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As our nation recently celebrated its
freedom, we are reminded of the ‘unalienable rights’ our Founding
Fathers appreciated: life, liberty, and the pursuit of happiness.
Sounds like the ideal retirement, doesn’t it? But unless investors
are careful, they’ll never achieve their own financial freedom.
Being financially free requires: 1) Living beneath your means. You
can’t spend more or equal to what you bring in and get ahead. 2)
Making a budget and sticking to it. Be realistic and leave room for
expenses to increase over time. Before you buy, count all the costs
such as long-term maintenance and higher insurance premiums. 3)
Basing your fulfillment on something other than your possessions. He
who dies with the most toys doesn’t win, and no, you can’t take it
with you.
Most would define financial freedom as having enough money to live
comfortably for the rest of their lives. But how much is enough?
Let’s take a look at two couples and get a better picture of what
true financial freedom is and how you can achieve it.
With our first couple, the husband just retired from a successful
career with $1,000,000 in his 401(k). They haven’t put any other
money into savings.
Now that they’re retired with all this money at their disposal,
their spending habits take over. They buy a new home, new car and
generously help out their children. They don’t live on a budget and
it is hard for them to see the impact their current decisions will
have on their future.
This couple has to invest fairly aggressively and earn at least 6%
to 7% just to keep up with their current standard of living. A
sustainable retirement lifestyle should be based on a withdrawal
rate of no more than 5%. Consistently earning enough to support a 7%
withdrawal rate is difficult at best.
Our second couple, also newly retired, has always lived under a
budget. Their household income was the same as that of the first
couple, but because they’ve lived ‘beneath their means’ through the
years, they have a larger nest egg of just over $1,600,000 to fund
their retirement.
They’ve made some major, but wiser, purchases. Rather than building
a new home on an expensive lot, they’ve chosen to do a more modest
remodel on their existing home. They don’t mind driving older
vehicles, and they help out their kids in more modest ways.
Because of the lifestyle they’ve chosen, both now and in the past,
they only have to earn 3% on their money to maintain their standard
of living. There is no need to take risks with their nest egg,
because they don’t have to.
So which couple has achieved financial freedom? The friends and
neighbors of these couples will say that it is Couple #1, because of
their expensive lifestyle. The answer becomes more obvious, though,
if we fast-forward a decade.
Couple #1 has to start tapping their principal to make ends meet.
Their lavish lifestyle combined with rising costs for life’s
necessities means they’re now facing the grim possibility of running
out of money and becoming dependent on their children.
Couple #2 has faced rising costs, too, but the impact has been
minimal. In fact, they’ve hardly changed their lifestyle at all.
Since they are able to earn more than they actually spend, their
nest egg has continued to grow. Not only do they have the peace of
mind that they won’t outlive their savings, but they know they’ll be
able to leave a nice inheritance for their children and
grandchildren.
It’s obvious Couple #2 is financially free. Financial freedom isn’t
about spending more, but worrying less. How much money you make
doesn’t determine whether or not you will achieve financial freedom.
It’s more about the relationship between your lifestyle and your
income.
Couple #1 may try to solve their problem by taking higher risks to
earn more on their investments. But they only have three choices in
order to reach financial freedom. They have to save more, spend less
and/or work longer. These are painful choices.
There isn’t a magic formula to becoming financially free. It is
based on consistently making the proper choices. The security of
having financial freedom is priceless and with a little effort, you
can do it.
Have a financial question? I’ll personally answer it. Go to
www.guardingyourwealth.com and click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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