Only about one in ten Americans are living their definition of financial freedom: living debt-free, living comfortably, not having to work, or being rich. Too many of us fall short of financial freedom because of a lack of retirement savings, salary constraints, debt, or unforeseen emergencies. This week, Joe Anderson, CFP® and Big Al Clopine, CPA put you on Your 11 Step Path to Financial Freedom. Learn to take inventory, invest in yourself, and sustain your financial dreams and goals.
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Important Points:
- 00:00 Introduction
- 00:44 Roadblocks to Financial Freedom
- 01:10 Financial Freedom Defined
- 01:43 Inventory, Invest, and Sustain
- 02:14 Step 1 – Take Financial Inventory: Net Worth, Cash Flow, Taxes
- 04:58 Step 2 – Budget
- 06:19 Step 3 – Reduce Debt
- 08:08 Calculate Your Financial Blueprint
- 08:42 True/False: The average employer match for a 401(k) is almost 4%
- 09:14 Step 4 – Save, Match, and Invest
- 11:06 How to Save a Million By Age 65
- 12:24 Step 5 – Have an Emergency Fund
- 12:44 Step 6 – Bank Smart
- 13:31 Step 7 – Improve Your Credit Score
- 14:00 Step 8 – Invest the Rest
- 15:03 Calculate Your Financial Blueprint
- 16:00 True/False: Married couple filing jointly pays zero tax on up to $94K on qualified realized long term capital gains
- 17:14 Step 9 – Retirement Income: Real Estate Investing & Social Security
- 19:55 Side Hustles
- 20:24 Step 10 – Spend Less
- 21:22 Step 11 – Adjust Your Plan Regularly: Asset Location, Withdrawals & Sequence of Returns Risk
- 22:06 I hear taxes could eat up your savings in retirement, if you’re not working how can that happen? – Lauren, San Diego
- 23:26 Calculate Your Free Financial Blueprint
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Transcript:
Joe: Financial freedom means a lot of different things to a lot of different people. Most people want it, but a lot of people don’t have it. It’s time to get it.
Welcome to the program, everyone. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors. I’m with the big man, Mr. Financial Freedom himself, Big Al Clopine.
Al: Oh, I like that title. I want some of that.
Joe: Yeah. Well, we’re gonna get it today. Big Al, we’re gonna get it. You know, if you look at financial freedom, what does it mean to you? We’re gonna define it and we’re going to get it. That’s today’s financial focus.
Okay. What are the roadblocks? Why are people not achieving this? Well, retirement savings. Do they have enough savings? Do they even know how much savings that they should have or save on an annual basis? Maybe salary constraints. Maybe they’re not making enough. They’re working paycheck to paycheck. They got a lot of bills that reaches higher debt, right? Maybe credit card, loans, mortgages, student loans, or then emergencies. Could be a health incident. Financial freedom means a lot of different things to a lot of different people. How about living debt free? That’s financial freedom to 54%. How about living comfortably? That’s pretty wide definition, but half the people said, Yeah, I want to live comfortably. That’s financial freedom. How about not working at all? Or being rich. Only 13% of people really want to be rich. I think everyone else just don’t want to find that happy medium. Let’s break it down even further. Let’s bring in the big man.
Al: Okay. Today we’re defining financial freedom. We’re going to look at 3 different things. We’re going to start with inventory, take an inventory of what you have, what you have to work with, not only your assets, but your income. Then let’s get into investing. How to invest, how much to invest, and also things to invest in that are not even financially related. And then finally, sustain. Once you figure out this financial freedom, how do you sustain it? Because you want to live comfortably throughout your life and retirement. So Joe, let’s dive right in.
Take Financial Inventory: Net Worth, Cash Flow, Taxes
Joe: Right. I think there’s steps that people have to take an absolutely number one is inventory. You need to know what you’re working with. Write it down on a piece of paper and what is inventory? Let’s just make it really simple. Your net worth, Big Al, assets, liabilities.
Al: Yes. So assets, you got to take a look at what you have, right? So look at your bank accounts, your retirement accounts. Maybe you’ve got real estate, vehicles, jewelry, whatever. Those are your assets. Add those up and then subtract your liabilities. Liabilities is your mortgage, your credit card payments, your car payments and so forth. You take your assets minus your liabilities. That’s your net worth. That’s your starting point, Joe.
