In talking with clients about the benefits their employer provides during the open enrollment season, one often overlooked benefit if clients have dependents is the Dependent Care Flexible Spending Account (FSA).
Health Savings Accounts (HSAs) are not only a savvy investment option but also offer numerous benefits, especially for high-net-worth families. An HSA is a tax-advantaged savings account designed for individuals with high-deductible health plans (HDHPs) to help cover out-of-pocket medical expenses. While the utility of HSAs is universal, they hold advantages for high-net-worth families and have steadily grown in popularity since their inception.
Earlier this year, I explained two principles you can follow to obtain the most happiness from your spending https://www.highlandplanning.com/learning-center-1/how-money-can-buy-happiness-part-1. In today’s article, I will cover three more concepts that can help bring more joy in your life with your spending. Below are the five principles outlined in the book Happy Money.
In a previous article titled “The Estate Planning Essentials”, I identified the documents needed for a comprehensive estate plan. Although this can be a morbid topic most want to avoid thinking about, reviewing the documents not only ensures your financial legacy is passed in accordance with your wishes as smoothly as possible but guides your agent to ensure your medical and financial wishes are addressed. So, how often should you review your estate planning documents?
As Wealth Advisors with extensive experience guiding high net-worth families through the intricacies of planning for their transition to retirement, we have witnessed firsthand the evolving dynamics of what it means to retire well. Traditionally, the focus has been on ensuring financial security through wealth accumulation, aiming to cover the expanses of one's lifespan. The traditional definition of "Retirement Planning".
The decision between a Roth 401(k) and a Pre-tax 401(k) can significantly impact your financial future. While both accounts offer unique advantages, certain scenarios may make a Roth 401(k) a more attractive option. This article delves into the top five reasons you might consider a Roth 401(k) over its Pre-tax counterpart.
A Roth conversion is a financial maneuver where you convert funds from a traditional Individual Retirement Account (IRA) or 401(k) into a Roth IRA. This process involves paying taxes on the converted amount, as traditional IRA/401(k) contributions are typically made with pre-tax dollars, and Roth IRA contributions are made with after-tax dollars.
I often asked this question in high school – it usually involved someone walking away without me finding out.
And now that I have your attention…
In September 2008, the financial services company ING launched a marketing campaign called “Your Number”. You may remember these commercials – they showed busy people going about their day with large six or seven-figure numbers floating over their heads.
Following a significant life event, such as divorce or the loss of a spouse, people face a common question: How will being newly independent affect my family's lifestyle? During this financially delicate period, a decrease in household income, the ability to remain in the family home, and the long-term impact on a person's retirement plan are all top of mind.
The new year has begun, and with it come changes to monthly benefits and costs for Social Security and Medicare. On the positive side, Social Security recipients will see a 5.9% cost-of-living increase in their benefits, the largest since Ronald Reagan was President. Unfortunately, due to various factors, Medicare is also experiencing the most significant increase in Part B and D premiums in the program’s history.
In Part 1 of F.I.R.E., we explored the meaning behind the movement and the different variations, while Part 2 of F.I.R.E. provided some context on common misconceptions. With that backdrop, we are going to outline how to quantify your definition of F.I.R.E.
Put your extinguishers back because it’s not that type of fire, although the concept is spreading like wildfire.
F.I.R.E. is a movement that began based on the idea of minimalist living and extreme frugality to save for early retirement. The initial adopters were aggressive in their approach. In some instances, the early adopters saved all income above fixed costs associated with housing and groceries and invested the proceeds for their goal of retiring decades earlier than expected.
Let’s be honest; this is not feasible for most people. As a result, the definition of F.I.R.E. has become looser with a greater emphasis on the “financial independence” aspect instead of the retire early.
F.I.R.E. is the latest movement to redefine Retirement. For many people, coming from a work-centric culture, retirement may feel like crossing the finish line in your 60s, followed by a period of winding down. However, retirement has evolved into an extended period of newfound freedom attainable by younger individuals through proper planning. For F.I.R.E. adopters, it is not necessarily about attaining the traditional idea of retirement but about having the ability to choose the work you enjoy doing without being concerned about salary.
F.I.R.E. involves a shift in perspective regarding money and work, prioritizing what is most important to your work-life balance, and making decisions not dictated by the need to earn money but the ultimate goal of financial freedom.
All the variations of F.I.R.E. share a common theme of focusing on saving enough money to provide financial flexibility. Still, the definition of financial flexibility is unique and varies from person to person.
There are several main types of categories of F.I.R.E.:
1. Lean F.I.R.E. - Based on the original purpose of living on the bare minimum and saving the rest to live a modest early retirement. F.I.R.E. could be achieved sooner because of its extremeness, but this means the nest egg may be lower.
