Episode Summary

In today’s episode, Mary Beth Storjohann, CFP® and Neela Neela Hummel, CFP® explore the concept of financial freedom and how to know if you’re on track to achieve it. They discuss the different interpretations of financial freedom, retirement planning, the FIRE movement (Financial Independence, Retire Early), the impact of savings and investment on achieving financial freedom, and the importance of having a diversified financial portfolio. They also touch upon the psychological aspects related to money, the significance of tracking net worth and budgeting, and the use of online retirement planning calculators to gauge progress toward financial freedom. They emphasize the personalized nature of financial planning and the need for a holistic approach when considering factors such as expenses, income streams, assets, and tax allocation. Tune in as Mary Beth and Neela share their insights on achieving financial freedom and providing valuable advice to help you on your path to financial independence.

What You’ll Learn in this Episode:

• Why being financially free means different things to different people
• How to define what financial freedom means for you
• Other definitions of being financially free besides retiring
• Why many people continue to work once they’ve reached financial freedom
• What the FIRE movement is and the sacrifices that come with it
• The 4% retirement rule and how to apply it to your life
• The importance of having a combination of assets when approaching retirement
• The tax implications if you are solely relying on your 401k during retirement
• The importance of tracking your net worth throughout your life
• The importance of a budget and understanding your household expenses as you approach retirement

Stay Connected:

• Connect with Mary Beth on Twitter, Instagram, and on LinkedIn
• Connect with Neela on Twitter, Instagram, and on LinkedIn
• Join the Abacus community by connecting with us on Facebook, Twitter, Instagram, and on LinkedIn

Transcript of the Episode

Neela [00:00:14]:

Hey there. Welcome to the If Money Were Easy podcast, the show where we teach you how to expand what’s possible with your money. We’re your hosts, Neela Hummel, 

Mary Beth [00:23:]:

and Mary Beth Storjohann, 

Neela [00:00:24]:

certified financial planners and co CEOs of Abacus Wealth Partners. Today on the show, we’re going to talk about how do you know when you’re on track to be financially free? This is provocative. 

Mary Beth [00:00:38]:

This is provocative. Very applicable to all of our clients. 

Neela [00:00:42]:

Yeah. 

Mary Beth [00:00:42]:

Basically anybody. How do you know? 

Neela [00:00:44]:

Anybody. So I feel like where we would kick this one off is what does it even mean to be financially free? Because I think different people have different interpretations of it. 

Mary Beth [00:00:54]:

Completely. I think the variety of clients that we work with, ourselves and at Abacus. So it’s either stopping work completely, it is taking a lower paying job. It’s being able to start my own business. It’s having the option to do whatever the heck I want. And maybe that’s work, maybe it’s volunteer. I don’t really know yet. It’s being able to maybe sell your house, buy a van, travel around the country. There’s a variety. Or actually retire out of the country. Another one. 

Neela [00:01:21]:

Yeah. It’s almost like the period. Whatever reduced financial pressure means to you, it’s that plus the opportunity and what’s on the other side.

Mary Beth [00:01:30]:

Yes. It’s highly personal, based on your own goals and values and potentially upbringing and what you want for your life. 

Neela [00:01:40]:

Yeah. And this is a big one to that point where it is not one size fits all because everybody has different ways that they live their lives. Different goals. I love that you mentioned the idea of selling all of your possessions and traveling the world and just maybe living a nomadic lifestyle forever or for some time period that is very different than putting your 40 years in at your company and retiring with a gold watch. 

Mary Beth [00:02:06]:

Exactly. 

Neela [00:02:06]:

Which, again, I’m going to date myself and sound like somebody from 1970. 

Mary Beth [00:02:11]:

Just watching like Mad Men a lot. Is that what that. 

Neela [00:02:15]:

A lot of mad men. Marvelous Ms. Maisel. Okay. That’s what I’m anchored to. 

Mary Beth [00:02:21]:

Got it. What companies are still giving out gold watches? We’re not doing that at Abacus. Full disclosure. 

Neela [00:02:26]:

Like a golden Apple watch. 

Mary Beth [00:02:33]:

But I agree. So, yes, the financially free, doing the reflection on your own life, your values, and knowing that depending on your age, it could change over time. What you view as financially free at 40 could look different at 50, et cetera. And by the time you maybe actually hit this traditional retirement air quotes at 60, it could be something completely different from there as well. So know that what you want today might not be what you want tomorrow, but starting somewhere. And that’s what you’re working the plan for. 

