In this episode of Next Act Ninjas, Rachael Van Pelt empowers you to find your financial freedom number (a.k.a. your Financial Independence or FI number), the amount you need to retire (if you so desire) and live your best life, sooner than later. We explore the changing face of early retirement, the importance of defining your personal vision of freedom, and how to calculate your financial goals using the 4% rule. Ignite your excitement for defining and achieving your personal vision of freedom. From setting your financial number and timeline to crafting a plan that works for you, this episode is packed with actionable strategies to help you seize control of your future. Get ready to be inspired and take the first step towards your ultimate financial freedom! Tune in, share with friends, and let's embark on this exhilarating journey of creating our best Next Act together.
Chapters
00:00 Mastering Your Financial Freedom: Knowing Your Number
02:59 Defining What Financial Freedom Means to You
04:39 Calculating your Financial Freedom Number: The 4% Rule
06:50 Factoring Inflation into Retirement
08:11 Strategies for Reaching Your Financial Freedom Number
Welcome back to Next Act Ninjas, the number one podcast for mastering your lifestyle longevity. I'm your host, Rachael Van Pelt, and today I want to talk about achieving your financial freedom number. You may also know it as your financial independence (or FI) number or your economic freedom number. Regardless of what you call it, do you know your number? The number you need to leave your job when you want and have enough money to live the lifestyle you want thereafter.
We used to just ask, how much do I need to have saved for retirement? But now that traditional retirement has been flipped on its head, that framing seems overly simplistic, doesn't it? Some people want to retire early. Some people want to embark on an encore career. Still others plan to work well into their 70s. Some will have had steady employment and saved consistently for decades, while others may have had gaps to care for kids or aging parents or even start a business. If you're just planning to work until 67y and save 10% of every paycheck until you get there, then that could be the end of discussion, right? You've set up your automatic deductions from your paycheck every month. It's going into a 401k. You set-it-and-forget-it and you just HOPE that it grows enough to meet your needs when the time comes. While I think that's a great start, you know it's not likely going to be sufficient, don't you? But how much do you really need?
If you ask your financial planner or you search the internet for how much you need to retire, you are going to get a variety of answers. There are the Susie Ormans of the world who will say you need to save at least $5 million and should work until you're 70y. And then there are those saying you could get by with as little as say $750 thousand as long as your home's paid off and you have other income streams. Then there's the Financial Independence Retire Early (or FIRE) crowd, where you have people striving for so-called retirement in their 30s.
Now I would argue that this isn't, retirement in the traditional sense of the word. When you dig into those FIRE stories, you find the person that supposedly retired at age 35y is managing multiple rental properties or has other side hustles that cash flow. And this is still a form of work, isn't it? They aren't truly retired, but they have achieved some sort of work freedom, right? Which I think is great. In many cases, these people are actually being more productive members of society than if they had stayed in their original 9-5 job. And the same is true for someone who does this at age 55 or age 65.
So it begs the question, how do you define retirement? What does financial freedom mean to you? Do you expect a complete life of leisure, skiing all winter, playing golf all summer? Are you willing to keep working in some capacity as long as you're not grinding in your 9-5? I know some people who are still putting in 70+ hour work weeks in their 60s who would feel completely free if they just got down to 20 hours per week. And there are others who don't want to work another day in their life. Some just want time freedom. Others want freedom to travel or play to their heart's content. I think it's important to know what your expectations are before you put a number on it.
What would make you feel most free? Drop your answer in the comments. I would love to know where people land. Do you want the freedom to not work except when you feel like it? Do you want freedom to travel or buy your dream vacation property? Do you want the freedom to spoil your kids or grandkids rotten,to become a philanthropist, or leave a family legacy?
Freedom looks different for everyone, so I challenge you to get clear on what it looks like for you. And don't be afraid to dream big. The reason this is important is two-fold. First, the clarity will help you point your compass towards your dream so you are more likely to achieve it. Second, you can't even begin to figure out what your number is without knowing exactly what kind of lifestyle that you aspire to.
