five or more years and you can take it all when you leave and transfer it to another plan at your new job or roll it into an IRA. Some companies will even match your contribution to the 401k so in effect you are getting “free” money by signing up as soon as you can.

The company where I worked for my first ten years in the job market Continue Reading →

February 25, 2010
by Jeremiah
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Forced Into Retirement? Consider These Steps

Did you love your job? If so, you may have been happy with your life. That is until your supervisors explained that your company was cutting costs. Due to those cost cutting measures, you are being forced into early retirement.

Most likely, you are over 55 years old. If you are like many other individuals in your shoes, panic may be the first feeling that sets it. Yes, being forced into early retirement may seem like “the end of the world,” but it doesn’t have to be.

Company Grapevine

At most companies, cost cutting is already in the company news or being talked about on the company grapevine. Everyone is talking about what is going on “upstairs” or in the board room. Most likely, your company, if it is of any size, has or will be bringing on a consultant. This way, management has someone to point the finger, when layoffs or early retirements take place. “We have visited with our consultants and it is their recommendation that . . . ”

First, when you get the news, take action. See if you can stay on for an additional two or three months – say 90 days. This will give you time to get your affairs in order. Explain that you understand that cutbacks are necessary, but as a valuable employee, you’d like to get your affairs in order and would like to stay on for three months “or so”.

Transition Teams

This terminology “or so” lets your employer know that you are going to go willingly, but would like some consideration and employment time to get your stuff together. Another term that is used is to ask, “Can I be on the transition team?”. Transition teams are needed to get the company from the size they are now, to the size they will become in six months. Transition teams might be one or two employees or they might be 100 or more. Some people will be asked to be on the team, and why not you?

When being forced into early retirement, you will be required to sign a number of important documents. Never agree to retirement without first learning about your company’s rules, restrictions, and attached strings. Will you receive a severance package? Does that severance package eliminate your pension or eliminate you from receiving any other important employee benefits? If so, talk to a financial advisor right away, particularly before you sign anything. Determine what your best course of action is. Is it better to take the severance pay or receive all of your benefits? Continue Reading →

February 23, 2010
by Jeremiah
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What Is The Rule of 72?

Here is the scenario: You are sitting at the kitchen table on a Saturday morning and start to think seriously about retirement. You take out your calculator and start banging out some numbers. I have a very basic calculator that I run all of my retirement numbers on. It is solar powered so I never have to worry about running low or even out of battery power. The one that I use at home is a TI-1795 SV (TI =Texas Instruments) that I got at my local Office Max. It cost under $20. Using this simple calculator, you can do some easy math to arrive at how long it will take you to retire.

Easy Math

Ready? Divide 72 by 3 and what is the result? If you got 24, that is the correct answer. So what does that mean? That tells you, if you get a 3% return on an investment, it will take 24 years to double your money. If you divide 72 by 7 then you will get an answer of approximately 10.3. In all of my “what ifs” I always plan on making a 10% return. So when you divide 72 by 10 you get 7.2 years. Hence the name of the rule is the Rule of 72.

So why is this important? It gives you an easy way, although not precise, to calculate when you will have enough money to retire. We’ll get to figuring how much you are going to need in another article, but while I have your attention, let’s add in another number.

Starting with $100,000 Continue Reading →

February 18, 2010
by Jeremiah
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Civil Service Early Retirement Part II

See Part One Civil Service Early Retirement Here

Background About CSRS and FERS

CSRS Retirement The Civil Service Retirement Act, which became effective on August 1, 1920, established a retirement system for certain Federal employees. It was replaced by the Federal Employees Retirement System (FERS) for Federal employees who first entered covered service on and after January 1, 1987.

The Civil Service Retirement System (CSRS) is a defined benefit, contributory retirement system. Employees share in the expense of the annuities to which they become entitled. CSRS covered employees contribute 7, 7 1/2 or 8 percent of pay to CSRS and, while they generally pay no Social Security retirement, survivor and disability (OASDI) tax, they must pay the Medicare tax (currently 1.45 percent of pay). The employing agency matches the employee’s CSRS contributions.

CSRS employees may increase their earned annuity by contributing up to 10 percent of the basic pay for their creditable service to a voluntary contribution account. Employees may also contribute a portion of pay to the Thrift Savings Plan (TSP). There is no Government contribution, but the employee contributions are tax-deferred. For more information about TSP, see the TSP website.

Unused Sick Leave, Health Insurance Coverage, etc.

If I take early retirement, what happens to my unused sick leave?

CSRS employees will receive service credit for any unused sick leave in determining their annuity (but they must meet eligibility requirements for retirement before the sick leave is added). Continue Reading →