Andreea Lucia Mihalache

 Retirement Financial Management: Investing Basics to Ensure an Early (Abundant) Retirement Introduction Early retirement – two words that, when placed next to one another sound equally enticing and unbelievable. I asked numerous people when they thought it was the ideal timing for retiring. Most answered the present. If I were to ask you the same question, I anticipate you’d give me the same answer. While that may not be accomplishable at once, you can aim at turning your wish into reality. Possibly, the main thing that pops into your mind when it comes to the topic of early retirement is providing an income that will support you. And that’s expectable, given the fact that saving and investing has plenty to do with that. Retirement can actually be that phase in your life that will enable you to live your life with joy when the approach is the right one. Because many people fail to plan ahead for their retirement, they convey it as a disappointment. But, for you, it can be the unique opportunity of enjoying life like never before. Contrary to popular belief, retirement can account for that phase that will enable you to become the person you have always wanted to be, and engage in the activities you like the most. Without fear of contradiction, relishing early retirement, and having your financial prospects ensured for the years to come, sounds excellent. Nonetheless, that doesn’t mean it will occur by chance. Planning ahead carries a significant importance in the equation. You have to consider a range of steps in managing your money successfully, in order to enjoy early retirement. And when the clock ticks, you’ll know it – the time has come for you to retire. Imagine how much time you’ll have on your hands, to spend with your partner, extended family, and friends, not to mention that you’ll finally get the chance to travel as you’d like. Because retirement doesn’t mean leading an idle existence, turning into a coach potato that hardly gets out of the house. What I’m trying to say that it’s up to you to construct the retirement life you want to lead. In my point of view, retirement is the last opportunity for each of us to invest in ourselves – find peace and harmony within our souls. And it’s up to you to embrace this chance and use it for your personal development, in order to pursuit your lifetime dreams. For me, retirement equals freedom, and believe me, your mindset is very important in this phase of your life. A positive approach towards existence, enjoying every moment, taking each chance to go after your dreams, are all things you can do when you retire early. By writing this book, I aim at covering the basic steps you should take on the road towards ensuring a successful, gratifying early retirement. There’s no better time than the present to start planning ahead, my friend – you’ll be happy you’ve taken this book into your hands. Without further ado, let’s start planning ahead together! Chapter 1: Retirement Planning – Why and How Should You Do It? In this chapter, you will learn: The main reasons you should consider early retirement The first steps you should take on the road towards financial planning Useful tips concerning effective financial planning and budgeting Why should I consider retirement planning? Before we delve into covering the basics on how to plan ahead for a fruitful early retirement experience, I want to outline the primary reasons you should do it. Ok, I suspect that you consider this question rather trivial, but it’s always a good idea to know all sides of the story. Here are the important motives that talked me into doing it. The uncertainty of pension advantages and social security Let’s cut it down to the chase – the prospects of retirement plans that are sponsored by the government aren’t all sunshine and rainbows. On the opposite, due to the fact that the world’s population is continually aging, the number of working-age individuals supporting the social security system is steadily decreasing. In lines with a 2005 study underwent by Stephen C. Goss, the chief actuary of the Social Security Administration, the percentage of covered workers versus the amount of beneficiaries under the U.S Social Security program has decreased drastically over the years. In other words, the system is burdened with an increased number of beneficiaries, because the number of people retiring is growing, given the benefits of modern-day health care. On that account, that leaves the government with no option apart from diminishing the benefits linked to social security. In the same respect, private pension programs are prone to suffer from these external causes as well. As a result, because of the wide range of uncertainties linked to these programs, we have been left no choice but to take our fate into our own hands, and start planning for our own retirement. The flexibility of coping with changes There’s no use denying that now and then, life may throw us a curve ball. Unexpected health conditions, the lack of certainty of your social security, and the pension system are some of the factors that may lead to an unprecedented occurrence. Nonetheless, in spite of the unanticipated challenges that you may have to face, ensuring the security of your early retirement is the one way to enable you to cope with anything that may come. The financial hiccups that may occur will be diminished in the long run, and, by implementing a set of steps, you’ll be