Neela [00:03:00]:

You bet. Yeah. And maybe it’s financially free for a period of time. It could be for several years or what have you. And I think that’s where it’s understanding all of your input so you can create that map. 

Mary Beth [00:03:12]:

Right. So to talk about being financially free in this concept of it’s really more this emotional state, I mean, it’s reflected maybe on paper, but being financially free is this kind of emotional feeling. Tell us a bit about what that looks like and what you’ve seen with clients.

Neela [00:03:30]:

Yeah. This one is almost universal in that I’ve worked with very few people who genuinely hate their jobs. I know that is probably a privilege because I think there are plenty of people out there who do not enjoy their work. But for the most part, people who have been working for a long time, have been saving aggressively, want to know if they’re on track and if they have optionality. And the only thing I can describe it as, it’s like the shoulder relax. When you’re able to provide some clarity around someone not needing to work as hard as they’ve been working. And something super interesting happens once they know that most keep working. 

Mary Beth [00:04:15]:

Most keep working.

Neela [00:04:16]:

Yeah. I never expected that to happen. I expected to be able to be like, you can do it, you can retire. And the next day they’re like, I’ve given notice and I’m on my way. And almost without fail, clients will stick around, and maybe they’ll do it in a part time capacity. Maybe they’ll shift their workload around, or they’ll keep doing the exact same thing. They’ll almost enjoy their work more because it feels like a choice. 

Mary Beth [00:04:43]:

Right? The choice is it having the choice decisions, there’s currency. There’s currency in that freedom and flexibility that is incredibly valuable. And some people, even with the choice, stay out of repetition. It’s what they know. It’s inertia. And so creating a change in disrupting the current pace or status of their life can feel scary in other ways. And so having the option is wonderful, but some people still stay because they’re afraid to disrupt what they have going.

Neela [00:05:19]:

Change is hard. 

Mary Beth [00:05:20]:

Change is hard, yeah. With retirement, transitioning to retirement or this idea of being financially free, there is actually a lot of prep work that is advised to go into that. It’s not like you actually flip the switch and that you’re done one day and you wake up in the morning and do whatever you want. Those that are most successful are planning for it years in advance and are figuring out what their hobbies are, how they want to spend their time. They’re drafting new plans for how they plan to lead their life, to make sure that they stay busy and active and keep their mind engaged. Otherwise, those that do retire without a plan typically tend to be unhappy, unfulfilled in some ways. 

Neela [00:05:55]:

I’m so glad you mentioned that. You shouldn’t be figuring out what to do after you’ve left your job. It’s like building that plan. I helped a client leave a very long law career. She’d been working in government after she got her law degree, and so she’d been there for 35 years. And by the time she retired, she had figured out all the different things that she wanted to do. She was like, oh, I’ll be doing Ma Zhang on Wednesday. I’m going to be doing my tennis on Thursday. She had filled up her life, and it was such an easy transition for her. And, yeah, just getting ahead of that. So that you’re not figuring all that out when you have too much time on your hands.

Mary Beth [00:06:34]:

Exactly. That’s when you can become a little restless. 

Neela [00:06:37]:

Yeah. 

Mary Beth [00:06:38]:

So talk a little bit about the FIRE movement before we talked about going into assets and allocation and whatnot. Tell what the FIRE movement is and what your experience has been, and then I’ll share mine as well. 

Neela [00:06:50]:

So I feel like the FIRE movement got a lot of attention, at least in financial nerdom, like, five to ten years ago. And fire stands for Financial Independence, Retire Early. 

Mary Beth [00:07:00]:

It’s like, ten years ago. 

Neela [00:07:02]:

Ten years ago. 

Mary Beth [00:07:03]:

Ten years ago.

Neela [00:07:03]:

Probably ten years ago, yeah, towards the end of the bull run over there. But it’s essentially a group of people who are so committed to saving so aggressively and also spending as little as possible. Basically, the less you spend, the more you can save. The more you can save, the sooner you can retire, because your expenses are that much lower. So if you’re able to save 50% of your income, not only are you spending less than half of your income, that’s the only income that you need to replace. And if you’re able to save a huge chunk of money, you could retire in, like, ten years or twelve years or something with those numbers because you have a smaller nut to replace. What I find very interesting is that there’s a huge group of people who did that and then are, like, very bored because they worked super hard, kind of just to our other point, and then are like, now what? That’s absolutely not everybody. But this idea of slaving at a job that you either don’t like or you’re just doing it for the money, which not saying you have to do to be part of the FIRE movement, but you then get to this there on the other side of financial independence, and then you’re like, well, now what? So I think the economics of the FIRE movement are really interesting. And it’s a good thing for people to remember that the more you spend, and if you make more money and you spend in a commensurate amount with that more income, right, that spending creep, then that’s more money that you need to save to be able to replace what you’re spending. So always keep in mind, that ratio that you have of what are you spending compared to what you’re bringing in is going to directly impact when you are going to be on track to be financially free. Because if you’re not careful and aware of that, you’re on track. Your Runway is going to get longer and further and further away. 

