Financial Freedom Number: Planning for a Secure Future

Achieving financial freedom is a dream shared by many, but it's essential to recognize that no two financial journeys are alike. Financial freedom doesn't just mean retiring early; it’s about having the freedom to make choices, whether you want to continue working or pursue other passions. This guide will help you calculate your personal financial freedom number and highlight strategies that suit a range of unique financial situations, as discussed in a recent live session.

What Is Financial Freedom?

Financial freedom means having enough savings, investments, and income streams to sustain your desired lifestyle without the obligation to work. Essentially, work becomes optional. However, this number looks different for everyone, depending on factors such as income, lifestyle, debt, and retirement goals.

Step 1: Calculating Your Financial Freedom Number

The financial freedom number is the amount of money you need to retire comfortably while maintaining your desired lifestyle. Let’s take an example discussed during the session:

• Current Income and Expenses: A participant, Roger, earns $200,000 a year at 40 years old. After accounting for mortgage payments, car payments, and lifestyle expenses, Roger has $20,000 annually to save.
• Future Retirement Needs: The financial freedom number involves estimating how much you’ll need to live on each year during retirement. Roger, for instance, would need $140,000 annually to maintain his lifestyle, assuming reduced debt and lower taxes.

Step 2: Accounting for Inflation and Future Expenses

• Inflation: Inflation can erode purchasing power over time. Roger’s estimated $140,000 per year today may need to be closer to $300,000 by the time he’s 65 to maintain the same lifestyle.
• Medical Costs: Don’t forget to plan for additional medical costs as you age. It’s often recommended to allocate 15% of your future expenses for medical care.

Step 3: Investment and Withdrawal Strategies

Your investments should be designed to grow your wealth and provide sustainable withdrawals during retirement. However, it’s important to account for mortality—how long you expect to live in retirement. The longer your lifespan, the more you’ll need in your portfolio to sustain your lifestyle. Estimating your life expectancy will help guide decisions about withdrawal rates and investment growth.

The session included calculations for different withdrawal rates, ranging from 2% to 5%, to illustrate how much capital you’d need to maintain an income of $300,000 annually during retirement. These calculations, however, must also account for how long that income needs to last.

• At 2%: Roger would need $14.5 million in investments by retirement to safely withdraw $300,000 per year without depleting his portfolio too quickly.
• At 3%: He would need around $10 million in investments.
• At 4%: $7.5 million could suffice, but this may carry more risk in terms of portfolio longevity.

Considering Mortality in Your Strategy

Many people underestimate their life expectancy when planning for retirement, which can lead to the risk of outliving their savings. For instance, if you plan to live to 80 but actually live to 90 or beyond, the funds you thought were sufficient may not be. A key takeaway from the session was that planning for a longer lifespan (e.g., 90 instead of 80 years) can greatly impact your financial strategy.

• Longer Lifespan = More Savings: If you expect to live longer, you’ll need to either save more or withdraw less each year to ensure your capital lasts. For example, withdrawing 4% annually may work if you plan to live 20 years in retirement, but if you live 30 or 40 years, a 4% withdrawal rate could leave you short.

• Retirement Age: Working a few more years can also make a substantial difference. In the session, the advisor showed that delaying retirement from 65 to 70 or even 72 could significantly boost your financial health, allowing your investments more time to grow and reducing the number of years you need to fund from your savings.
  
  

  Both your withdrawal rate and your expected lifespan must be factored into your financial freedom calculations. Planning for longevity with a conservative withdrawal rate and a realistic outlook on investment growth is essential for ensuring your savings last throughout your retirement.

These strategies are not one-size-fits-all, and each rate carries its pros and cons depending on your tolerance for risk and investment returns.

Step 4: Considering Different Scenarios

Not everyone will fit into the typical “40 years old, $200,000 income” mold, and the session covered numerous other scenarios to illustrate how financial freedom can vary. For example:

• Lower-Income Scenarios: Let’s say someone earns $50,000 and expects to need the same amount annually in retirement. The savings and investment requirements would be much lower compared to someone with a higher income. Planning and discipline in saving could still lead to financial independence.

• Different Retirement Ages: The earlier you retire, the more savings you’ll need. However, small adjustments—like working until 70 instead of 65—can significantly reduce the amount of capital required to achieve financial freedom. This is particularly relevant for those who want to continue working part-time or in flexible jobs later in life.

• Debt Management: Reducing or eliminating debt before retirement is critical. High debt loads can severely impact the amount of capital you need to save. Reducing debt allows you to retain more of your income for savings and investments, accelerating your journey toward financial independence.

Step 5: Tax and Estate Planning

Taxes and estate planning were emphasized in the session as crucial components of financial freedom. Many individuals overlook the long-term impact taxes and estate planning can have on their retirement strategy. By lowering taxes through proper planning and maximizing deductions, you can preserve more of your wealth for future use.

• Lowering Your Tax Bracket: By reducing taxes and debts to manageable levels, Roger’s hypothetical savings rate improved from 10% to nearly 30%, drastically increasing his ability to build wealth over time.
• Estate Planning: Those with significant assets should factor estate taxes into their financial freedom calculation. Estate planning can prevent large tax burdens on heirs and ensure that wealth is passed on efficiently.

Step 6: Tailoring the Plan to Your Needs

There’s no universal blueprint for financial freedom. Every person has unique goals, incomes, lifestyles, and risk tolerances. During the session, the advisor emphasized the importance of personalizing your plan based on your unique situation:

• Comprehensive Planning: A personalized strategy that includes debt, retirement, and lifestyle planning can make a big difference in achieving financial freedom.
• Flexible Consultations: You may start with a basic consultation to calculate your financial freedom number, then evolve into more comprehensive financial planning as your situation changes.

Whether you're a high-income earner, a business owner, or someone managing a modest income, financial freedom is attainable with the right approach. Consistent savings, smart investments, and strategic tax planning are key components that, when combined, can lead you toward the goal of financial independence. But it’s important to understand that this number is unique to each individual.Take the time to calculate your financial freedom number, review your financial situation regularly, and adjust as needed. The earlier you start, the more flexibility you have to shape your future.