Early Retirement Stories

Early retirement is a concept that seems to have many different definitions. Of course, everyone agrees that the entire household choosing not to work and living off savings is early retirement. I've also seen the following early retirement definitions: leaving a corporate job and starting a business, reducing hours worked or only one spouse working. Specifically, some people think of early retirement as leaving their day jobs and starting their own business. Other people consider working less hours in their own business early retirement. Finally, some people think of it on a individual level, i.e. one spouse retires (or quits working) while the other continues working.

Here are some stories about the different types of early retirement. Can You Afford An Extreme Early Retirement by Bankrate.com shares stories about couples without kids who retired in their thirties and forties. Their approach was to save a lot while working and spend a little while retired, with yearly expenses ranging from under $10,000 to $24000 per year. Extreme early retirement experiences, also by Bankrate.com, shares stories about range of people, including families with children, one spouse retiring, reducing to part time work and selling one's business. Retired by 50: Real Life Stories on MSN.com has two stories about a families with children that retired early. In one case, the family significantly cut expenses and moved to a lower cost of living region. In the other case, the family quit their jobs and "retired" to a franchise business. The last story was about a couple that worked in their own businesses and then sold them to retire.

Overall, I was pleased to read about people in many different situations retiring early. (Sometimes it seems that couples with no kids or successful business owners are the predominant types retiring early:-) Also, while each early retirement had different specifics, there seemed to be some consistent themes:

Make retiring early an explicit goal. Then plan to do it.

Save a lot, early and often. In some cases, the early retirees saved up to 50% of their income.

Make choices to reduce expenses. Many early retirees chose to reduce or eliminate "normal" expenses such as new cars, cable television, or eating out. Some even chose to move to lower cost of living areas.

Say "no" to debt. These early retirees typically had no debt or only a home mortgage.

For more on Reaping the Rewards Reflections , check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Better Stock Market Returns For The Future?

Stocks Tarnished By 'Lost Decade' in The Wall Street Journal shares a dismal record by the S&P 500. During the past 10 years the S&P 500 has only achieved a total return of 1.3% a year. The return was -0.37% a year for the past nine years and -1.4% a year for the past 8 years. Given this performance, should investing in the stock market still be a good method to build and maintain wealth?

To answer this question, I looked to the historical rolling 10 year returns for the S&P 500. Bespoke Investment Group did an great summary of this information going back to 1900. They provided an excellent graph of the data and noted, "As shown, periods where returns were lower occurred in 1914, 1921, 1932, 1938, 1974 and 1977. We also highlight years where returns peaked -- 1929, 1959, 1992 and 2000. While the returns could easily get worse, periods that have been this bad have not lasted longer than 4 years (1937-1941) before they've started to get better." In addition, the lows appear to be double bottoms (e.g. 1914/21, 1932/38, and 1974/77) that were followed a steep rise in returns for about two decades.

In spite the current uncertainty, I believe data shows that the market will be much higher a decade from now. If history is an indicator of the future, the market's return to higher gains is likely close and not farther than four to five years away. Given this scenario, it makes sense to have part of one's savings in the stock market, at every age. In our case, we will continue to put long term funds (i.e. not needed for 10 years) for my parents, ourselves and our child in the stock market. For us, that means keeping IRAs, college savings accounts, and 401Ks invested in the stock market. That way our long term savings will participate in the historically higher returns of the stock market.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Three Events That Can Cause Wealth Destruction

Building wealth is often a long process, easily taking several decades to achieve one's goal. The destruction of wealth can happen much faster, through poor judgement, or bad risk management. However, there are sometimes uncontrollable events that can also lead to wealth destruction. Here are three types of events that have potential to cause wealth destruction:

Death - This is not surprising, especially if the person is the only or major earner in the household. Having the household income reduced by over 50% can become a major issue, especially if there is significant debt. However, death can sometimes be an issue even if it happens to the secondary wage earner.