on the right path towards ensuring your financial wealth management. These are two of the primary reasons that, to me, were convincing enough. Certainly, there are many others such as enjoying spending more time with your partner, engaging in all kinds of activities – volunteering, and so on and so forth. It’s all up to each of us to plan how we wish to live our lives. When you can rest assured that your financial future is safe, you transform your entire life and your mindset. How much money will I need? Let’s move on to the next question, which is the most frequent question about early retirement – how much money do I actually need to retire early? The answer is subjective – namely, it depends on each’s situation. No particular sum of money can guarantee that you’ll relish early retirement as you anticipate. That’s, mainly, because multiple factors play a substantial part in this equation such as the lifestyle you wish to pursue, your retirement age (how early do you want to retire?) and expenses – including potential medical costs. However, there is good news as well – you can aim at establishing a reasonable sum of money by anticipating your retirement needs. All you have to do to is take the time and answer a set of questions. As long as you’re sensible about your choices when it comes to financial planning, it’s possible to accumulate enough to ensure you live your golden years to the fullest. Settle down the age at which you plan to retire. Establish the annual income you’ll require for your retirement years. I personally encourage you to estimate the high end for the sum. For instance, it’s down to earth to anticipate that you’ll require about 80 percent of your present salary, in order to ensure your style of living. You can utilize a retirement calculator to establish the amount of money you want to accumulate by the time you reach your anticipated retirement age. Factor in a long-term care plan, and anticipate the expenses linked to this plan. Evaluate the value of the benefits for your Social Security. U.S. residents may obtain estimation here. Consider the market value of your savings and investments – we’ll cover this topic right away. Establish a realistic annual real rate of return on your investments. You might anticipate that inflation will be about 4 percent per year, which will imply that your performance will vary between 6 to 10 percent. I recommend you always estimate on the low side of the sum, just to be safe. In the case in which you have a company pension plan, you should obtain an estimate from your provider. Social Security as investment – an open possibility The U.S. Treasury Department administers the Social Security trust fund. Did you know that there’s the option of conveying Social Security as an investment? In fact, there are scenarios in which one can invest the Social Security benefits, in this way ensuring long-term financial wealth. Numerous financial advisors have claimed that it is nonsense to postpone Social Security, because that sum of money may be invested, and one may earn a significant percent of income in return. By all means, there are cases in which the monetary gains are considerable; hence, claiming in advance is advantageous. For this strategy to be efficient, your spending goal shouldn’t be too large, in lines with the size of the financial portfolio. In that scenario, an extensive portfolio will permit Social Security delay to diminish the withdrawal rate. In other words, it’s mandatory to withdraw more, to the point to which Social Security starts. However, that means retirees can withdraw much less once Social Security begins. Truth be told, the cash value of your insurance policy can account for a major financial base for your early retirement plans. However, we’re talking about a rather sophisticated strategy. On that account, I would encourage you to discuss the implications with your insurance company, as well as a financial advisor, before you take the leap and take a loan or withdrawal. All in all, without fear of contradiction, early retirement and living a life filled with joy shouldn’t be an oxymoron, as long as you embrace a realistic approach towards financial planning in retirement. It’s about utilizing the resources you have at your disposal, and make the best choices along the way. Early Retirement depends on perpetual income When it comes to early retirement, financial planning depends on continuous income. For instance, I have been financially retired since the age of 40, meaning that I didn’t earn money for paying living expenses. The question that naturally emerges is the following – how can I do that sensibly, when there’s no way I would anticipate my investment returns, spending patterns, life expectancy or inflation? #1 First things first, your primary purpose should be constructing an investment portfolio that should suffice to throw off residual excess. Remember that I’m not referring to total return but to residual income alone. You can spend the revenue produced by your assets, but under no circumstances should you go near the assets. Making the distinction is essential. On that account, when the cash flow on your portfolio exceeds the amount you spend on your expenses, then, my friend, you have attained financial wealth. You don’t need to be the adept of complicated math to understand this principle. #2 Secondly, you have to aim at managing your assets in such a way, as to facilitate that growth exceeds