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The 3 Secrets to Retiring Early

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The 3 Secrets to Retiring Early

You’ve likely read articles about people retiring early. Is it possible for you, and if so what will it really take? First let’s establish the age at which most people retire.

Age 66 is considered full retirement age by the Social Security Administration, but that clearly hasn’t stopped people from exiting the workforce a lot earlier. According to a 2016 Gallup survey, retirees said they stopped working at an average age of 61.

The definition of early retirement can be pretty subjective. You cannot draw from Social Security until age 62, but under certain circumstances you can begin withdrawing from your 401(k) at age 55 (age 50 if you’re a public safety employee like a firefighter). So for the purposes of this conversation we’ll peg early retirement as any age before 50.

The key to retiring early? Low expenses, no debt, and high income.

Retiring early is no easy feat, and in most situations it will require several events to occur, some of which you may not have control over. In the vast majority of cases you will need to keep your current cost of living extremely low, earn a high salary, and have little to no debt. These barriers automatically make it harder for the 42.4 million Americans with student loan debt, according to latest data from the U.S. Department of Education; the class of 2016 alone had an average of about $37,000 in loans.

Though debt always plays a factor, cost of living may be the biggest hurdle to overcome on your path to early retirement. Peter Adeney, who runs a very popular financial blog called Mr. Money Mustache, retired at 30 and has become one of the most popular names behind the FIRE (Financial Independence Retire Early) movement. (Pete does not reveal his last name to media to protect his family’s privacy).

But he is hardly kicking back at an island villa sipping cocktails all day. According to an interview in MarketWatch, his family of three subsists on $25,000 per year in Longmont, Colo. Not everyone is able (or willing) to cut back their expenses to fit under such a low threshold. Where you choose to live can determine how much of your income you can save. MagnifyMoney recently analyzed over 200 U.S. cities to find the best and worst places to retire early.

Choosing the right career with a high salary on the front end can be a huge boost, Travis and Amanda of the blog Freedom with Bruno saved $1 million by 30 and retired to Asheville, N.C., according to Forbes. Thanks to a career in tech they were earning a combined income of $200,000. Jeremy of Go Curry Cracker, who made nearly $140,000 per year at Microsoft, saved 70% of his income, and lived on less than $2,000 per month, also retired at 30. It is also important to know that Pete and his wife (mentioned earlier) were also in the tech industry.

Not everyone can relocate to an inexpensive region of the country due to their job or the need to be close to their family, nor do most Americans have the privilege of a six-figure salary, but there are some great lessons that can be applied to your situation, no matter your income or age.

What you would need to retire early

Regardless of salary, debt, or cost of living, having a clear and defined goal is what gives people the confidence to retire early. Without it, they wouldn’t know the amount needed to leave their jobs. You will need to know how much you should be saving toward retirement each year and how much you will need while in retirement. Bankrate has a free retirement calculator here to help you visualize your retirement savings.

The typical rule of thumb is to live off of 4% of your total retirement savings. If you can live comfortably off of $40,000 per year in retirement, you would need about $1 million by the time you retire. If you could live comfortably off of about $25,000, you would only need about $600,000; this is what Pete from Mr. Money Mustache saved when he retired. Another easy way to get to that number is by multiplying your ideal retirement income by 25. So someone needing $55,000 in retirement would need $1,375,000. Once you figure out what you would be comfortable living on, you’ll need to select quality, low-cost investments. For many early retirees this comes in the form of index funds.

If you’re looking into cutting your cost and putting more toward retirement, you may have to get creative or put some serious efforts into increasing your income. This may include keeping a car on the road that’s 19 years old, cooking for every single meal, or moving in with your adult siblings to pay off your debts. Early retirement will require serious commitment and discipline. If you’re in the right position to do it, then this may be the path for you.

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4 Ways to Get Out of a Loan if You Are a Cosigner

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4 Ways to Get Out of a Loan if You Are a Cosigner

Being a co-signer has risks. If the primary borrower does not pay, you may be on the hook for debt and your credit score could be negatively affected. You may have signed on for a child’s student loans to help them through college or helped your brother get a new car or credit card. After some time has passed, you want to remove yourself as the co-signer.

According to the Federal Trade Commission, 75% of cosigners end up paying some portion of the loan because the primary borrower was not making payments on time.

