Want to Retire Early? Be Aware of These 5 Financial Risks.

early retirement

Many people want to take early retirement. If you’ve saved up enough money then why not? Well, first of all, you have to be sure that you’ve saved up enough money. Many people think that they have planned accordingly only to realize that there are a lot of financial downsides to early retirement.

Here are five of the biggest money problems that people tend to face in early retirement:

1. Failing to Plan Properly for Taxes

Did you know that many people are in a higher tax bracket at retirement than for much of their working career? This means that you’re likely to owe more at tax time than you’re accustomed to. Moreover, once you start taking out your 401K money, you’ll have to pay taxes on that.

Therefore, taxes in retirement can be pricey. If you haven’t planned ahead, then you’re going to have to readjust for that reality. If you retire early, then you’ll have to start figuring that out years ahead of your peers.

2. Years and Years of Spending Ahead

That brings us to the next key point. If you retire early then chances are that you’ll have more years of retirement. Therefore, you’ll have to make your retirement income stretch. If you retire at 55 instead of 65, that’s ten less years of earning and ten more years relying on retirement income.

3. Where Will Your Money Come From?

You won’t even be able to access some of your retirement funds, such as your 401K, until you hit a certain age. Therefore, you’ll have to figure out where you’re money is going to come from prior to that. If you haven’t planned in advance, then you can easily find yourself overspending in those early years. If you tap into your savings or refinance your home to cover those costs then you’ll have to find some way to make up for it later.

4. What About Healthcare?

Just because you retire early doesn’t mean that you can access Medicaid early. Therefore, you’re going to have to figure out how to pay for health insurance until you reach regular retirement age. If you’re not working anymore then you can’t count on employer rates. Your health insurance could get very expensive very quickly.

Even though you’ve retired early, you’re old enough that you can’t risk going without healthcare. If anything were to happen, your care costs would be exorbitant. Therefore, you do have to pay out of pocket for health insurance. How are you planning to do that if you’ve retired early?

5. You Don’t Maximize Your Retirement Benefits

If you take early retirement then you may not make as much money post-retirement as you could have. For example, if you have a job that pays a pension, the pension amount might be significantly lower if you retire early. Likewise, if you start access Social Security early (“early” currently means age 62) then you won’t get as much as if you’d waited. So, you start using the money sooner and yet you’re getting less of it than you could have. Waiting to retire could be well worth it.

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Guide to Taking a Weekly Spending Sabbath

money sabbath

The Sabbath is a weekly day of rest practiced in Judaism as well as in several other religions. However, you don’t have to be religious to benefit from taking a Sabbath day each week. There are many different ways that you can adapt this practice to fit your own life. One option is to set aside one day per week as a spending Sabbath, also known as a no-spend day.

What is Sabbath?

Sabbath is a day of the week that people adhere to specific rules. In Judaism, the Sabbath runs from Friday night to Saturday night. Christian religions that celebrate Sabbath often do so on Sundays. The specifics vary between religions. The general idea, however, is to take a break from the usual way of life in order to focus on things of religious value. For example, people who observe the Sabbath may choose not to work, cook, or use electronics. If you are religious, you may use this day to honor God. If you aren’t religious, you may use the Sabbath to connect with self, family, and community.

Spending Money and the Sabbath

Jewish people who observe the Sabbath generally follow rules about money. They do not do work to earn money. Moreover, they do not engage in commerce. In other words, strictly following this religious Sabbath means that you don’t make or spend money on this day of the week. Traditionally, they may not even handle money at all. Of course, people participate in their religious practices to varying degree of strictness. Nevertheless, this tradition is a good reminder that money matters can take us away from loftier pursuits.

What is a Spending Sabbath?

Whether or not you participate in a religious Sabbath, there are many good reasons to consider implementing your own spending Sabbath. A spending Sabbath is simply a 24-hour period each week during which you don’t spend any money. If you are really strict about it, you might even set your automatic bill pay services to avoid paying out on that day of the week. However, it’s more about consciously opting to replace spending money with actions that align with your core values.

For example, on your spending Sabbath Day, you might have the urge to go out to eat with your family. However, since you’ve decided not to spend money, you have to find an alternative. Maybe everyone can figure out one thing to cook using the ingredients that you already have at home. This might meet your core values of spending time with family, avoiding food waste, and living frugally.

