Lesson Plan for the Future: Financial Freedom (Independence) and Retirement

Written by Posted On Monday, 22 February 2021 00:00

As a Certified Financial Planner, I always explained, to my clients and my students, that my definition of financial freedom is:

"Being able to do whatever you want, with whomever you want, whenever you want, and not worrying about the cost."

How to get there?

When you mention retirement to many people in the real estate business, they will tell you that they “never want to retire.”

That is a cop out.

If selling real estate forever is your idea of a good time, then you are retired right now…and you still need a reserve fund for those slow periods in the economic cycle so you can do “whatever you want to do, whenever you want to do it, with whomever you want to do it with.”

Begin by quantifying your objectives and determining where you are today.

One of the reasons so few people achieve Financial Freedom is that they fail to quantify their objectives. How can you get to where you want to go if you don’t know where it is? You must have a target.

From there you can develop a planning horizon and a savings and investment strategy.

Consider that there are 3 primary methods of generating income:

1. You at work
2. Others working for you
3. Your assets at work – Money is the best employee; money never sleeps, money never gets sick, money never takes a vacation…ultimately, you want the bulk of your income derived from this income generating method.

Your goal is less of numbers 1 and 2 above and more of number 3.

To arrive at this point in your life (some call this retirement), you must increase your net worth over your working career, saving what you can to get to a point where your financial needs are met by the money you have accumulated, suitably invested (suitability is a conversation for another time).

So how much money must you accumulate, and how do you accumulate what will no doubt be a substantial sum? Let’s tackle the amount first.

You begin by deciding how much money per month you require to maintain the standard of living you are looking forward to in retirement.

Remember, this is just for the purpose of example. You can change this number anytime you like…it is your retirement, but we need to start somewhere. Let’s assume that number is $6,000 per month (and that includes the state and federal income tax required).

$6,000 per month is an annual income of $72,000 per year.

Now let’s pick a conservative rate of return…5% (you can change this as well…if you can get more than 5%, you will need to accumulate less, but we must make some assumptions or we remain stuck in inaction).

The formula we use is one that is familiar to most real estate professionals:

Income = Principal x Rate ( x Time, Time being 1 year)

Our Financial Freedom Target is the amount of money invested (Principal) at 5% (Rate) resulting in $72,000 per year (Income).

Dividing $72,000 by 5% (.05) results in $1,440,000

To generate $72,000 in income from capital invested at 5%, you need to accumulate $1,440,000 over your working career. You must accumulate this money from the money you earn and from the money your invested money earns.

How is that possible you might ask? If you are like most people, there is too much month at the end of the money.

Simply stated you must:

1. Increase savings
2. Reduce taxes
3. Reduce luxuries (for the time being)
4. Live more efficiently (financially)
5. Make your invested dollars work harder

Of all the areas we consider in financial planning, effective month to month cash management can contribute most to your goal of increasing your net worth and gaining control over your financial affairs. It doesn't matter how complex your financial situation is, it all boils down to this: you earn money on one hand and spend it on the other. What remains before investment spending is "gross cash flow." This is the amount you can manipulate to increase your net worth.

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