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Here are 4 ways to remove yourself as a co-signer:

1. Refinance the Loan

One of the best ways to get your name removed as a co-signer is to have the loan refinanced in the primary borrower’s name, which will essentially replace one loan with another, usually with a lower interest payment or better terms. For mortgages, car loans, and student loans the process for refinancing is pretty straightforward.

To get started, the primary borrower would need to go through a process very similar to the one used to obtain the original loan. He or she would need to provide their credit history and income information to the lender, which could be a bank, a credit union, or an online lending company. If the loan is approved, it can replace the old debt, which would release you from the liability and establish new payments and terms for the borrower.

Note: The borrower will need to have a good credit score in order to refinance his or her loan. If their credit is poor, unfortunately, this may not be an option and you may be stuck as their cosigner. They will need to improve their credit score and try again later.

2. Ask to Be Removed

Depending on the credit history of the primary borrower, some lenders may give the co-signer the option to be removed after a certain period of time, though this situation is rare, as it does not benefit the lender. Check the loan documents to see if your loan allows this. You may also call the lender to inquire. In some situations, the primary borrower may be able to have you removed as the co-signer.

3. Transfer the Balance

Sometimes you may have to be more creative to be removed as a co-signer. One way to do it is by using a 0% balance transfer credit card. If the primary borrower can get approved, it could allow them to pay down the balance without paying any interest while also letting you off the hook. You can use a balance transfer from several different types of debts, including student loans, home equity loans, credit cards, auto loans, and personal loans.

In terms of the borrower, transferring certain types of debts makes more sense than others. For example, most balance transfer credit cards give you 12-18 months before they start charging interest. If you cannot pay the debt in full by that time, the interest rate could be a lot higher than it originally was. Large amounts like student loans and auto loans may not be the best move unless the borrower can pay them off within the 0% interest time frame.

4. Sell the Asset/Pay Off the Balance

Depending on your relationship with the person you cosigned for and the type of debt, you could just pay off the debt or ask them to sell the asset and take whatever financial loss you might face. It may not be the most financially savvy method, but it works. As a co-signer, you agreed to be the backup in the event the primary borrower does not make payments. Though you might have their best interests at heart, you’ll want to make sure that you’re in the position to make any payments to protect your own credit.

Additional Questions to Answer:

What are the pros and cons of removing yourself as a co-signer?

Financially speaking, there aren’t many cons to removing yourself as a co-signer. Without the co-signer tag, you’re back in full control of what happens to your credit score. The one potential con could be what happens to your relationship with the borrower.

If you’re attempting to end a co-signer relationship due to a missed payment or financial irresponsibility of the borrower, you could sour a close relationship. But this doesn’t always have to be the case. If you set the right expectations going into it, removing yourself as the co-signer could be a welcomed event instead of a painful breakup. If the borrower’s credit has improved, being removed could be seen more like a financial graduation.

What if the other co-signer won’t cooperate? 

If the borrower does not cooperate, unfortunately your options are limited.

“There is very little you can do. The only path is to seek legal advice,” says Neal Frankle, certified financial planner at Credit Pilgrim. You may have to get a lawyer to write a letter on your behalf to the lender seeking to be removed from the loan. But if you signed a legitimate contract, chances are low that they’ll release you. Says Frankle: “The issue is getting the lender to agree.”

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Am I On Track For Retirement?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Am I On Track For Retirement?

Inquiring about your path to retirement is one of the most important financial questions out there. Every year thousands of Americans are polled, and the overwhelming majority are worried about being on track for retirement or running out of money in retirement. According to Prudential’s 2016 Retirement Preparedness Survey, for 59% of current retirees, “not running out of money” in retirement is on the top of their priority list. Among those who are still approaching retirement, about one in four Americans are worried about not having enough money, with millennials leading the pack at at 29%.

There also seems to be a huge disconnect between our fears around money and the confidence in our ability to remedy those issues. Seventy-one percent of people consider themselves capable of making wise financial decisions, but only 2 in 5 don’t know what their money is invested in. Couple that with the fact that 25% of Americans have less than $1,000 in retirement savings, it is clear to see that we’re overconfident and underprepared.

While there isn’t a wealth of information as to why we’re so confident with our money, a part of the problem is not knowing where to start, not feeling like there is enough money to invest for retirement and paying down debt.