Joe: Yeah. I think a lot of times people use this as their report card, right? But I think there’s another measure that is way more important than the net worth. I could be worth $20,000,000. But if I cannot produce any type of cash flow, what’s it all for? So I think what makes people wealthy, or what makes people feel that financial freedom, is they have cash flow.
Al: Yeah, I think so, Joe. And there is a definition of financial freedom, and that is when your income, or your passive income, equals or exceeds your expenses, then you’re free. You don’t have to work, but let’s talk about income. So income is obviously things like your salary, but maybe you got interest and dividends. Maybe you got alimony. Maybe you’ve got other kind of benefits. But then you have to subtract out your expenses, like your living costs, your mortgage, property taxes, insurance, and the like. That net number is your cash flow. Hopefully that’s positive so that you can save for the future.
Joe: Yeah, I think there’s things that you can control and there’s things that you cannot control. When I’m looking at cash flow, there’s a lot of things that you can control. Maybe you cannot control your salary at your existing employer, but you could receive more salary if you had a side hustle or a second job. Or maybe you asked for that raise. Your interest or benefits. These are some things that you can control. I think on the expense side, a lot more control. So maybe if some of this is fixed and you want to have that cash flow positive, we’ll start looking at controlling here. And number one, Big Al, let’s start with taxes.
Al: Yeah, taxes. We all know about it but just as a review, right? You make $100,000 a year. This is a single taxpayer in California. That’s not what you take at home. It’s not your net paycheck. You gotta pay federal and state taxes. You gotta pay Social Security, state disability. So in this example, you make $100,000 and Joe, you’re netting almost $72,000, but $28,000 out the door.
Joe: Yeah, when you look at expenses, this by far could be one of the largest expenses most people have. And I think there’s a lot of strategies potentially that you can reduce that from. Let’s keep moving though. If I’m looking at, hey, I have that $6000 per month coming in, where are those dollars going?
Al: So half of that, $3000 would be your needs. Right? What’s a need? Well, it’s groceries, it’s housing expenses, transportation, things that you absolutely have to have. Then maybe $1800 would be what you want. What do you- vacations, right? Entertainment, nice clothes, whatever they might be. But then make sure you’ve got money to save. In this example, 20%.
Joe: I believe most people will put this last. Alright, well here, we need to pay the mortgage, we pay our taxes, and then here. Well, I really want to go on this vacation. Or hey, maybe I need a new suit. And then whatever’s left, people save. What I would ask all of you to start thinking about is putting this first. You get your income, put this into your 401(k) plan, that could be a pre-tax, so that’s even before taxes, Uncle Sam gets their dollars on it, or gets their hands on it. So paying yourself first is really a great way to find that financial freedom. And then have your needs, and then your wants come last, but no one wants that. Right? Everyone wants to put this first.
Al: They do. And Joe, I mean, that’s probably the most important point maybe on this whole show, right? Is pay yourself first. But here’s what gets in the way, right? Credit cards, a lot of sub credit card debt. So an average credit card balance right now is almost $9000. And if you take an average payment in this example of $272, it takes you 53 months to pay off and you have to pay not only the $8600, but now almost another $6000 of interest expense.
Joe: If someone would do this exercise before they use the credit card, I bet you that the credit card use would go down a little bit. If you wanted to buy something and it cost you $8000, and then you looked at the statement prior to you purchasing it and saying, well, it’s going to cost you $8000 plus another $6000 in interest, how bad do you need it or how bad do you want it?
Al: Yep, it’s a good point. And a lot of us get caught in that trap. But let’s look at what could you- what- what if you had that same $272 and you just invested it instead for 20 years at 6%? Now Joe, you end up with almost $125,000. So that $8000 item that you really wanted, could have been $125,000.
Joe: Right. So then you have to compare all sorts of different numbers. I know this is to an extreme, but hopefully this sinks in to say, man, if I put that on a credit card. So this is coming outta my cashflow that I have to pay that debt back and I have to pay that debt back for quite some time, and I’m gonna end up paying $5600 in interest. Or if I took that same $272, invested it, at 6%, by the time I retire, $125,000 bucks. So that $8000 really cost you at $125,000 almost.
Al: It’s such an important concept and we talk about compounding of money. Paying yourself first, this is why.