Mary Beth [00:09:02]:

Right. I think the other thing that is missed in the FIRE movement, and there are tons of blogs out there dedicated to this movement and forums and content, is the sacrifice that is made along the way to reach this concept of financial freedom. So in terms of spending as little as possible, saving everything, you read about the extreme steps that people are taking, and not necessarily deprivation, but they are really sacrificing, having any type of enjoyment in their lives in many ways, or have really had to do this work to kind of adjust their mindset around this so that they can reach this other point of financial freedom. And when they reach this financial freedom, don’t forget, you’re basically on a fixed income there as well, because your portfolio can only generate so much money if you’re not doing some other side income type thing. So the straight FIRE movement in terms of reaching this financial freedom, because you have enough saved for retirement, you’re still on a fixed income. And so then you’re on a fixed income at a younger age, and your income is tied to the market in many ways. So if there’s some tough years, that income is going down as well. And so that’s the really interesting part about the FIRE movement as well. You’re tied to these lower amounts across the board in this very different lifestyle, then you potentially could allow yourself by extending out your timeline, maybe allowing yourself to find a job and some flexibility along the way. But the extreme nature of the FIRE movement is very interesting to me, and many people are working to get to this financial freedom component. And what they’re really doing is then they’re like, oh, I’m financially free, but look at me, I’ve started my real estate business. They’re doing other things as well because they do have to supplement the income on the other side. So when you actually dig into the FIRE movement, it’s very interesting to see how many people are just straight living on that income that they’re generating from their portfolios versus those who now have the flexibility to maybe do part time and they’re supplementing in other ways. And maybe they’ve used this movement as a launching pad. But it’s interesting when you dig into it from a psychology standpoint and the moves that people are making, I think the habits are really great, a solid foundation. But in some ways, depriving yourself at such an extreme rate for this idea of financial freedom and not having joy for that period of time is interesting as well.

Neela [00:11:17]:

There’s a cost.

Mary Beth [00:11:17]:

There’s a cost. 

Neela [00:11:19]:

There’s a cost. Is that the life that you’re trying to replicate with having x amount saved?

Mary Beth [00:11:25]:

Okay, so financial freedom, what do your assets look like? What does your portfolio, your financial life look like? If you have reached financial freedom, when do you know that you’re there? 

Neela [00:11:38]:

Yeah. And this is where it’s very valuable to talk to a financial planner because there tend to be lots of moving parts, but at the highest level, you need to be able to replace the money that you’re spending. How are you going to do that? You’re going to do that from a combination of passive income streams. So if that’s real estate, if that’s investment returns, et cetera, and then anything else that you have saved aside. And so a lot of the financial freedom is based around what you might hear as the 4% rule, where if you have a million dollars, you can basically take $40,000 a year out of that chunk of money, and that ends up being that fixed income. So I think it really comes down to what are you spending on an annual basis? Multiply that by 25 and see where that money is going to come from. And I think this is where it gets complicated. We’ve talked a little bit about Social Security. When does Social Security kick in? Are there other income events in your life? Are you going to be inheriting some money? So it’s basically getting a sense of, do you have enough in the way of assets to support the expenses that you’re incurring on a regular basis? 

Mary Beth [00:12:46]:

Is the expenses you’re incurring on a regular basis and then some. We talked in just another episode that we were recording about the inflation costs in terms of health care, how much that’s creeping up on an annualized basis. And so is that factored in? Are there any not just future income events, but future expense events? How often are you purchasing a new car, if necessary? Do you have travel, home purchase, whatever those things are, depending on the age that you are at, what do the future goals look like and where will your assets support those purchases as well?