the inflation rate. For instance, in the case in which your income originates from a bond portfolio, the growth is zero because income and total return equal each other in the long run. In other words, it means your biggest enemy – inflation – will swallow your bond portfolio, which isn’t a positive perspective. Alternatively, when your cash originates from properly evaluated dividend paying stocks, together with positive cash flow coming from rental real estate, your assets are likely to experience a growth with inflation, meaning that your income will increase as well. In plain English, as long as the distinction between the income of your assets and your total return outgrows the rate of inflation, you can rest assured. #3 The third principle is the following – your residual income should always come from various, non-related sources. That concept refers to investment diversification. We’ll cover this aspect in detail in the upcoming chapter. #4 It’s equally important to embrace budgeting. So, you have to be smart about spending. If you have a mortgage on your home, it’s ideal to direct your attention towards paying it down, and eliminating any considerable debt, which may prevent you to relish early retirement as you’d like. Even if the sum of money you have to produce to ensure a peaceful early retirement is depressingly high, there’s no need to despair. You have plenty of time to catch up. Your aim is to facilitate the growth of your investments, and take advantage of passive income, a topic we’re going to cover in the following chapter. What happens if I’m late getting into the game? In the case you are thinking that you’re arriving a bit late to start financial planning for your early retirement, I’m going to be honest with you – you’ll have to work hard to catch up. First of all, you’ll need to establish a budget for your present expenses, in this way aiming at maximizing the monthly contributions to your retirement fund. When you embrace budgeting, you have to remember that a little goes down a long way. By tracking your expenses for a month or so, you’ll notice that skipping a dinner out will save you a considerable sum of money, and that can go a long way in boosting your financial prospect. Your initial objective should be to raise your savings rate. Additionally, you might take up alternative means of earning money to improve your financial situation. For instance, second jobs can be a viable option. If you have a home, you could consider renting a room, to minimize your expenses as much as possible. Another idea would be to sell your current home, and move into a smaller, less expensive residence, or use it as a reverse mortgage. A reverse mortgage enables you to convert a segment of your equity in your home, in the form of tax-free income, while remaining the owner of the building. If you aim at pursuing this path of a reverse mortgage, do make sure that you take into consideration all the hidden, additional costs that come with it, which may equal those that usually emerge upon purchasing a new house. I’m talking here about origination and appraisal fees. Check your understanding! Which are the main steps you should take to calculate an estimative amount for ensuring your financial wealth? What are the core principles that lie at the foundation of perpetual income? Chapter 2: Understanding Basic Investment Principles In this chapter, you will learn: The basics concerning money investment and passive income What characterizes retirement investing diversification What makes investing diversification utterly essential for the early retiree A brief introduction to stock market investing The concepts behind Investing Diversification By all means, I won’t deny that managing your finances when planning early retirement is a tricky business. Economic uncertainties, high inflation, and unexpected market crashes can be the source of panic and worry for the early retiree. On that account, there’s a key to eliminating this concern – I’m talking about retirement investing diversification. That’s because diversification can ensure an increased level of reassurance and certainty, which will ensure your sleep at night! Namely, such an approach is more than recommended for sensible financing – jumping from an investment to another, looking to grasp the hottest sector and directing your lifetime earnings there isn’t the most appropriate strategy. The importance of diversification couldn’t be stressed enough. We could summarize the entire concept into a single expression – steer clear of putting all your eggs in one basket. It’s a simple, basic concept, but it does pay off to take it into account. In spite of the type of investment you want to go for, whether we’re talking about stocks – we’ll cover this subject later on – real estate, or bonds, by all means, don’t bet your early retirement plans one a single asset. Given the fact you’ll contribute to your savings account on a regular basis, namely per month, the last thing you want is to see your money go down the drain. Truth be told, even the most experienced and professional financial advisor couldn’t dream of predicting the financial success of every aspect. As a result, it goes without saying that you should embrace diversification. In this direction, today’s financial market provides each of us with plenty of opportunities of accomplishing investment diversification. While you may assume that this is easy to achieve, that