Archives for March 4, 2019

Early retirement used to mean leaving the workforce at age 50. But a growing group of full-time workers are planning to quit even earlier.

The desire to retire in your 30s or 40s is what’s driving the so-called FIRE movement. The name is an acronym for “financial independence, retire early.” FIRE appears to be gaining popularity among millennials.

Two FIRE members, Tanja Hester and her husband, say they both had demanding consulting jobs. Each earned more than $100,000 a year, but both careers required long hours and extensive travel.

“My husband and I had jobs that we loved, actually,” Hester told CNBC’s “On The Money ” in a recent interview. “I think there’s a common misconception that those of us pursuing early retirement are doing it because we hate work. Or we feel like we shouldn’t have to work. It really couldn’t have been farther from the truth for us. It was just that we felt the toll that work was taking and we knew we couldn’t sustain that pace until age 65.”

Six years ago, they began to envision a life without daily 9-to-5 jobs.

Hester said they started “saving more without a real plan, then we built out a detailed plan.” That strategy included investing more of their income, while cutting spending.

Simultaneously, she started chronicling their progress on a blog, “Our Next Life.” It’s one of many FIRE movement blogs and podcasts aimed at, for and about the group by those involved in it.

The FIRE movement is “a program of extreme savings and investment that allows proponents to retire far earlier than traditional budgets and retirement plans would allow,” according to Investopedia.

While sharing similar goals, Hester said the methods to get there differ.

“Like any group of people, you’ve got a wide range of folks in the FIRE movement.” she told CNBC. While some focus on extreme frugality, Hester said she and her husband don’t share that mission.

“Mark and I are much less frugal. We weren’t natural super-savers. And I wanted to show folks even if you don’t love counting every cent you spend on your groceries, you can still pursue early retirement or some form of it. ”

Although she declines to share how much they accumulated in their portfolio before quitting work, they officially began their early retirement last year. She at 38 and her husband at age 41.

“Early retirement isn’t magic, it doesn’t make life perfect. But I do like no alarm clock.” She said in their first year, “a big chunk of the year we were away traveling,” to destinations including Taiwan, Mexico, France and Monaco.

Her blog writing evolved into a new book, “Work Optional: Retire Early the Non-Penny-Pinching Way, ” where she suggests these tips among many, “Be clear on what life you want to live. You need to know how much it costs. Second, be clear on your spending.”

But Hester adds there isn’t a single template for early retirement, “I think it looks different for everyone. ”

“It’s easy to get caught up in the traditional retirement definition. Thinking that it has to mean that you either work, or you don’t. I think it’s so much more gray area and that each of us can really define for ourselves how much of a role we want work to play in our lives. Whether that’s full early retirement or if it’s something where you work some, or like I do which is I do a lot of stuff that looks like work but it’s all projects that I feel passionate about. ”

But what happens down the road if you’re not working and you get an illness, have an accident or something else you hadn’t anticipated?

Hester said: “I think that working sometimes gives us a false sense of security. And tells us we can spend all of our money, when in fact we should be saving a lot of it. Knowing that your career is only going to go for a decade, two decades, three decades, something shorter than the norm, I do think motivates you to save more and to make some different decisions”

She added people in the FIRE movement are choosing to live their lives differently than the work-life pattern of previous generations.

“It’s people finding alternative narratives for their life and saying, ’You know, just because my parents and grandparents did it this way doesn’t mean that I have to.”

Investing your money is a good way to grow it into an even larger sum over time. But if there’s one downside to investing, it’s having to pay taxes when your portfolio makes you money.

There are several ways you might get taxed on investments. If you sell assets for more than what you paid for them initially, you’ll be liable for capital gains taxes. Similarly, if you earn income from your investments in the form of interest payments or dividends, the IRS will be entitled to a portion of that money as well.

If you’re tired of watching your tax burden go up as a byproduct of investing, here’s one move that might help keep the IRS at bay: loading up on municipal bonds. Not only are they a relatively safe investment, but they’re a good way to secure a steady stream of income that the IRS might not manage to touch.

What are municipal bonds?

Municipal bonds are issued by states, cities, or counties to fund public projects. There are two main types of municipal bonds: general obligation bonds, and revenue bonds.

General obligation bonds are backed by the full faith and credit of the issuing municipality, which means that if a city issues them, it’s required to do everything in its power to make good on its bond payments. As such, general obligation bonds are considered to be safer than revenue bonds, which are backed by a specific revenue stream. For example, a city might issue revenue bonds to build a new toll road, and then repay bondholders once that road opens and motorists start paying to use it. There’s a little more risk in investing in revenue bonds, because if a given project fails, bondholders could be out of luck.

A world of tax savings

From a tax perspective, municipal bonds offer investors a solid opportunity to save money. That’s because the interest they pay is always exempt from federal taxes (whereas if you buy corporate bonds, you’ll always pay taxes on the interest you receive). Furthermore, if you buy municipal bonds issued by your home state, you’ll avoid state and local taxes as well.

