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5 Steps Towards Financial Freedom

Wouldn’t it be great to sit back and enjoy your retirement years without having to worry about where your money is coming from? Financial freedom is a dream that we all share, and making it a reality starts with one step: creating a plan. Here we’ll go over five steps that will get you moving in the right direction.

1. Think About What Financial Freedom Looks Like

When you start visualizing a life of financial freedom, it sets you up for success. Creating a mental picture gives you a tangible dream to strive for, and is a technique commonly used by elite athletes and entrepreneurs. Visualization also helps you determine how much money you’ll need for your more leisurely years.

Do you envision yourself living near the beach and playing golf every day in retirement? If so, you’ll probably need a little more cash than the average retiree.

Or maybe you’re the opposite and never plan to truly retire, knowing you’ll still be working in some capacity during your retirement years. In this case, you won’t need as large of a nest egg to rely on.


2. Figure Out How Much You Need to Save

Discovering how much money you’ll need to have saved up is the most essential step to achieve financial freedom. The first thing to consider is how many years away from retirement are you? This will be the basis for understanding how much money you need to put away each year to stay on track. The number of years before retirement will also dictate where your money can be best put to use. If you’re a long way away from retirement, you don’t need to worry about liquidity and can focus on the long-term growth of a stock portfolio, rather than low-risk, low-return bonds.

The worst thing you can do when planning for retirement is underestimating how much money you’ll need. A common trap you can fall into is underestimating your spending. Many people assume they will spend considerably less in retirement than they do currently. If you know your mortgage will be paid off by the time you retire, this could be true. But also consider what you’ll be doing when you’re not working all day. Most likely, you’ll want to go out for meals with friends, go shopping, and possibly travel the world.

Some will tell you that you should expect your spending in retirement to decrease by 30 to 40 percent. However, financial advisors often suggest that you should expect your spending to stay the same, or even increase. You’ll be much happier in retirement if you overprepared rather than underprepared for future expenses.

After you’ve done a rough estimate of how much money you want to live on each year in retirement, multiply it by 25. If you plan to live on $50,000 per year in retirement, you will want a portfolio worth $1,250,000 ($50,000 x 25).

A common rule of thumb for how much retirement income you can receive from investments is the four percent rule. This rule states that a well-balanced portfolio can provide an income of four percent annually for 30 years before you would run out of money. For example, if you have $625,000 worth of stocks and bonds in your portfolio, you can take out $25,000 every 12 months for the next 30 years before you run out.

3. Eliminate Debt and Unnecessary Expenses

High-interest debt will stunt your savings and cost you dearly in retirement. If you have any outstanding credit card debt, work out a plan to eliminate it. If necessary, look into debt consolidation services to help reduce costly high-interest rates.

Another helpful way to reduce debt is to refinance your mortgage. With a quick search online, you can see what current mortgage rates are being offered. If you’re paying a higher rate, you should reach out to a mortgage professional and see if you can reduce your monthly payments.

Next, look for any recurring charges that aren’t necessities. You may be paying for two DVR cable boxes and only use one, or you may realize you never actually watch anything on Hulu. Everyone likely has multiple recurring monthly charges that can easily be dismissed and won’t be missed. Identifying a few of these can quickly cut down on your monthly expenses.

4. Consider When to Take Social Security

If you can afford to delay the year you take social security payments, you’ll benefit significantly in the long run. The retirement age for social security is 67 years for anyone born after 1960. If you start taking social security at this age, you’ll receive 100% of your benefits. But if you delay taking those payouts, you can increase your monthly payments by 8% per year that you delay up until you’re 70. By delaying for three years, that would be an increase of 24 percent. If you were set to receive $2000 per month from social security, that number would go up to $2480.

Conversely, you can choose to take social security five years early but will receive just 70 percent of your benefits. In the example above, that would mean monthly checks for $1400. If you don’t believe your life expectancy to be much past 70, it may make sense to start taking your social security checks early. But if you plan to live through your 70s and into your 80s, you’ll end up with much more money in retirement if you wait.


5. Balance Your Portfolio

The closer you are to retirement, the more risk-averse you should be with your investments. At that stage in life, you want safe and predictable investments like Federal bonds to maintain your income. But when you’re younger, you can have time to live with the ebbs and flow of the stock market. A common calculation to determine how you should balance your portfolio is taking 110 and subtract your age. If you’re 35, you should keep 110 – 35 = 75 and keep that percentage of stocks in your portfolio. If you’re 55, rather than 75 percent of stocks in your portfolio, that number will decrease to 55 percent.

Bottom Line on Achieving Financial Freedom

Take a minute to picture a life of financial freedom. With this image in your head, you can begin to motivate yourself to start planning. Planning for retirement may sound like a daunting task that you keep putting off because it seems too complicated. But if you take it one step at a time, your reward will be peace of mind and confidence in your future.

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