assumption is partially accurate. You still need to make every decision sensibly and aim at creating a diversified portfolio. On the other hand, though, having multiple investments noted in your portfolio won’t enable any of them to generate a significant passive income. The bottom line Bear in mind that, in spite of the method you choose, there is no strict pattern that will fulfill the requirements of every individual. Your investment goals, together with your financial means and experience are all factors that play important roles in this scenario. You should begin by mixing a set of stocks, cash, and bonds, and settle what works best for you. Nonetheless, diversification is a positive concept, when it’s done in reasonable quantities. Extensive diversification doesn’t mean you might not lose much, but, it actually means that your gain will be held to a minimum. From that point, if you think you need the assistance of a financial advisor to maximize your potential, you should know that there are numerous professionals who are more than eager to help. Building Passive Income for Early Retirement Constructing passive income is, by all means, the holy grail of financial wealth management. It may sound great and you may think: “Wow, I want that, too!” I know you do, but bear in mind that everything passive, at first, requires action, which you should take. And, truth be told, the ideal moment to start planning for early retirement is when you’re still young and can optimize your energy and vitality in order to ensure a free, positive future as you grow older. This is inevitable, so you’d better embrace that and make the most out of it. Instead of concentrating on saving a considerable amount of money, direct your attention towards generating money apart from your day job. That implies a lot of effort and time, but your aim is to cover your monthly expenses with the passive income you generate. Consider the following sources of acquiring passive income: Rental properties. A wide range of people has managed to retire early successfully with rental income. Certainly, getting started is no piece of cake, because you’ll require a considerable amount of cash for down payment. Another way you could embrace this practice is by renting your own home in the case in which you move out. That’s just a suggestion. Certificate of deposit. This alternative implies that you lend a particular amount of money to your credit union or bank, for a fixed amount of time – three months, six months and one to five years. During that lifespan, the invested sum increases, and you can expect to make a particular return on the investment made. Nonetheless, you should be mindful and acquire the right information before you go down this route, as low-interest rates typically result in a low investment return. Peer-to-peer lending. That is a new option for passive income. Usually, you lend money directly to borrowers through peer-to-peer firms such as Lending Club and Prosper. In this scenario, the investor behaves similarly to a bank. By all means, the interest rate is considerably higher compared to the certificate of deposit. However, at the same time, the risk is increased as well. Dividend stocks. Multiple companies in the stock market supply their investors with regular payment. For instance, AT&T pays $1.84 for each particular share. By directing your investments in stocks, you can aim at starting small, and, in time, you can grow the amount of passive income you generate. If you have, say, $1000 for investing, by buying stocks, you’ll receive a steady percent dividend per year. Tax-exempt bonds. Generally speaking, state and municipal bonds encompass the vast range of exempt bonds, and supply you with revenue, while providing you immunity from federal income tax. Additionally, as a bonus, in the case in which you aim at investing in municipal bonds offered by your state, you can avoid having to pay for federal and state taxes, while facilitating your gain from bond holdings. Pensions. Even though the occurrence of defined pension plans isn’t that frequent, there are still some employers that will start paying out, right after you separate from service. Additionally, some employers are willing to provide a continuation of insurance coverage, in the case of eligible retirees. If you are fortunate to work for an employer that provides a defined, immediate pension plan, that can partly fund your early retirement, and, depending on your state of residence, you can benefit from a range of further tax advantages. The best part about early retirement and passive income is that you are in control of your finances. In other words, you have control over your monthly expenses, and you can decrease them in order to attain your goal in time. Also, some people are genuinely good at making renting work for them, earning a substantial amount of money, while others feel more at ease with dividend stocks. The Basics of Stock Market Investing Without fear of contradiction, the stock market is, arguably, the ideal wealth creator. However, in spite of that, it remains a source of confusion to many Americans. The greater majority of people assume that stocks are the magic solution to attaining financial wealth. Still, the incidence of events in the realm of stocks proved that they do come with plenty of risks. Therefore, the solution to approaching stocks the right way is by acquiring information on the subject. Knowledge is power. So, let’s