The most popular method used to estimate what someone needs saved for retirement uses the 4% rule. That's because when you retire, the rule is to take out no more than 4% of your retirement savings each year to ensure that you're not going to run out of money before the end of life. That assumes your savings need to last you about 25 years. If you take that into account, we can reverse engineer how much we need to have saved before we retire. We simply determine how much we want to take out yearly for living expenses and discretionary spending, and then we divide that number by 4%. For example, if you think you will need $100,000 per year or about $8,300 per month to live off of, then you divide that number by 0.04. That's the same as multiplying by 25. The math says you need $2.5 million saved for a 25-year retirement.
Of course, that doesn't take into account any other streams of income you may have. If you have a second property that you expect to cash flow $2,000 per month throughout retirement, so you only need to take out $76,000 per year, now the amount you need in your retirement savings is $1.9 million dollars. Alternatively,if you still do the work to get to $2.5 million you will have $10,000 per month instead of $8,000 per month to live off of. And for many of us, that extra $2,000 per month might mean the difference between living frugally or luxuriously. It's the freedom to travel rather than to have to stay put.
And don't forget to factor in social security or any pensions you may have. Just remember that you can't draw on social security until you're 62 years of age. And ideally, you want to wait until 67y. So if you're retiring earlier than that, those funds will not be available right away. Now 401Ks and IRAs, you can start with drawing at age 59.5y.
Now you might be wondering about inflation. We all know that $100,000 today will not give us the same buying power 10 or 20 years from now. You might be able to live on $8,000 per month early in retirement, but not later in retirement. Well, the good news is that 4% rule allows for an inflation adjustment each year. If inflation is 3% per year, then you can take out 3% more each year and still be fine because your retirement account is going to grow with that inflation as well. You'll take out $100K/yr in year one and $103K/yr in year two, and so on.
Likewise, if you have a property that is cash flowing from long- or short-term rentals, the rent or the ADR will go up over time as well. So instead of $2000 per month, in our example, a few years into retirement, you might be collecting $2500 per month from your property. And that's the great thing about investments. They will continue to grow throughout your Next Act, assuming that you don't liquidate. That's why you don't stop investing just because you retire, especially if you retire early or you expect good longevity. Keep taking advantage of the law of compounding.
Which brings me back to our financial freedom number. Now that we know how to find that number, let's shift gears and cover how to reach that number that we've targeted. [It's probably a good time for me to point out that nothing I say here should be construed as financial advice. We're only talking general guidelines here. Always consult a certified financial professional if you want advice.]
Okay, so let's say you've been working hard and automatically saving for years so you have a good start to your nest egg. But you have some catching up to do. Most of us find that at some point, right? What next? There are really only three variables to manipulate: 1) how much you earn, 2) how much you save and invest, and 3) how much time you have left. So I'm going to take time off the table as something you can manipulate, bringing this down to two variables. Of course, you can always delay retirement, work longer, and that'll give you more time to grow your nest egg. And assuming you stay healthy, your workplace isn't ageist, and AI doesn't replace you, maybe you can work indefinitely.
But I'm going to assume for a minute that you are all ready to not just settle on a number, but settle on a date. The whole point of achieving financial freedom is that we want that freedom sooner than later, right? Again, you're going to have the freedom to keep working after that date if you want. But at that point, it'll be your choice. It's not going to be your chronological age or your retirement account that's making that decision for you.
So sticking with our example, if you've decided that your number is $2.5 million and you want to achieve that in five years, then your next step will be figuring out the gap between where you are today and where you want to be in five years. How much do you have right now? How much do you need to grow that over five years? And don't let this step scare you. Honestly, taking a hard look at this gap is more than most people will take the time to do because it's a little scary. It's a little nerve wracking, but it makes all the difference when it comes to achieving your financial freedom.