Joe: Alright, if you need more help with this, you want to find your financial freedom? How about a financial blueprint to get you there? Go to YourMoneyYourWealth.com, click on that special offer this week. It’s our Financial Blueprint. Get your blueprint to financial freedom. Look at those plays on words. We’ll be right back.
Hey, welcome back to the show. We’re talking about getting the freedom of finances or your financial freedom.
We’re going to get into investing in this segment, so you don’t want to miss that. But before we get there, let’s see how you did on that true/false question.
Al: The average employer 401(k) is almost 4%. Joe, that seems correct to me. What do you think?
Joe: Yeah, I would say on average, you know, people put in a couple of bucks and then they get that 4%. I think our company gives us 4%.
Al: It does. And I think when you look at all the averages together, I think it works out to be about 3.9%.
Save, Match, and Invest
Joe: People, don’t leave that money on the table. A lot of times you have to understand when you save into the 401(k) plan, does the company give you a match? And if they give you the match, is it dollar for dollar? Or are they going to have some sort of formula, depending on how much match that you get, depends on how much that you actually put in. Understand that there’s billions of dollars, some studies say, that are left on the table because people are not fully taking advantage of their employer match. This is free money. When we’re talking about investing and how to get to that financial freedom, leaving money on the table is probably one of the biggest mistakes.
Al: You wanna make sure, no matter what you do, put enough into your 401(k) to at least get the company match.
Joe: Let’s take a look at the different retirement plans that a lot of people have to start building this wealth or taking the money out. 401(k) plans. 403(b)s. These are defined contribution plans. These are offered through your employer. You can make contributions up to a certain dollar limit. Hopefully that company matches to another dollar limit, so 401(k) plans, defined contributions. If you don’t have those plans through your employer, you can always contribute to your own individual IRA. In fact, if you do have a plan here, you can actually double up. So individual retirement accounts, they have a lower contribution limit than the standard 401(k) plan, but it’s better than nothing. Self-employed, you have all sorts of really cool opportunities in regards to savings, solo 401(k), SEP plans, simple plans, defined benefit plans. And then also brokerage accounts, things that are sitting outside of the retirement accounts that you can invest in as well. So understanding your options, I think is key.
Al: Well, I think so, too. And some of these are tax favored. right? Some of these are outside of tax deductions. Some could be Roth IRAs or Roth 41(k)s. All of these are important. Make sure you save. But Joe, it depends upon- how much you save is based upon when you start savings.
Joe: Yeah. It’s always good to start early. How do I get $1,000,000, Al? I want $1,000,000. What do I need to do?
Al: Yeah. So let’s say you start at age 30 and you’re gonna retire at 65 and we use, I think we use the 6% rate of return. So I got to save about $700 a month. You know, it might be a little tough, but at least it’s doable. But what if I wait? What if I got, have nothing at age 40? To get that $1,000,000, I have to save almost $1500, about double. And if I wait till age 50 to get that same $1,000,000, I’m investing $3500 a month. Which gets to be a little bit difficult.
Joe: I think a lot of times when people see these numbers, if I’m a little bit behind on my savings and people might think that they need $1,000,000 to have a comfortable retirement or to become rich or financial freedom or whatever the term you want to use, don’t let these intimidate you. If you can’t save $700 a month at age 30. That’s okay, right? Save $100, $200. At least start somewhere and at least start saving and then as you age or if you’re 50 and if you can’t save $3500, who cares? But at least start and then each year or each month, each quarter, just increase it a little bit.
Al: That is such a good point, Joe. I mean, if you’re age 60 and you haven’t started, start today because whatever you do today will put you in a better situation. But while you’re saving, you want to make sure you have an emergency fund as well. We like to recommend 3 to 6 months of money in a savings account that you can draw on if you need it. Why is that so important? Well, if you don’t have that, then you’re going to have to dip into your credit cards, which we just talked about. You don’t want to do that because of high interest rate.
Joe: Yeah, when you bank, you want to bank smart, right? There’s different things. Online bill pay is great, right? Very convenient. You want to make sure that the bills are paid on time because that can affect your credit. Setting up these automatic payments is phenomenal, right? But then you want to make sure that you understand when these dollars are coming out. Don’t get yourself in trouble where you put too much on automation. You still want to control the overall bank account, but having the bank set these things up where you don’t necessarily have to write checks anymore or send it directly from, you know, online and then also looking at high yield savings accounts. So a couple of different things here where you could just get a little bit smarter is going to help you if you pay your bills on time and you have a little bit higher interest rate, those are all good things.