How to Start a Spending Sabbath

If you’re ready to give this weekly no-spend day a try, then you should start with some brainstorming. First, figure out which day of the week is likely to be most successful as your spending Sabbath day. If you know that your family is always out and about on Saturdays, shopping and whatnot, then that might not be the best day of the week to pick. On the other hand, if you find it hard not to buy things on your lunch break from work then perhaps a weekend Sabbath day is best.

Next, track your spending over several weeks. Pay attention to the types of things that you tend to buy on impulse. You will need to learn to avoid the temptation to buy those on your spending Sabbath day. Furthermore, pay attention to things that you spend money on every single day. These are the things that you might have to plan ahead for so you don’t buy them during your weekly spending Sabbath.

Next, make a list of ideas for how to spend your Sabbath. Get in touch with your core values. Align your plans and activities with those values. If you typically spend money to achieve your goals, figure out free alternatives. The more well-armed you are with ideas before you begin, the more successful your Sabbath will be.

Finally, put it all into action. Stick to it. If you spend during your Sabbath, don’t use it as an excuse to quit. Think about what caused you to spend. Re-assess, re-adjust, and recommit next week.

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Should You Pay Taxes with a Credit Card?

pay taxes with a credit card

You can pay your taxes with a credit card. Should you?

Every single year when I do my income taxes, I think about the things that I should do differently. For one thing, I always buy tax software. However, I could use the IRS eFile tool for free. I’m a creature of habit and making the switch challenges me. Nevertheless, it would be a financially smart thing to do.

I also typically pay taxes with a credit card. I’m aware that it’s doesn’t make the most financial sense. I do it anyway. That’s something I really need to look at it if I truly want to stick to my frugal living goals.

It’s Convenient to Pay Taxes with a Credit Card

Sometimes I pay a little bit more for convenience. That’s part of frugal living. I’m not trying to get the cheapest thing all of the time. I’m just trying to “trim the fat” to make sure that where I spend money is where it makes sense to do so. Sometimes convenience makes sense.

It’s definitely convenient to pay taxes with a credit card. I see what I owe. I enter the credit card information. It’s all done. I don’t have to worry about whether or not I have enough money in the bank to cover it. If I don’t, then I’ll move money around later to pay that card off. You can’t do that if you pay with a check; you have to have the money right then and there.

I Like My Credit Card Rewards

I have a good cash back credit card. My rewards accrue all throughout the year. I don’t touch them. Then, come December, I have a nice chunk of cash back money that I can use. December is a tough month financially for almost everyone. I also have several big annual bills that come due around then. Plus, as a freelancer, it’s almost always my slowest income month. Therefore, I love using those rewards.

When I pay taxes on a credit card, I get a nice bit of cash back. I don’t need it in the spring, but I’m really happy that it’s there come December. Therefore, I do like that aspect of paying taxes with a credit card.

The Rewards Don’t Outweigh the Fees

Here’s the thing, though. If you pay taxes with a credit card, then you’re charged a fee. You can’t pay the IRS directly with a credit card, so you have to use a processing service. The fee varies depending on the service you use. According to the IRS, the fee is sometimes deductible. However, that’s not always the case.

In my experience, the fee almost always costs more than the rewards I get back on my credit card. If you have an excellent cash back card then you might still get a little extra money. At the very least, it might even out. However, if you’re trying to pay with a credit card just to get cash back, then you should be aware that you probably aren’t doing yourself any financial benefit.

If you’re using a cash back rewards card, try to use one that’s got at least 3% cash back. Moreover, check with the processing service to see if the fees differ depending on the card that you use. For example, the fee is sometimes higher for American Express, so you might want to pay with a different card to keep costs down.

If You Don’t Pay the Credit Card Immediately, Then You Really Pay

It isn’t cheap to use your credit card. I usually pay my balance in full each month. Therefore, I don’t pay a lot of money in interest. However, if something goes awry, those interest charges can add up fast. If you do pay your taxes with a credit card, make sure that you don’t rack up a bunch of interest fees by failing to pay that card balance off quickly.

You can set up a payment plan with the IRS. Therefore, if you don’t have the money to pay your taxes right now, then you shouldn’t go straight to a credit card. Save money by working directly with the IRS instead, where the fees will be considerably lower.

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