Early Retirement Pitfalls

So you won your independence (kind of) – now what?

Independence day is approaching.  As I do every year, I try to examine the concept of independence on a personal level.  If this isn’t your first visit to my BLOG, you already know that I place an extremely high personal value on my own independence and those who earned it for our entire nation.  My own independence isn’t on my mind this year, however.  Presently, I’m watching my parents machinate over the strategy of collecting on a retirement promise without being penalized for their remaining work ambitions…all while jockeying between being an emotional support system for their four adult children (with grandchildren)…and dealing with the their own aging parents (90 & 92).  Someone you care about is in the same boat (maybe it’s even you).

Being 62 years old doesn’t mean what it did in the late 1940′s or 1960′s.  People in their early 60′s are much more active, spry and alert – contributors to society, the economy, the political world, their community and their families - far more than the ”dependent” tone of past 20th Century Retirees.  For those Baby Boomers considering early retirement, there is an almost tragic environment which (through a handful of circumstances and regulations) makes it challenging to have a “survivable income”.  Achieving personal or financial independence continues to be a hard-fought battle (despite, and sometimes in spite of, social programs). 

Baby Boomers still have plenty of gas in the tank (along with higher car payments and more drive) than the retirees of old…but electing to access Social Security Benefits basically requires them to hand over the keys in exchange for a “benefit” (park their car in exchange for a bus pass…and subscribe to “public” transportation…while still making their car payment).

Nothing in this world is entirely absent of humor, and I personally think SS is fodder for great jokes…but let’s be serious for a second:  Claiming Social Security benefits at age 62 means you can’t earn more than $14,000/year without having to give 30% of it back to social security (in addition to being taxed on every dollar in the first place).  If you have positioned yourself at 62 to sustain your still active lifestyle with about $1,200/month in benefits and about $1,200/month (cap) in part-time earnings you’re way ahead of the game.  That’s $28,800 before taxes and all I can say is “congratulations!”. 

For those who don’t feel congratulations are in order, read on.  For those who have disposable income, read on.  I’ve had countless conversations in recent months with every retiree I know.  This is a generational issue and it isn’t going away.

There is no “one size fits all” solution to conquer the puzzle of “financial ambition after 62″, but below are some creative solutions to discuss with your accountant and associates (I’ll divide them into three categories – “self-employed”, ”business owners” and “general”):

NOTE: I’m making the assumption here that you can’t just afford to “cash out and walk into retirement” (or I would have titled this, “Retirement Success”).

Self-Employed:
(you own or operate a business as a Sole Proprietor or entirely as a 1099 contractor)

• Partner with a younger spouse and compensate them for any net earnings in excess of $14,000/year. 
  • Rationale: They don’t have a cap on how much they can earn because they aren’t claiming their SS benefits yet (sure they still have to pay taxes on earnings, but at least they don’t also have to pay $1/3 to social security). 
  • Result: 30% net income improvement…and the earnings stay in your household.
• Surrender to the keys to your own car and take a part-time job or engage in a different partnership. 
  • Rationale: Less effort spent contributing to someone else’s business than perpetuating your own at half-speed (W2; preferrably someone whose success you really care about, like a family member or close associate).  
  • Result: Wages plus some negotiated incentives on the growth impact your maturity, notoriety, experience, credentials, licenses and fundraising efforts will have on their business (deferred compensation – in an IRA or profit-share), means you can cap out your $14k while still building something you can collect on after you turn 65).

Business Owners:
(you own or operate a business but your income is W2 or Stock)

• Step 1 – Change your W2 to the $14k cap (and/or pay someone in your household on W2)
• Assets – Use any available business capital to buy things that enhance your business today but can be SOLD when you turn 65.  Your balance sheet drives your stated income.*  (this could include real estate, vehicles, purchasing a competitor, mergers, etc…)
• Tax Credits – Our tax code is complicated and you really need a professional to do things right, but if your business qualifies for tax credits, now is the time to use them (Solar, Film, Vehicles and Organic Farms are creative ways that businesses and individuals reduce their liability.  These are most exploitable when “growth” or “marketing” is of genuine interest…but they are still useful as an excuse to acquire something, without tax liability, which you can profit from later [when you liquidate it as an asset]).

* A note about “Balance Sheets” as a rolling strategy.  Banks and Public Companies utilize this strategy and our economy essentially revolves around it.  In fact, it is partially the reason why some banks are taking their time foreclosing on so many properties which are currently in default - it isn’t that they lack the device to execute foreclose – they haven’t quite figured out how to get those bad assets off their balance sheets once they take them back from the borrower.  Simply put (from a mortgage company perspective), “missing money” is less ugly on a balance sheet than a “bad asset”.  If you are creative enough to present a balance sheet solution to mortgage companies, you’re the next overnight millionair (my apologies if you’re on SS…you’ll be taxed twice on the earnings).

GENERAL:
(more generic ideas)

• IRA – Utilize your Individual Retirement Account fund to invest in something that has a 3year maturation (there are plenty of non-stock, unconventional places you can utilize those funds and still have it remain outside tax liability until you have to rely on it for income).
• Start a Business – find a dozen like-minded associates and start a busines (30% x 10 people = 300%).  Surely there is an investment (like say, real estate, backing an inventor or young entrepreneur) that can have a 3 year delay on a capital return.  In three years you’ll be 65 and there won’t be such a penalty to enjoying the fruits of your risk as “income”.
• Concede for Health reasons – Changing your income (regardless of your business/employee status), while not being eligible for MediCare yet can create opportunities for “low income” eligibility of other health care coverage (Massachusett’s comes to mind).  Accept the caps on income in exchange for savings on your healthcare expenses.  You’re not dying, but maybe COBRA or your former employer’s/business healthcare plan is the thing preventing you from surviving on your anticipated income.  Go back to work part-time or reinstate your self-employment activities after you turn 65.
• Become a Consultant – 1099 income allows certain expenses to off-set your income as a “self-employed” person.  Hell, we could use you at Mahar Enterprises, Inc.   We are a creative solutions company with creative compensation plans – we could use a talented person that still has gas in their tank (and believes in the independent entrepreneurial spirit of America).

NOTE – I’ll fall on my sword, if I’m wrong, but:  Major economists, strategists, authors and commentators say that one of two things will happen in this economy.

1.) Hyper Inflation or 2.) Depression

I am predicting that it isn’t one or the other, but rather half of BOTH.  Inflation will be first. History tells us everything we need to know about how nations find themselves in these situations (and how they respond to it).  It will happen within 18 months.   Strangely, a flailing economy can be a good thing if you have your house in order (and more reliance on “non-cash” support systems).  Get a plan and stick to it.  If I’m wrong, early retirees still have a problem to cure for their own life (the three year gap between health coverage and earning caps).

Okay – that’s enough for now.  Call or write or comment if you like.  Send me a note if you’d like to become a consultant or partner in one of the many projects our team consults on.  I worked all evening on a contract last night so I’m gonna go watch an afternoon On-Demand movie with my dad (he makes awesome popcorn!).

Happy Independence (it isn’t just about a single day of the year).

Mark