Al: Yeah, they are good things. And then let’s talk briefly about your credit score because a better credit score allows you to get better interest rates when you borrow for things like, let’s say, a car or your mortgage. So how do you improve your credit score? Well, this is kind of basic, but just review for many of you. Pay your loans on time, pay your debts on time. Don’t draw all your credit cards. If you have a $10,000 credit limit, don’t constantly have $8000 or $9000. You want to have some room there, have a long credit history, and then make sure you check your credit report at least once a year that there’s no errors on it.
Joe: You know a couple things when you’re looking at investing it depends of course on your age. If I’m in my 20s, I want to put all of my investments in education, right. And this could be in all different forms. It’s not necessarily going to college, but maybe I want to run a business. Well, I want to be educated in figuring out how do I run a business? Maybe I start taking internships or apprenticeships. Looking at things where I want to get into or networking and finding that true niche that I wanted to thrive in. Education is so key. But then you also want to make sure that you’re maintaining the different assets that you currently have as you age and you start accumulating wealth. You want to maintain the overall net worth. Then you want to make sure that you’re insured. A lot of different things can happen. And if it does, it’s pennies on the dollar. And health, Big Al, this is your motto.
Al: Yes, I love to be healthy. Make sure you’re exercising, make sure you’re eating right, make sure you’re getting enough sleep. Because you want to enjoy this financial freedom.
Joe: All right, Big Al’s livin’ it. If you want to learn a little bit more, go to YourMoneyYourWealth.com. Click on that special offer. It’s our Financial Blueprint. It’s a blueprint to get to that freedom that we’re looking for. YourMoneyYourWealth.com. Click on that Financial Blueprint. It’s absolutely free. You can do it right there at home. Answer some questions. It will give you a blueprint of what you need to do. Gotta take another break. We’ll be back to wrap it up and answer your question.
Hey, welcome back to the program. Show’s called Your Money, Your Wealth®. Joe Anderson, Big Al, trying to find that path to financial freedom. Go to YourMoneyYourWealth.com, click on our special offer this week. It is our Financial Blueprint. You can do it right there at your home, free of charge. It’s our gift to you today. Find the blueprint you need to get to financial freedom.
Let’s see how you did on that true/false question.
Al: Married couple filing jointly pays zero tax on up to $94,000 on qualified, realized long term gains. That’s a mouthful. And that’s a true statement. What’s a realized long-term gain? That’s a capital gain. That’s if you sell stock, mutual fund, ETF, even real estate outside of a retirement account. If you hold it for at least a year and a day, you get a special capital gains rate. And believe it or not, the capital gains rate for up to $94,000 of taxable income if you’re married is taxed at zero. You may have state taxes, but that’s the federal tax. Then there’s a 15% tax up to $500,000 plus. And over that, it’s a 20% tax. Of course, there’s a net investment income tax as well. But the point is, if you’re trying to save your money and stretch your money, capital gains are a much lower tax.
Retirement Income: Real Estate Investing & Social Security
Joe: Let’s say that you made it to the finish line, that freedom line, if you will. Now you have to sustain the net worth and create the cash flow that you need from the assets that you’ve accumulated. So you wanna make sure that you protect it, but it also needs to create income. So a couple of different things that you might have done. You might have some real estate that is kicking out some passive income. You have rentals or maybe a real estate investment trust. You might have some investments like your index funds, mutual funds, maybe individual stocks that pay out dividends. This could be in your retirement accounts. It could be in your brokerage account, things like that. But here are some different asset classes that you might have accumulated that can help you then produce that passive income where that income is now working for you while you can do the things that you truly enjoy. If you truly enjoy working, then continue to work. But now that you have the freedom not to, you know, these are the tools that will give you that income.
Al: Yeah. And let’s talk more about real estate because a lot of people have been very successful in creating passive income with real estate. So number one, number one benefit with a rental, long-term rental, is that you can hopefully create positive cashflow. Right? In retirement that positive cash flow is income that you can live on. But that’s not all, properties can appreciate and very often do. You can end up selling the property, making money on that. What if you have- I don’t have a rental property, but your house, it’s got enough room in it. Maybe you could do a little conversion, little granny flat, convert a garage, right? Make some extra income that way. Or maybe you got a vacation rental, right? And then you do AirBnB or BRBO, which is what I do with my condo in Hawaii. It’s a great way to create income.