Here is what we did to protect against death being a financial issue. While I was working, we had sufficient term life insurance on me to pay off our debt, which was only our home mortgage. In addition, I purchased survivor income insurance, which would cover the different between Social Security survivor benefits and my take home pay. Fortunately, we never needed to use the survivor income or life insurance benefits.

Disability - Not being able to work due to medical reasons can be another wealth destruction event. Many people may not have enough funds to cover the 90 days before Social Security disability benefits take effect. In addition, Social Security disability benefits will not cover all lost income.

Our solution was to carry disability insurance while I was working. Now that I retired in my forties, we do not carry additional disability insurance, since sickness won't reduce our income. However, both of us carry long term care insurance our health situation requires nursing home care.

Divorce - Wealth can sometimes be cut in half through divorce. In many cases, retirement account contributions and property obtained while married will be split equally in a divorce. I saw several colleagues have their retirement accounts and marital assets cut in half when a divorce happened. How divorce hits your 401k at MSN.com summarizes how this event can affect your retirement account.

There is no monetary insurance against this type event. Good judgement is the main defense, i.e. marry the right person the first time:-)

For the first two events of death and disability, proper insurance may help protect one's wealth. For divorce, there are not many solutions, except for not getting divorced :-)

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Don't Forget To Include Non-Wage Income When Doing A Tax Return

Everyone remembers to use wage income (W-2s) for filing a federal income tax return. As wealth grows, one will often receive income from other sources that are often reported on a 1099 form. People sometimes forget about 1099 income because they "didn't get to spend it," as in the case of CD interest or reinvested mutual fund dividends. However, the IRS considers 1099 income taxable and expects it to be reported when filing a tax return.

Here are some of the 1099s I've seen and the type income reported on a them:

1099-B - This is form income from a brokerage account. It includes interest, dividends and sales of stock. Often, the form does not include information on the original cost of the sold stock. For reference, it is important for the taxpayer to have the price paid for the stock. Otherwise, the IRS considers all the proceeds from a stock sale taxable.

1099 -C - This is for income due to the cancellation of debt. That's right, if a bank, credit card company or individual forgives debt, it is considered income for the debtor. Exceptions to being taxable include if the forgiven debt can be considered a "gift" (from an individual) or if the debt forgiven is less than the insolvency of the debtor.

1099-INT - This is for interest received from bank, CD, and money market accounts.

1099-DIV - This is for dividends received from stock that is owned directly, i.e. where the shares are listed in one's name.

1099-G - Typically used for unemployment income or state/local tax refunds. Yes, unemployment income is taxable. State/local tax refunds may be taxable if one used itemized deductions for the previous year's tax return.

1099-MISC - This is used for non-employee compensation. Essentially, one is being paid as a contractor. The taxable amount can be reduced by deducting expenses (e.g. supplies) to do the work, resulting in net taxable income. Also, one will need to pay self-employment taxes (social security and medicare) for the net income from a 1099-MISC.

1099-R - This is for income from a retirement account, usually a pension, IRA or 401k. Retirees and people who take early distributions will receive this 1099. Unfortunately, early distributions also result in 10% penalty, over what is owed for taxes.

This is not a complete list of 1099s and the types of income. For a more comprehensive list of 1099 forms and associated income, see the IRS Guide to Information Returns. Remember, in the absence of additional information, the IRS considers all income reported on a 1099 taxable. For 1099-B, C and MISC, the income may be reduced with the appropriate information, resulting in a net taxable income that is less than the reported amount.