start with the basics. What is a stock? In plain English, it’s a share of ownership in a firm. Stock stands for a claim on a company’s earnings. If you acquire more stock, the ownership stake is on the rise. Shares, stocks, and equity, they all mean the same thing. Being in possession of a stock implies that you are one of the multiple owners of a company, namely, you are entitled to claim everything the firm owns. What about the risk? I want to outline that there are no guarantees, especially when it comes to individual stocks. Some companies pay out dividends while others don’t. Dividends equal the profits that you are paid off as a result of the enterprise’s profits. The risk is that the firm may experience bankruptcy, and in that scenario, your investment goes down to nothing. Even though the risk may make the whole concept of stock investing appear black as pitch, the greater the risk, the bigger your investment return will be. That’s mainly the reason stocks have presented an improved performance in comparison with other types of investments such as bonds or savings accounts. From a historical point of view, stock investments had a fair return of 10-12 percent. What determines the changes in stock prices? The stock market suffers changes because of market forces. In other words, share prices change because of demand and supply. If more and more people want to purchase stocks – demand, as opposed to supply – the prices may go up. On the other hand, if the number of people wanting to sell stocks is bigger than the number of those wanting to buy them, this means the supply is greater than the demand, and that makes the price go down the charts. Ok, understanding supply and demand isn’t that problematic. What is, however, challenging, is to note what makes people opt for a stock over another. The fundamental aspects you should grasp about the matter are the following: Fundamentally, the demand and supply influence the price alterations on the stock market. Earnings represent the primary factor that affects the investor’s appreciation of the enterprise. However, there are other factors such as expectations and attitudes of the investors that influence stock prices. There are multiple theories about the way in which share prices fluctuate. Nonetheless, no particular theory clarifies the topic on a whole. All in all, it’s best to educate yourself about the way in which the stock market functions and, by acquiring a steady investment return, you’ll be able to benefit from some income, with minimal risks. All it takes is to embrace an open-minded approach to the opportunities of the market and aim at diversifying your portfolio while constructing your early retirement plan. Check your understanding! Which are the primary means of constructing passive income? What makes investment diversification such a primordial concept for your investing behavior? How can you manage your finances to ensure a positive prospect of early retirement? Do’s & Don’ts Do’s Practice active investment diversification practices – The key to optimal investment management is diversification, as previously outlined in the book. However, your portfolio should present variety to a certain extent; an unbalanced portfolio won’t bring you the returns you anticipate. Ensure your prospects by facilitating passive income – If you manage to master your perpetual income through passive income, you are on the right path towards embracing retirement earlier than you anticipate. Be flexible and get informed – As nothing remains unchanged, particularly when it comes to the stock market, it’s essential to embrace a flexible mindset and obtain knowledge to maximize your revenue. Don’ts Don’t wait to start budgeting and planning – Even though you may have years lying ahead of you for saving for your retirement, and you think that you are still young and restless, you shouldn’t wait to start saving and planning. The key concept is to make early retirement a priority and, little by little, you’ll manage to attain your goal. Don’t forget to factor in the expenses of a long-term health care plan – No one likes the idea of aging, but it will happen once retirement kicks in. On that account, if you plan to retire early, that doesn’t mean you shouldn’t anticipate the expenses linked to long-term health care, which does come with plenty of costs. Acquire information related to this subject to avoid that. Don’t fail to upgrade your retirement plan – In today’s fast-paced world, everything changes. On that account, it’s vital that you update your early retirement plan now and then, and see if everything is OK. Conclusion I hope that this guide on abundant early retirement has served as a helpful introduction to this topic. Remember, early retirement equals financial planning and investing, implementing a set of useful practices, and always aiming at enlarging your knowledge on the subject. Early retirement doesn’t have to be an oxymoron – each of us can plan and relish it when the times come. That’s something I have experienced, and it’s my turn to encourage you to do the same, and pursue this path with determination and ambition. Living abundantly in early retirement shouldn’t be a conflicting goal – as long as your objectives are regularly updated, and you’re using the resources you have at hand for maximizing your investments. I really appreciate that you have read this book so far. I wish you the best of luck in pursuing your goals!