Joe: Most of us don’t have a condo in Hawaii. So we have to rely on maybe Social Security. So looking at Social Security, if you wait until full retirement age at 67, you’re going to receive 100% of your benefit. If you want to take it early, that’s great. Take it early. Just know that you’re going to receive a haircut, depending on what your full retirement age is. And if you take it at 62, 63, 64, up to your full retirement age, you will receive a haircut. At the most, a 30% haircut. If you’re also working during this timeframe, if you take your benefit early, and you also have earned income, you have to be aware of the reduction of your overall benefit, too if you’re still working. If you wanna wait till age 70, you will receive 124% increase on the overall benefit. So it might pay off to work or- to push your benefit off until 70, or it might make sense to take it as early as you can. Each of your circumstances a little bit different, but just understand how the benefit works with a reduction and also with the increase.
Al: And Joe, if you need a little bit more income. How about working on the side or a side hustle or part time job or consulting? All kinds of ways these days with the Internet that you can make money, freelancing or maybe consulting with your prior company. Maybe you’re a blogger or you want to be a blogger. You set up something on YouTube or you could be a virtual assistant. A lot of companies use virtual assistants these days or many people are tutors. They train, teach guitar, whatever it may be, to make a little extra income so you can live that retirement life that you want to.
Joe: Once you are start taking the income, you have to consistently take a look at your overall strategy. It’s not a set it and forget it, because markets move, tax rates change, people’s health kind of, it’s really good, and they couldn’t- get really bad. So you want to make sure that you’re always adjusting your strategy to where your life is. For instance, let’s say you have $1,000,000 at age 65. So if someone takes that $60,000 a year out of $1,000,000, that’s a 6% distribution rate, right? This is assuming a straight line, 6% with taxes and things of that nature. This is going to potentially run out of money at age 85. If you maneuver and say, you know what? Maybe I have to take a little bit less out. Well, that could make your assets last that much longer. Five years. That’s significant.
Al: Yeah, Joe, that does make a big difference, really, in terms of how much you’re taking out, which kind of goes in into making adjustments. The 4% rule. We talk about that. That’s kind of a good guideline. Of course, that’s just a guideline. Some people can take more, some people less, but don’t take too much out of your portfolio. Some other things that you might want to adjust is look at where your assets are, where your liquid assets, your investments. Do you have the right assets accounts in your Roth account versus your IRA? versus your non-retirement account. And then finally, Joe, sequence of returns is such an important thing to consider. A 6% rate of return is one thing, but it doesn’t work out that way. If you retire and the market goes way down, you’re going to have to make some adjustments quickly.
Joe: Okay, let’s switch it up a little bit. Let’s answer the viewer questions, Big Al.
Al: This is from Lauren in San Diego. “I heard taxes could eat up your savings in retirement. You’re not working, so how can that happen?” Lauren, great question. Taxes don’t stop when you retire. In fact, when you take money out of your IRA or 401(k), what, guess what? That’s taxable income. You have to pay taxes on it. When you reach required minimum distribution age, you’re forced to take money out and pay taxes on it. Your investments may have interest and dividends, or you may sell an investment and have capital gains. There’s lots of ways that you have to pay taxes in retirement.
Joe: Very common question, and I’m glad you asked it. Because I think a lot of us have heard, all right, defer your taxes until later because you’re gonna be in a very low tax bracket in retirement, or maybe you don’t pay any taxes at all. And then all of a sudden people retire, it’s like, whoa, I have this big tax bill. I wasn’t expecting to pay the same amount of tax that I was potentially when I was working. Well, it depends on where your money’s held. If it’s all in a retirement account, as Al alluded to, all of that is taxed exactly like your paycheck. You don’t pay FICA tax, so you do get some breaks there. But from a state and federal standpoint. It’s taxed exactly the same.
That’s it for us. Hopefully all of you will reach that financial freedom. Whatever that definition means to you, if you want our help, of course, you know where to go, YourMoneyYourWealth.com, click on that special offer. It’s our Financial Blueprint.
Get that blueprint to financial freedom. Thanks for watching. We’ll see you next time. For Big Al Clopine and I’m Joe Anderson. Have a wonderful day.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