For more on Ideas You Can Use , check back every Tuesday for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

3/24/08 Stock Purchase Update - Perhaps A Short Term Bottom

With the market decline of early 2008, the stock purchase updates have not been as fun to write. However, I am going to remain disciplined and do a weekly update until I sell the positions from the portfolios. Currently, the portfolio is based on a 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), CNH Global (CNH) and BHP Billiton (BHP) and a January, 2008 stock pick update of Apple (AAPL), Research in Motion (RIMM), Intuitive Surgical (ISRG), Priceline (PCLN), Core Labs (CLB), and Google (GOOG). The total portfolio now has a slight gain of 1.1%, due primarily to the Potash, Intuitive Surgical and Priceline. Google and Apple continue to under perform. Here's the current status of the stocks in the portfolio:

	My Wealth Builder 10/15/07 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 3/21/08
Potash (POT) [6/7/07]	50	$71.59	$144.26
Southern Copper* (PCU) [11/13/07]	40	$108.24	sold 2/19/08 @ 109.05
CNH Global NV** (CNH) [11/13/07]	50	$55.22	$48.32
BHP Billiton*** (BHP) [11/27/07]	50	$71.54	sold 2/19/08 @ $73.98

*On 1/18/2008, the system gave a sell signal for PCU.
**On 2/1/2008, the system gave a sell signal for CNH.
***On 2/15/2008, the system gave a sell signal for BHP.
I will try to sell CNH during an upcoming market rally, hopefully above the purchase price.

	My Wealth Builder January, 2008 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 3/21/08
Apple** (AAPL) [1/17/08]	25	$160.93	$133.27
Research in Motion (RIMM) [1/17/08]	25	$88.71	sold 2/22/08 @ 103.23
Intuitive Surgical (ISRG) [1/18/08]	20	$261.81	$300.69
Priceline (PCLN) [1/18/08]	25	$92.33	$118.63
Core Labs* (CLB) [1/25/08]	25	$116.25	sold 2/19/08 @ $121.67
Google** (GOOG) [1/25/08]	20	$582.66	$433.55
Google** (GOOG) [2/1/08]	10	$521.27	$433.55
Google** (GOOG) [2/26/08]	10	$457.44	$433.55

*On 2/8/2008, the system gave a sell signal for CLB.
** On 3/7/2008, the system gave a sell signal for AAPL and GOOG.
I will try to sell AAPL in an upcoming rally. I plan to hold GOOG since it is part of my core holdings.

The market appears to have hit a near term bottom again. As of the close on 3/14/08, the Dow, Nasdaq and S&P 500 indices were respectively down 6.26%, 14.86%, and 10.81% year to date, up from last weeks lows of 9.37%, 16.58% and 11.86% in my 3/17/08 Stock Purchase Update.

I continue to believe that the probability of a recession in 2008 is relatively high, if we are not already in one. The multitude of negative factors will eventually outweigh any actions by the government and financial institutions. Originally, the Fed interest rate cuts and other actions led me to expect that the bull market would last through summer, 2008. However, the economic data in early 2008 has already caused the bull market to end earlier. For either case, I expect the market to continue to be choppy in 2008 with many short term rallies and declines. At this time, I plan to sell CNH, AAPL into a near term rally and continue to hold the balance of the portfolio. I do not plan to add any more to the amounts that I have already invested in the above tables.

Full disclosure: I own all the stocks mentioned in this post that are not indicated as sold.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Tax Carnival #33 - Deduction Tips, Rebates, and Tax Planning

Welcome to 33rd edition of Carnival of Taxes. First, I would like thank Kay Bell at Don't Mess With Taxes for allowing me to host this esteemed Carnival. Second, I would like thank the authors who submitted articles during the busy tax filing season and the holiday weekend. For your reading pleasure, here are the tax related submissions for this week's Carnival.

Tax Tips

Kevin presents Claiming Pizza Delivery Mileage On Your 2007 Taxes posted at Pizza Delivery Stories. Kevin's tip is also worth considering if any employer doesn't reimburse one for business use of a car. However, remember to keep written documentation of the mileage, since the IRS may request this information to validate any deductions.

Speaking of mileage, Nickel reminds us not to forget the volunteer miles driven for qualified charities in Uncommon Charitable Tax Deductions posted at fivecentnickel.com. Other tips include charitable deductions for uniforms and appreciated property.

For those who are still deciding on tax preparation software, FMF presents Review: TaxCut posted at Free Money Finance. Although it was only briefly mentioned, the Deduction Pro feature may help identify opportunities that weren't previously considered.

