Monday, 17 September 2012

Retire Sooner Rather Than Later

Retire Sooner Rather Than Later

By Keith Dennis

What do you need to retire? Here is a hint. If you have enough you will never worry about it again! All you need is money! To be more specific what you really need is an income stream that never ends. And you need that income stream to grow with inflation and be enough to cover your bills right now.

It is amazing that it is that simple but it isn't easy by any means. The hard part is saving enough money through your 401k and other retirement plans to be able to provide that income by the means of investment income. How much do you need? That is a tough question and even most financial advisors do not completely agree.

Typically, a financial advisor will recommend about 4% of your asset base as safe to withdraw on a regular basis. If we work from that number we can figure out your basic asset need. If you currently earn $70,000 then plan on needing at least $1,750,000 in investments in retirement. That is just 4% of your principal balance to create income. That is assuming that the standard 4% rule even works anymore. With the market drops and uncertain economic conditions no one really knows.

The best case scenario would be to withdraw your 4% as long as the market isn't down. If it is down then do not withdraw any income. But that doesn't really work because if you need $70,000 in income per year it is very unlikely you could live on zero income. What to do?

Basically there are two great options. The first is to create another income stream. My advice would be real estate for most people. Think it through. If you could create an income of $2,000 per month, how much would your investment principal need to be then? You would only need $46,000 per year from your investment accounts. And $46,000 is 4% of $1,150,000 which shaves $600,000 from your savings goal!

The other way is to create a guaranteed income stream using annuities. The goal of 4% income could be achieved using some creative annuity laddering techniques. Of course, having the full amount in investments needed to produce the income would be best but there are options just in case you don't quite make it.

Annuity laddering can increase your income especially if you are a very conservative investor. If like CD's and bonds this idea is for you. If you like risky stock investments then this idea is for you as well although it will not be very exciting. Just remember that the goal is income then you can use the rest of your money for any investment you like.

The first step in annuity laddering is get your income started. Use an immediate 5 year annuity for this purpose. If we stick with the $70,000 example from above, about $350,000 would be needed to create this income. That will take you 5 years into retirement with guaranteed income.

The next step is to invest in three more long term annuities. The idea is that the longer the term the higher the rates and the more time for growth. Each annuity will be used to grow for about 5 years and then provide income for 5-10 years. With the last one growing for about 15 years and then providing all of your income needs.

With guaranteed income there is no need to worry about market returns. It's not necessary but as a side note you could also use the guaranteed income time to secure a few new rental properties as well to sure up the income stream even more! Follow these tips and retire sooner rather than later.

Keith Dennis works exclusively with small business owners to help them create tax-free income streams for retirement. Business owners are often stuck in the tax-deferred investment trap. They get a small break now and then end up paying much higher taxes later because they lose their business deductions. Then on top of that, their income is usually 100% taxable!

With tax-free investing you can literally have twice the income in retirement saving the same amount of money, retire sooner, or even save about half as much versus tax-deferred investments.

Get it touch with Keith today to learn how it works through the Small Business Retirement Group's Fan Page.

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