Neela [00:13:16]:

Yeah, what do those tools actually look like? Because if you have it all in one real estate building and that’s throwing off a bunch of income. Great. And what happens the next time there’s a real estate crisis? Do you have enough cushion to be able to withstand the ups and downs of the real estate market, the stock market and everything that comes with it? Because it’s also what we love to see. The people that we feel the most excited about being at this stage is when they have assets in a lot of different types of vehicles. They’ve got some money in cash, they’ve got some money in non retirement money so that they’re not paying taxes every time they take that money out on. 

Mary Beth [00:13:57]:

Your trust, your joint account, your individual account. 

Neela [00:14:00]:

Right. And then also having some tax deferred accounts like 40Ks, IRAs. And then ideally you got some Roth money, too. So we want to have a couple of different liquid tax buckets that we can play with so that we can also make sure that we’re not paying a whole bunch extra in taxes because we only have retirement money that we’re going to be taking money out of.

Mary Beth [00:14:19]:

Let me ask you a question. When it comes to clients looking to reach financial independence, this is blanket across the board. But in general, somebody’s maxing out their 401k, do they need to go above and beyond that? Is that enough? 

Neela [00:14:35]:

In this day and age, it’s actually not enough. 

Mary Beth [00:14:39]:

even in a dual income household. 

Neela [00:14:40]:

It can be depending on what that household is spending. But the real issue is that if you’re only saving into your 401K, you’re going to end up with these really big, beautiful retirement accounts. But every time you take money out of those accounts, assuming they’re traditional 401Ks, you’re going to pay ordinary income on those. And so the clients that are set up for success tend to have a combination of both retirement money and non retirement money so that they don’t get stuck in a tricky tax position. But again, it depends on what they’re spending on a regular basis. But for a lot of people. You want the tax benefit of going into 401Ks, but you really want to have another bucket that you’re starting to fill so that you have a little bit more flexibility. 

Mary Beth [00:15:24]:

Right. When you’re thinking about retirement planning, we’re not just looking to, hey, do you have the money to cover your expenses? We’re also looking at tax allocation as well. Totally. Two things that we’re looking at as financial planners. We’re looking at, okay, where are those buckets that you have your money that we can pull from and which ones are going to cost you the less in terms of taxes? How can we strategize to save on taxes on an ongoing basis? And if you have only put all of your money into the 401K over time, that is not going to give much room for strategizing. 

Neela [00:15:53]:

Right. Ties your hands a little bit. It’s great. It’s super important. You get great tax deferral along the way, but it ties your hands a little bit in the future. And I’ve yet to find the client who said, I want to pay as much tax as I possibly can. I’m still waiting for that client, but I don’t think they’re coming. 

Mary Beth [00:16:09]:

Yeah, I ask about the 401Ks because it’s hard to hear sometimes. If you’re listening, it’s hard to hear. And it’s true, though, in general, for where we’re at, in terms of inflation, expenses for the majority of people that I work with, the 401K is not enough. Doing two 401Ks is sometimes not enough to maintain the lifestyle that you’re looking to lead and meet all of your goals. And so if the two 401Ks at $23,000 this year is not enough, that also means that just doing your Roth IRAs is not going to be enough. Totally commendable. And continuing nothing needs to happen overnight. And so I never want to discourage anybody, but it is an ongoing basis to continue to be able to increase the amount that you’re saving. So if you are just able to do your Roth IRA right now, that is amazing. And working to continue to grow your income and to set aside more along the way or really being clear into the know of what your expenses are and what that number is for you to make that transition to financial freedom, but sometimes it’s not enough. And so being able do what you can, but working to have that continue to grow each year, the amount that you’re setting aside. 

Neela [00:17:16]:

I think it’s really interesting. You and I both love reading financial articles and one of the ones that gets so many clicks is how much money should I have by age 40? 

Mary Beth [00:17:27]:

Those are my favorite to write for my old website. I was like, this is great. That’s just going to get all the clicks. It was one of the best ones because everybody else has this. That’s exactly. So I’m going to have my article titled that. 

Neela [00:17:37]:

Why do people love those? Why do we love those so much? 

Mary Beth [00:17:38]:

We want the answer. We want to put it in the microwave and we want it to come out done. That’s what we’re looking for. Generation. Yeah, exactly. Tell me what to do. That’s the hardest part for when we’re interviewed by the media. How much should somebody in their 20s be saving? How much should somebody in their 30s? It depends, but I’ll give you a vague number, generalized, if that will make you happy for your article. 