Here’s how that might play out. Let’s say you’re in the 24% tax bracket, and you receive $500 in corporate bond interest. The IRS, unfortunately, will take a $120 cut of that $500. But if you buy municipal bonds issued by your home state, and you receive $500 in interest from them, the entire $500 will be yours. That said, corporate bonds typically pay more interest than municipal bonds, so you’ll need to determine your tax-equivalent yield to see which type ultimately leaves you with the most money in your pocket.

Another thing to keep in mind about municipal bonds is that while the interest they pay is exempt from federal taxes, and in some cases, state and local taxes as well, you will be liable for capital gains taxes if you sell your bonds at a higher price than what you initially paid for them. The amount you’re taxed will depend on the length of time you hold those bonds for. If you hold them for a year or less, you’ll face short-term capital gains taxes, which is effectively what you pay on ordinary income. On the other hand, if you hold your municipal bonds for at least a year and a day before selling them at a profit, you’ll be taxed at the more favorable long-term capital gains rate.

A great way to diversify

Though municipal bonds generally aren’t the most lucrative investment out there, they’re a great way to secure a steady stream of income without having to worry about raising your tax burden. Furthermore, municipal bonds have a much more solid track record of meeting financial obligations than corporate bonds, so as long as you do your research before diving in, your chances of falling victim to a default are pretty low.

Paying taxes on Bitcoin and other cryptocurrencies is becoming a priority for individuals in the US after the IRS announced on July 2nd, 2018 that one of their core campaigns and focuses for the year is the taxation of virtual currencies.

Because cryptocurrencies are treated as property in the eyes of the law, they are subject to capital gains and losses rules just like stocks, bonds, real estate, and other forms of property.

The challenge with cryptocurrency in regards to taxes is that the data making up your crypto buys, sells, trades, transfers, mining income, forks, splits, air drops, wallet transactions, and other crypto activity is likely scattered across many different platforms and exchanges. This can make the tax calculation and reporting process difficult.

These five tips will help make the crypto tax reporting process easier and allow you to stay in the good graces of the law.

1. KEEP A RECORD OF EVERY EXCHANGE WHERE YOU HAVE BOUGHT OR SOLD CRYPTOCURRENCY

Exchange data is essential in the crypto tax reporting process. Exchanges are likely the places where you originally converted fiat currency into cryptocurrency, and thus your cost basis is originally established here. You should have complete historical data from every exchange that you have used. Most exchanges have an option that allows you to export your complete trading history.

Having this data on hand will make the reporting process easy whether you are doing calculations by hand or with the help of crypto tax software.

2. MAINTAIN RECORDS OF ANY CRYPTO THAT YOU RECEIVED AS INCOME

Cryptocurrency that is received as income is treated differently than crypto trades for tax purposes. It’s important that you have records of income events such as Bitcoin mining payouts, crypto received from a job, or any other form of cryptocurrency received as income. You should keep track of the amount of crypto received as well as the date and time that you received it.

3. LEARN HOW TO CALCULATE GAINS AND LOSSES ON BITCOIN AND CRYPTO INVESTMENTS

You owe taxes on what you gained from trading, so it’s important to understand how to calculate your gains. To calculate your capital gains and losses, you use this formula:

Fair Market Value – Cost Basis = Capital Gain / Loss

Cost Basis is the original value of an asset for tax purposes. In the world of crypto, your cost basis is essentially how much it cost you to acquire the coin.

Fair market v alue is just how much an asset would sell for on the open market. Again with cryptocurrency, this fair market value is how much the coin was worth in terms of US dollars at the time of the sale.

Therefore, to calculate your gain or loss on each trade, you need to know at what USD value you acquired the crypto for and at what USD value you traded or sold it for. If you haven’t been keeping track of the USD value of your trades, you can use crypto tax software to crunch those numbers for you.

4. SPEAK WITH A CRYPTO TAX SPECIALIST

If your crypto trading activity was pretty straightforward, it is likely that you will be able to handle your own tax reporting without much trouble. However, if your situation is complicated and you don’t want to deal with the reporting process yourself, it may be helpful to speak with a Bitcoin accountant or a specialized crypto CPA. Certain accountants have become specialists in cryptocurrencies, and they work full time to help traders sort through the tax implications.

If you have specific questions regarding your situation, it could be beneficial to consult an accountant.

5. SAVE MONEY ON YOUR US TAX BILL BY REPORTING YOUR CRYPTO LOSSES

When you realize a capital gain (you sold your crypto for more than you purchased it for), you owe a tax on the dollar amount of the gain. However, when you sell (or trade) your crypto for less than you purchased it for, you incur a capital loss, and you can use this loss to offset gains from other trades or even a gain from the sale of other property like stocks in your portfolio. This can save you a substantial amount of money if you have heavy losses.

While tax season isn’t the most fun time of the year, it doesn’t have to be stressful. Keep good records and leverage the Bitcoin tax tools that are out there to seamlessly file your cryptocurrency taxes for the year.

It costs over $1 million to retire at age 65. Are you expecting to be a millionaire in your mid-60s?

If you’re like the average American, the answer is absolutely not.