Tax Rebates

Phil presents The Top 6 Reasons Why the Tax Rebate Won't Stimulate the Economy posted at Phil for Humanity, sharing "the reasons why the Economic Stimulus Act of 2008 and tax rebates will not stimulate the American economy out of this recession." While it may not impact the economy, Dan Meyer notes that the rebate has already stimulated a number of con artists in A Surfeit of Stimulus Scams posted at Tick Marks.

In case you're wondering when YOUR rebate will arrive, the two submissions below provide the answer. Raymond presents Economic Stimulus Payment Schedule posted at Money Blue Book showing it will be based on one's social security number. Kay Bell, at Don't Mess With Taxes, tells us the Rebate delivery schedule is announced , and advises taxpayers to "schedule your rebate shopping plans now! The IRS has announced the checks' delivery schedule."

However, Penelope Pince cautions Don't Spend that Tax Rebate Just Yet posted at Our Fourpence Worth, sharing, "a few suggestions based on an article by Liz Pulliam Weston about one of this year's popular tax topics, the very anticipated tax rebate."

Tax Planning

Getting married? Don't forget to think about one's tax situation. Diane Dean points out the options at Filing as Married on your W-4 posted at Need IRS Help?.

David Gross share how he achieved paying zero federal income tax in Money Magazine tells its readers how to pay zero taxes posted at The Picket Line. Money Magazine even featured the unconventional method he used, advising against taking the same approach due to an "ascetic lifestyle" one might need to follow.

Tax Process

Wenchypoo presents Update: The FairTax Crafter Finally Answers Me posted at Wisdom From Wenchypoo's Mental Wastebasket, which shares her displeasure with the response she received from Congressman John Linder, co-author of the The FairTax Book, on her questions about the FairTax.

Ever wonder what happens when people don't file for their refunds? Beckie provides the answer in Unclaimed Refunds posted at A Tax Consultant for All Seasons. When moving, it's also probably a good idea to send a change of address form to the IRS, if one expects a refund :-)

Finally, our tax withholding system has caused some people to focus on big refunds versus lower tax liability. Here is Why I Don't Like A Big Tax Refund posted at My Wealth Builder.

This concludes this edition of the Tax Carnival. The April 7, 2008 Tax Carnival will return to its home at Don't Mess With Taxes and submissions can be made via this blogcarnival form.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Personal Finance Simplification - Credit Card Consolidation

During March, 2008, I am working towards consolidating our bank, credit card and brokerage accounts. Last week, I shared our progress on reducing bank accounts. This past week I have been working primarily on reducing our credit card accounts. Our goal is to get to and maintain two cards, one for each of us. For reference, we use our credit cards for convenience. We pay off the balance each month.

Over the past year, we have already been consolidating credit card accounts. We've already eliminated new cards from our bank, stores or brokerages. Here is a summary of the remaining accounts, my analysis, and the decision:

Visa - This is my wife's credit card and is a platinum card with additional benefits such as reward points, rental car insurance, and extended warranty insurance.

Discover - This is also a platinum card, which I have had quite a while. Discover is the original cash back card, although the levels are relatively low, initially at 1/2% and up to 1%, with monthly specials at 5% for certain purchases. It also has additional benefits such as rental car insurance.

American Express - In 2005, I applied for a True Earnings card through Costco since American Express is the only credit card they accept. The card provides cash back at 3% for gasoline and restaurants, 2% for travel and 1% for everything else. The annual fee is waived as long as I am a Costco member.

To maintain credit ratings for both of us, we want to each person be the primary account holder for one credit card. Since the Discover and American Express cards are both in my name, the elimination choice was mine to make.