2. Fat F.I.R.E. - This builds on the Lean approach, but this method is less extreme. There are fewer lifestyle sacrifices, but mindfulness around purchases takes precedent. Based on current lifestyle expenses, the asset threshold needed to provide flexibility will be higher than with Lean, so this may not be possible for every type of earner.
3. Barista F.I.R.E. - This focuses on saving enough money to allow you to retire from your full-time job early. Instead of not working at all, people may use their financial independence to work part-time, do freelance work, or pursue a less lucrative dream career.
According to a survey conducted by T.D. Ameritrade and the Harris Poll, only 11% of 1,500 respondents, have heard of the movement, while 26% are not familiar with the term but know the concept.
That means 2/3 of the American population may not have heard of F.I.R.E. yet. However, there has been a 94% increase in google searches for "Financial Independence Retire Early" in the last five years, so it’s gaining momentum. As F.I.R.E. is turning into a buzzword and is catching the media's eye more, the core principles may be misconstrued and layered with misconceptions.
Common misconceptions around the F.I.R.E. Movement?
Myth 1) One must save 80% of their income. According to the poll, 68% would rather retire at a reasonable age and enjoy life during the accumulation phase, i.e., the period you are earning and saving money. For most, it's not a mythical quest to live frugally to save as much as possible in a brief period. Instead, adopters emphasize living within their means to save and invest by taking advantage of compounding interest from an early age.
Myth 2) The journey to F.I.R.E. is about deprivation. Most financially independent individuals realize there may be lifestyle limitations and tradeoffs in the short term, but there are boundaries. 67% believe F.I.R.E. is not worthwhile if they need to "live like they are broke."
Instead, F.I.R.E. is about reprioritizing what matters most to you and shifting from living materially to living intentionally. Setting goals trigger new behaviors and momentum to implement and make financial progress. Being mindful of the tradeoffs allows for adjustments to expectations or behaviors to maintain progress in your action plan.
Myth 3) You need to make uber bucks. The funds required to be financially independent are very subjective. The cash flow needs of a school teacher or financial advisor will not be the same as a professional athlete. The number required to fund your nest egg depends on your lifestyle spending habits.
In general, you may need to save 25 to 30 times your annual salary. It's essential to create a spending plan as a blueprint for your money that provides actionable steps to spend money intentionally without guilt. Mindful spending is awareness around how you think, feel, and act with money, helping to answer these critical questions:
How much will I need to spend each year in retirement?
How much can I save and invest now?
How can I live within my means while saving for the future?
Myth 4) It's only about retiring early. As I mentioned in Part 1, F.I.R.E. involves a shift in perspective regarding money and work, prioritizing what is most important to your work-life balance, and making decisions not dictated by the need to earn money but the ultimate goal of financial freedom.
About 74% of the 1,500 pollees indicated financial security and peace of mind is more important than actually retiring earlier, while 43% plan to continue working even once they meet the asset threshold needed to retire because they genuinely enjoy it.
Although saving, in general, is integral to success, you need to know what you are saving towards and why. By starting with goal setting, it will inspire you to make your goals a reality. The definition of financial independence is unique and varies from person to person; be introspective and ask yourself the following questions:
1. What does financial independence look like to me? There are three main types of F.I.R.E. – Lean, Fat, and Barista.
2. What is most important to my work-life balance?
3. Are my decisions dictated by the need to earn money or the goal of financial freedom?
4. Do I want to retire when financial independence is fully achieved, or do I want the ability to choose the work I enjoy without being concerned about salary?
The magic number is an estimate of what is needed to attain financial independence. This is not an end-all-be-all method, but it morphs an intangible idea into a concrete goal. The figures used to get to the magic number should reflect your current cash flow patterns. Just like a business, you want to focus on what’s coming in (income), what’s going out (expenses), as well as what’s being retained for the future (savings).
To start, you need to determine your annual savings. This should include employer-provided matches, your investment accounts, and your savings accounts not being consumed for daily lifestyle expenses. This annual savings figure is the powder that will increase your investable wealth and generate long-term growth.
Next, your current lifestyle expenses indicate the amount needed in your portfolio at your retirement age to sustain that lifestyle. This is where tracking expenses should become a habitual practice. Add up all your costs, not including taxes or savings. An easy way to categorize the remaining costs is to group them as either fixed or discretionary.
Fixed expenses: These are items you must pay every month to maintain your current household, such as your mortgage or rent, car payment, insurance premiums, and utilities. Generally, the amounts will not change on a month-to-month basis.
Discretionary Expenses: The joy of life is doing what you love. Whether traveling, hobbies, or dining out, this section gives you the flexibility to spend on the ‘fun stuff.’