What's the gap for you? Are you $1 million dollars short? Are you $2 million short? Whatever the gap, don't get discouraged. You'll be amazed what you can accomplish in a few short years if you put your mind to it. And remember, you won't stop growing your nest egg when you reach your freedom number. Your investments will continue to work for you for decades. So let's get back to those two variables. You can manipulate how much you make and how much you save over the next five years. How much you make comes from your paycheck and any other income streams you have, such as rent, royalties, side gigs. How much of that income you save and grow depends on your budget and your investment strategy.
Start by looking at your current income and outflow. Review your budget closely. Can you reduce your outflow by cutting down on expenses? Can you increase your income by asking for a raise at work and/or adding a side gig? If you can get resourceful and reduce your expenses by let's say $10,000 per year and you increase your income another $10,000 per year, that will give you an additional $20,000 per year to invest and grow over the next five years.
And make sure you're maxing out your 401k and your IRA accounts. After the age of 50y, you are allowed additional catch-up contributions to both of those. You can invest up to $30,000 per year over the next five years if you max out your 401k. You can invest $7,500 per year if you max out your IRA. And don't forget to take full advantage of any employer matching contributions you may have. This is essentially free money, so make sure you tap into that. Now, assuming that you already had $1.5 million invested in retirement accounts and it's growing year-over-year at an average of 8% return, that investment in-and-of-itself will grow to about $2.2 million over the next five years.
That's great, isn't it? You're almost there. So what you're really trying to accomplish is adding another $300,000 with your additional contributions. If you got resourceful and you came up with another $20,000 to invest every year for five years, you can grow that to about $120,000 over that time frame. Does that get you to your goal of $2.5 million? Not quite. That gets you to $2.32 million. So it's pretty darn good and those extra contributions are going to keep compounding into the future. Of course, if you can aggressively contribute another $50,000 per year for the next five years, that will get you to $2.5 million.
Alternatively, what if you seriously consider a real estate investment during that time? If you've already done the hard work of getting resourceful and reducing your spending, increasing your income, you could take that money and invest it in a property instead of the stock market. By year three, you would have a substantial down payment for a rental property. You could maybe even have that by year two if you also have a home equity line of credit (HELOC) that you can tap into.
In the short-term, buying a property is going to slow the growth in your retirement account because you're not putting that money that you saved for a down payment into the stock market. But in the long-term, you will potentially have much more in your overall retirement portfolio. We've talked about this in previous episodes. Not only will you have a more diversified portfolio, you will have an asset that appreciates at a greater rate than the stock market. That is depending on the market you buy in. The combined effects of asset appreciation, debt pay down, tax savings, cash flow, all of those things add up to yield a return on investment that's greater than the average return from the market.
Now keep in mind, it will require a bit more work on your part to manage. Owning real estate is not the same set-it-and-forget-it kind of investment as putting your money into an index fund. There's an advantage to just setting it and forgetting it, right? On the other hand, if you also use that property as a family vacation retreat over the next decade, that's going to contribute to your overall quality of life in addition to growing your nest egg. So don't forget to factor
in your desired lifestyle into your freedom calculations.
The bottom line, there are multiple ways to reach your target freedom number. But whatever you do, get started immediately. Seriously, figure out exactly what your financial freedom means, what it means to you, how much you need to support the lifestyle you want, calculate your number, set your deadline, and get resourceful. Don't fall into the trap of your number and date being a moving target, always just a few more years, a few more dollars away, and then a few more years, a few more years. Even if you love your job and you think you could do it until you're 75y, maybe 80y, get to your financial goal right away, as soon as possible, so that you have the freedom that we're talking about. You never know if your health will hold or you'll be forced to retire for other reasons. And besides, you may spontaneously decide you want to take that trip around the world that you always dreamed of. That's why you want to stay focused on achieving your financial freedom number rather than some culturally determined retirement age. Have fun with this! The kind of clarity that you're going to get from finding your number and creating your plan to get there is going to create its own kind of freedom.
That's all for today. I'm Rachael Van Pelt. Thank you for joining me on Next Act Ninjas. Be sure to share today's episode with someone you know who would benefit. And until next time, live well, love more, age less, my friends.