Many financial planning conversations are centered around preparing for retirement.
The classical American Dream is roughly divided into three acts: study hard for two decades, work hard for four decades, and then play hard (and relax) in retirement. For me, though, delaying that “play hard” phase of life until 60, 70, or even 80 years old isn’t quite my ideal lifestyle.
“Financial independence” is a concept more rooted in freedom and less directly tied to whether you’re working or not. When you’re financially independent, you own your time, and you can decide whether and when to work. For many people, achieving financial independence as soon as possible is a highly desired goal, even if they have no plan to “retire” for years or even decades to come.
But how do you know when you’ve achieved “financial independence?”
A simple way to describe financial independence – with words – is to say that you have enough accumulated assets to support the cost of your lifestyle indefinitely without the need to work.
As a numbers guy, I can’t help but add a mathematical definition too. While there are many variables involved (and thus assumptions and simplifications are necessary in order to generalize) within the financial planning community, there is significant respect for the “4% rule”, which essentially says that you need 25 times your annual spending in accumulated assets to be financially independent. So, for example, if you want to spend $100,000 per year, you need a portfolio worth about $2.5 million.
And those “accumulated assets” ideally do not include your use assets, like cars and houses, because you’re going to need to continue using those into and throughout retirement.
Some people find this “25 times” rule quite sobering, but my theory is that as long as I understand where I’m headed, the more likely I am to reach my goal. Additionally, there are two pieces of good news!
First, Albert Einstein famously called compound interest the eighth wonder of the world, and – depending on your investment timeline – compound interest can help grow your portfolio over time.
Second, the federal government understands the importance of incentivizing both workers and business owners to save for retirement, thus they have created several types of “retirement accounts” that qualify for special tax treatment. Generally, you’ll pay less in taxes by using retirement accounts as compared to regular brokerage accounts.
I like to say that there are three “powers” of retirement accounts. The least powerful are called IRA’s. In 2023, the annual contribution limit for IRA’s is between $6,500 to $7,500. 401(k)’s – and other, similar types of accounts – are the medium power of retirement account. They can allow for contributions between roughly $20,000 to $70,000 per year. Finally, the most powerful type of retirement account is called a defined-benefit pension plan. If you own your law practice and you have relatively few employees, this option could allow you to contribute several times what a 401(k) allows.
I know that previous paragraph was heavy on numbers and details, but here’s the important piece to keep in mind: the tax-saving and wealth-building benefits of retirement accounts can help accelerate your progress towards financial independence.
I like to remind clients that studies have shown roughly 9 out of 10 millionaires are self-made.* 90%! But most people don’t just accidentally end up as millionaires. There are tips, tricks, and techniques that can help.
If you’d like to understand exactly where you stand today and the steps needed to bring you closer to financial independence sooner, reach out to a financial advisor for help developing a financial plan that’s tailored to your unique circumstances.
About this article: This article was originally published in the “Membership Matters” issue of Communiqué, the official publication of the Clark County Bar Association, (June/July. 2023). See https://clarkcountybar.org/member-benefits/communique-2023/communique-june-july-2023/.
Hightower Las Vegas is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Hightower Las Vegas and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Hightower Las Vegas and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Hightower Las Vegas and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Hightower Las Vegas and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.
- Source (5/1/2023): https://money.usnews.com/money/blogs/on-retirement/articles/7-myths-about-millionaires
About the author
C.J. Neff is a Wealth Advisor with Hightower Las Vegas, one of Nevada’s largest investment advisory firms, with more than $1 billion in client assets under management.
© 2023 Clark County Bar Association (CCBA). All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Editorial policy available upon request.