The bottom-line amount is what you are projecting to spend throughout your retirement. Take the annual expense amount and multiply by 25; this is the magic number
For example, Timmy spends $100,000 per year, so he would need $2,500,000 ($100,000 x 25).
Lastly, calculate how long it will take you to accumulate the magic number based on the amount you save each year (part of step 1 above). This will require you to assume investment returns.
For example, based on an average annual return of 6.5% and annual savings of $30,000, it will take Timmy 30 years to save up to the magic number of $2,500,000. Instead, if Timmy cuts back on expenses and saves $40,000/ year, it will only take him 26 years.
The more you save, the sooner you’ll reach financial independence.
A spending plan is a blueprint for your money and gives you an actionable plan to spend your money intentionally without guilt and fear of overspending. This is not designed as a strict budget. We get it; life happens! There will be months with higher outlays than usual, and the objective is to be prepared for those unexpected months while having sustainable money management skills. Mindful spending is awareness of how you think, feel, and act with money.
The amount you identified should be the savings target for the foreseeable future until your goal is completed. Automatic savings can systematize the process and ensure this is done regularly. Think of automated savings as a fixed expense where you are paying yourself just like you would any other bill.
Firstly, Cash flow and goals will fluctuate as your life evolves, making the magic number a moving target. The future is unpredictable, so if progress is not evaluated regularly, there could be unexpected issues. Keep in mind that there is no guarantee that your projections will occur as mapped out.
For example, based on Timmy’s initial review, as explained above, he has been saving $30,000 per year for the past five years, so based on an average annual return of 6.5%, he has $170,810. He has been working towards his magic number of $2,500,000 based on expenses of $100,000 per year.
However, Timmy has not reevaluated his savings plan for the past five years. Timmy received a raise two years ago and has been spending an additional $20,000 per year, which he expects to maintain during his definition of retirement. This means his new magic number is $3,000,000!
Secondly, the stock market can be erratic, but it is necessary to participate in it for capital appreciation. The primary reasons to take the risk are to achieve a higher return than inflation and fund specific goals by forecasting additions to capital (portfolio savings). If portfolio returns do not meet expectations, that can lengthen the time to achieve the goals.
For example, if Timmy’s portfolio earns 5.5% over five years, he would have $167,500. Although this seems insignificant, the lower rate of return adds three additional years onto his financial independence horizon.
Investing in a diversified portfolio can mitigate some risks of being in the markets, making the investing experience smoother. Stick with an investment strategy designed to weather all types of events but provide the long-term return needed for your plan. Multiple scenarios of investment outcomes should be run to test the validity of your plan and consider worst-case scenarios as a stress test.
This movement may not be for everyone, but we can all learn something from it. Overall, we need to be conscious of living within one’s means while saving for the future. It does not have to mean sacrificing all comforts and should encourage better habits around personal finances. This ideology is the foundation for financial planning and understanding your financial situation.
Rather than relying on a generic approach, work with a financial advisor to analyze your current spending and what that would look like over time. The process of financial independence takes a more thoughtful approach and working with an advisor will likely provide the best chance of success.
A financial plan does not need to be complicated and should provide a starting point for measuring your long-term success. Financial planning is as unique as you are, so a remedy for one person may not be appropriate for your situation. Planning allows us to be proactive rather than reactive in shaping our lives because we have more control over the outcomes.
This is a very dynamic process that will reduce your stress about money, support your current needs, and build assets for long-term goals. To grossly oversimplify this, you want to focus on four things: investing in your professional/ personal growth, spending less, saving more, and investing prudently.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, LLC based out of Wayne, NJ. HIGHLAND Financial Advisors, LLC is a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management to help clients focus on what matters most to them.
AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is involved with Upswing Advisor, a platform dedicated to creating a solid financial foundation for young professionals. AnnaMarie is a member of NAPFA .
In Part 1 of F.I.R.E., we explored the meaning behind the movement and the different variations. According to a survey conducted by T.D. Ameritrade and the Harris Poll, only 11% of 1,500 respondents, have heard of the movement, while 26% are not familiar with the term but know the concept.
As the world continues to evolve, it comes as no surprise that life expectancy in the United States has vastly increased over the last four decades and will most likely continue to rise as new technological advancements in health care continue to emerge. The U.S. Census Bureau recently conducted a report analyzing the change in life expectancy over the 100 years from 1960 to 2060.
Gap years are no longer just for recent graduates but are now for seniors who may not have had the time to pursue their passions or try something new during their working years. For many retirees coming from a work-centric culture, retirement may feel like crossing the finish line, followed by winding down and boredom.
Federal student loans are efficient forms of debt because the interest is tax-deductible, and the interest rates are relatively low compared to other forms of debt like credit cards. In addition, student loans are designed as an investment in yourself and provide the ability to earn more through your human capital in the future.