Some estimates say you’ll need as much as $2.5 million to retire comfortably, while the average 401(k) account balance is just $96,000, according to Vanguard. The truth is there is no one-size-fits-all figure. The number you need to retire comfortably depends heavily on when you plan to retire, your cost of living, your health, and how long you live in retirement. Additionally, those living in rural areas usually don’t need as much as those in metro area.

Here are a few ways to figure out how much you need and to check if you’re on track.

1. Do the math

Retirement planning calculators can get pretty complex, but to simply find out if what you have saved already is on par for what you will need in the future, there are some very easy calculations that you can use. One popular way to see if you’re on track is by using retirement benchmarks.

Using the chart below from JPMorgan is pretty straight forward. If you’re 35 years old with a household income of $75,000, you should have a total of $120,000 invested today. These charts, however, aren’t perfect because the underlying assumptions can vary wildly.

screen shot 1.2

This chart from Charles Farrell, author of Your Money Ratios, suggests at 35-year-old making $75,000 per year should have $67,500 saved. This is $52,500 less than the JPMorgan chart shown earlier. This is because different models use different assumptions about how much your investments may grow, how much you continue to save, and at what age you plan to retire.

screen shot 2

The JPMorgan chart assumes you will only save 5% per year versus 12% in Farrell’s model. Also when comparing both charts JPMorgan would have you on pace for saving just 8.4 times your salary versus 12 times your salary; a difference of $270,000. No benchmark is perfect. These estimates are meant to provide a quick assessment to let you know if you’re on the right track in terms of how much you have invested. They do not suggest which investments you should be holding.

2. Use a retirement calculator

In addition to doing the math yourself, there are some free tools to check your progress to retirement. Fidelity has a calculator that works very similar to the Charles Farrell mode, which gives you a factor that you need to have saved. Using the same example of a 35-year-old making $75,000, Fidelity’s calculator suggests having 2 times their salary, or about $150,000.

Get your retirement savings factor

It is worth noting that Fidelity’s assumptions of how they reached this figure were not on the site, but by age 65 they suggest having a factor of 12 times your salary saved.

The Vanguard Retirement Nest Egg Calculator takes a different approach. Instead of taking your age and spitting out the amount you should have saved, this calculator asks you your current savings and investment allocation and gives you a prediction of whether your money will last or not. This is done by using what is called a Monte Carlo simulation. Vanguard tests the factors 5,000 times by changing different variable such as investment performance and cost of living.

Keeping all factors the same, someone who has saved $900,000 (which is 12 times their annual income of $75,000) would have a 50% chance that their money would not run out in 30 years.

screen shot 3

Again, it is always important to consider the assumptions. In this calculator Vanguard is assuming you’re investing 20% of your money in stocks, 50% in bonds, and 30% in cash (indicated in the pie chart). This highlights the importance of asset allocation and its effect on your investment success. When we change the allocation, the success rate changes as well.

screen shot 4

In this example, by reducing the cash from 30% to 10% the chances of success increased to 68%. Vanguard also assumes you’re withdrawing 5% of the portfolio per year, meaning that from the $900,000 you saved, you should be spending $45,000 of it each year.

screen shot 5

If you were to increase or decrease this number, the chances of your money surviving would change as well.

By changing the withdrawal rate by just 1% to $36,000 per year, the probability shoots up to 92%. Most experts agree that a 4%-5% withdrawal rate is standard; what you decide to withdraw depends on what amount of money you think you can live off of at that point in time.

Finally, SmartAsset’s retirement calculator takes somewhat of a combined approach from the previous two we covered. Their calculator runs a Monte Carlo simulation like Vanguard and also takes into account what you’re currently making and when you want to retire, like Fidelity and JPMorgan. What makes SmartAsset’s calculator stand out, however, is that it takes into account your current location, monthly savings, and marital status. If you are falling short of your goal, the calculator tells you how much you need to save to catch up.

screen shot 6

retirement savings ove time graph

 

Meet with a financial planner

Finally, you can seek professional advice. Financial planners will take your investments, savings rate, and several other factors and show you if you’re on track. Additionally, a financial planner may also suggest better investments to get you closer to your goals.

Many banks and brokerage firms will run a comprehensive financial plan with no cost if you’re a customer. Independent financial planners may charge from $1,000 to $2,500 for a plan. Many people believe independent financial planners go more into depth with their analysis versus those who work in a bank. But it really comes down to a matter of preference, how well the person listens to you, and if they have your best interest as their top priority.

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