The Emptiness of the Average American Retirement Account

The first thing to know is that the average American has nothing saved for retirement, or so little it won’t help. By far the most common retirement account has nothing in it.

Sources differ, but the story remains the same. According to a 2018 study by Northwestern Mutual, 21% of Americans have no retirement savings and an additional 10% have less than $5,000 in savings. A third of Baby Boomers currently in, or approaching, retirement age have between nothing and $25,000 set aside.

The Economic Policy Institute (EPI) paints an even bleaker picture. Their data from 2013 reports that “nearly half of families have no retirement account savings at all.” For most age groups, the group found, “median account balances in 2013 were less than half their pre-recession peak and lower than at the start of the new millennium.”

The EPI further found these numbers even worse for millennials. Nearly six in 10 have no retirement savings whatsoever.

But financial experts advise that the average 65 year old have between $1 million and $1.5 million set aside for retirement.

What Is the Average Retirement Account?

For workers who have some savings, the amounts differ (appropriately) by generation. The older you are, the more you will have set aside. However there are two ways to present this data, and we’ll use both.

Workers With Savings

Following are the mean and median retirement accounts for people who have one. That is to say, this data only shows what a representative account looks like without factoring in figures for accounts that don’t exist. This data comes per the Federal Reserve’s Survey of Consumer Finances. (Numbers rounded to the nearest hundred.)

• Under age 35:

Average retirement account: $32,500

Median retirement account: $12,300

• Age 35 – 44:

Average retirement account: $100,000

Median retirement account: $37,000

• Age 45 – 55:

Average retirement account: $215,800

Median retirement account: $82,600

• Age 55 – 64:

Average retirement account: $374,000

Median retirement account: $120,000

• Age 65 – 74:

Average retirement account: $358,000

Median retirement account: $126,000

For households older than 65 years, retirement accounts begin to decline as these individuals leave the workforce and begin spending their savings.

Including Workers Without Savings

When accounting for people who have no retirement savings the picture looks considerably worse. Following are the median retirement accounts when including the figures for people with no retirement savings. The following do not include mean retirement accounts, as this would be statistically less informative than median data.

• Age 32 – 37: $480

• Age 38 – 43: $4,200

• Age 44 – 49: $6,200

• Age 50 – 55: $8,000

• Age 56 – 61: $17,000

How Much Should You Have Saved For Retirement?

So that’s how much people have saved for retirement, or more often don’t. Now for the more useful question: How much should you have saved for retirement?

The truth is that there’s no hard and fast rule. It varies widely by your age, standard of living and (perhaps most importantly) location. Someone who rents an apartment in San Francisco needs a whole heck of a lot more set aside than a homeowner in the Upper Peninsula of Michigan. 

The rule of thumb is to estimate by income. Decide the income you want to live on once you retire, then picture your life as a series of benchmarks set by age. At each age you want a multiple of this retirement income saved up. Your goal is to have 10 to 11 times your desired income in savings by retirement.

• By age 30: between half and the desired income in savings

• By age 35: between the desired amount and double the desired income in savings

• By age 40: between double and triple the desired income in savings

• By age 45: between triple and quadruple the desired income in savings

• By age 50: between five times and six times desired income in savings

• By age 55: between six times and seven times desired income in savings

• By age 60: between seven times and nine times desired income in savings

• By age 65: between eight times and 11 times desired income in savings

So, if you earn $50,000 per year, by age 40 you will want to have between $100,000 and $150,000 in retirement savings set aside. The formula grows later in life for two reasons. First, as your savings accumulate they will grow faster. Second, as you approach retirement it is often wise to accelerate your savings plan.

What You Should Do Next for Your Retirement Savings

Retirement is approaching a crisis. In the coming decades millions of Americans will get too old to continue working without the means to stop. Millennials, crippled by debt from graduation, will turn this crisis into a catastrophe in about 40 years. And Social Security, designed to prevent exactly this problem, covers less than half of an average retiree’s costs of living.

It’s beyond the scope of this article to discuss exactly how this happened, but if you’re one of the many people who have fallen behind on retirement savings, don’t panic. There’s plenty you can do. But… it might not necessarily be easy.

The key is to think about retirement savings like a debt. This is money you owe to yourself and it charges reverse interest. Every day you go without adding money to your retirement account is a day you lose investment income. That’s money that you’ll need someday and won’t have.

Next, take stock of where you are. How much will you want to live on in retirement and how much do you have saved today? Use our chart above. That will tell you how far behind you are compared to where you need to be. Are you a 40 year old with $25,000 in savings who will want to live on $50,000 per year in retirement? Then you’ve got $75,000 you need to make up for.

Now, begin catching up. Chip away at that debt every week and every month. Pay into your 401k and IRA the same way you would whittle down a credit card. By thinking about it this way, as a specific goal, you can take away some of the fear of saving for retirement and turn it into an achievable (if large) amount. It’s not just some big, black hole you can never fill. It’s a number, and numbers can go down.

It won’t necessarily be fun. You might have to cut back on luxuries or take on some extra work, but even if you start late in life you can catch up on your retirement.

Now’s the right time to start.