Neela [00:17:58]:

Everybody always wants the rule of thumb. Everybody wants to know, am I okay? Am I doing okay? Am I on track? And I think that’s a really relevant one for this session. And if we link back to what we were talking about in the very beginning is what does it mean to you? Because you should have x amount. It’s going to be dependent on what you want to do with that money. And so what we want to make sure that you’re doing is that you are making progress, that you are spreading your money out in a couple of different ways, and that you are continuing to move in the direction where you have options. Because at the end of the day, money is freedom. Money is options. And just being able to decide how you want to spend your time is the most important thing that money can buy. 

Mary Beth [00:18:43]:

Yeah. One of the things that I always did with clients was not necessarily investment performance is wonderful, but looking at the net worth growth on every six month basis. So am I on track and how am I doing? That’s very personalized. When you start working together, when you start tracking your net worth, it is one number. And then as you update it on an annual or every six month basis, you can see the steady improvement over time or you can see if the market maybe has taken it back down. But you are able to see and track that progress. And it’s relevant across the board to your life, whether it’s your mortgage is being paid off, your home gone up in value, you saved more into retirement, whatever those things are. But the net worth progress has also been very meaningful, I think, to clients along the way as well, because it’s personalized. It’s great to feel like your portfolio has earned x percent, but you could check on it tomorrow. And that could go down as well. So the net worth gives a more comprehensive view. And I think that’s a great way for people to, if you’re listening, to get started on your own, very easy to track your own net worth.

Neela [00:19:38]:

And psychologically, because there tends to be such a scarcity mindset and such a feeling of shame around money where it’s like, I’m not doing enough, I should be saving more. For you to kind of take this, look back and be like, yeah, but look how far you’ve come is so powerful. 

Mary Beth [00:19:54]:

Super powerful. Super powerful. And so I think that’s a really great one. But it goes back to if you don’t have a financial planner, which you should, but if you don’t have one, using one of the online calculators, you can google retirement planning calculator, I’m sure, to understand what you need. And so you’ll know that calculator will tell you what you need at retirement, and you’ll know based on if you know your net worth or what you have in your accounts, you’ll be able to gauge, am I on or off track for getting there? Even our 401K at Abacus now tells me if I’m on or off track. I log in there, they’re like, here’s your Social Security estimate. What, whatever percentage of the way there, which I plugged nothing into it. So it’s assuming everything about me, which is lovely, but it’s very easy to find calculators these days. 

Neela [00:20:32]:

Right. Which then forces you also to understand this is a good time to have a budget, to understand what are you actually spending in your household? Is this the amount that you want to replace? Are there things that would go away once you’re financially free? If you are no longer income dependent, do you need to carry life insurance anymore? Maybe not. Do you need disability insurance? Maybe not. Are your kids going to grow out of daycare? And then you don’t have that expense anymore. So push yourself forward to what your timeline goal would be. What would your expenses be there? And focus on the intersection between the more you spend, the more you have to save to cover those expenses in the future. 

Mary Beth [00:21:08]:

Yes. That’s it. 

Neela [00:21:09]:

Good luck, everyone.

Mary Beth [00:21:11]:

Good luck. 

Neela [00:21:13]:

Most people have formed helpful and harmful habits around spending, giving and investing. Head to abacuswealth.com/quiz to take our financial archetype quiz and learn your three dominant money types. You’ll receive personalized guidance that helps you have a healthier, more balanced relationship to money. 

Neela [00:21:55]:

Abacus Wealth Partners is an SEC registered investment advisor. SEC registration does not constitute an endorsement of Abacus Wealth Partners by the SEC, nor does it indicate that Abacus Wealth Partners has attained a particular level of skill or ability. This material prepared by Abacus Wealth Partners is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security strategy or investment product. Opinions expressed by Abacus Wealth Partners are based on economic or market conditions at the time this material was written. Facts presented have been obtained from sources believed to be reliable. Abacus Wealth Partners, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Abacus Wealth Partners does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. No investor should assume that future performance will be profitable or equal either the previous reflected performance or that of the reference benchmarks. The historical performance results of the comparative benchmarks do not reflect the deduction of transaction and custodial charges or the deduction of an investment management fee, the incurrence of which would decrease indicated historical performance. The S%P index includes 500 leading companies in the US and is widely regarded as the best single gauge of large cap US equities. The holdings and performance of Abacus Wealth Partners clients’ accounts may vary widely from those of the presented indices. Advisory services are only offered to clients or prospective clients where Abacus Wealth Partners and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Abacus Wealth Partners unless a client service agreement is in place.