I decided to keep the American Express card. While Discover was a Platinum card, it did not have any benefits above the Platinum Visa card. Also in my experience, Discover is not accepted outside of the U.S. While the American Express card does not have Platinum benefits, it does have better cash back rewards, and can be used at Costco. Once I receive the Discover cash back payment, I will cancel my Discover account. In addition, we won't add a new credit card, unless we plan to cancel an existing one.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Why I Don't Like A Big Tax Refund

In 2007, the IRS issued 110.8 million refunds equal to $280.4 billion, or an average of $2530 per refund. Through February 22, 2008, the IRS reported that the average tax refund is at $2708 for 46.9 million returns filed.

In my discussions with people that have large refunds, they like it because they feel it is an effective way to save. If the money had not been withheld by the IRS, it would have been spent. Thus, a refund is a great windfall. Occasionally, I ask, "Would you be interested in reducing your withholding and getting an extra money each month, or do you prefer to get a large refund?" The answer is 100%, " I prefer getting a large refund."

While tax withholding may be an effective way to force saving, it not an effective way to manage money. First, the IRS does not pay interest. If people had the amount over withheld deposited each month to a savings account and earned 4%, it would add up to $5.2 billion of interest payments. For reference, this amount is greater than the profits of 19 of the Fortune 50 companies in 2007. Second, people lose the use of their own money from a month to over a year. They need to wait until the following year to get a refund from the previous tax year. In some cases, these people pay finance charges for a loan against their own tax refund. Getting a big tax refund is like lending a lot of money to someone for free.

My preference is to owe a little bit when filing my tax return. That way I benefit from having my money to use before sending it to the government on April 15th.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

Rewards and Challenges of Early Retirement

Since retiring in my forties in October, 2007, I have had no regrets. It has been great experience with both rewards and challenges. Here's what I've experienced over the past five and half months.

Rewards

Excellent time flexibility. When I was working, it required extra effort to make sure I could attend the family events. Even with that effort, business travel or other commitments sometimes had priority. Now family events receive top priority, from pre-school teacher conferences to family vacations. As a result, I have maximum availability for our child's activities. I won't miss seeing our three year old grow up. From going to school to our regular games, I wonder if she sees me too much:-)

No daily commute. I do not miss driving 45 minutes twice a day trip for work. I do not miss traffic backups due to weather. I do not miss waking up at 5:30 AM to get to work. A side benefit is that my gasoline bill has been reduced by half.

Flexibility to experiment in depth. From exploring new work to new hobbies, retirement offers great flexibility to try and learn. I done part time work in a job with some elements of my dream job and learned I absolutely love to work directly with the end customers of a business. I'm testing a business idea on the Internet and may take some golf lessons.

Challenges

Managing income. A regular paycheck is one of the great benefits of working. No need to worry about from where the money is coming. Since we don't have a pension or receive Social Security, we need to consciously manage our investments to have sufficient income each month.

Being overly available. Retirees seem to get a higher proportion of volunteer requests, since it is assumed they have more discretionary time. While I do not spend time working, I don't feel I have more discretionary time to offer. A similar challenge was being overly flexible for part time work. In the interest of being a good employee, I offered to work any time on any day. Next year, I will restrict the hours to only those that I would like work.

Not being defined by work. A job, career or title can be part of how a person is viewed by others, especially when meeting for the first time. People are often surprised when I say I've retired. Many friends and former colleagues expect that I will be announcing a new job or career any day.

Even with the current economic issues, I am still glad I retired last year. I fully agree with the old saying, "No one ever said on their death bed that they had wished they had worked more."

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

The Expense Of Higher Education

After a discussion with a neighbor on our cost of attending college, I looked back into my records and found that the cost of attending my alma mater has increased 7.4 times since my freshman year, at approximately a 6.5% annual growth. This means our three year old's freshman year cost will equal about 2.4 times today's tuition, room, board and fees, or about $113,000 in 2022. This is about 25% higher than I had estimated in a previous post about saving for college costs.

Our current 529 plans contributions should cover about half of the costs. Currently, I hope to have the other half equally split among summer jobs, school jobs, grants, and loans. Hopefully, this plan will enable our daughter to graduate with a minimum amount of student loans.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC