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Independence Day: Are you Financially Free?

Independence Day: Are you Financially Free?

As Independence Day approaches, it makes me think about all of our freedoms including the choice to make work optional. It’s a modern convenience, to be sure: retirement is a very modern idea.

The interesting thing about financial independence is that it leads to other freedoms. Not only can you choose how to spend more of your time, you can speak your mind without fear of being cancelled. Ever notice how older friends tend to “tell it like it is”? As we gain wisdom, and freedom in life, we are more free to be ourselves in all things.

What does it take to become financially free? Consistently saving and investing throughout your career. I recommend that everyone reach a savings rate of 15% of your gross earned income. If you can start that with your first job, you will easily adopt a lifestyle to live on the other 85%.

Everyone’s road to success is different, but knowing you are on the right track will help you stay consistent. One rule of thumb is that your retirement portfolio will need to be 25x your yearly expenses (not including social security and other pension income). This is only a starting point. And realize that the road to 25x starts slowly, but compounding will kick in heavily at the end.

This weekend make sure to celebrate all of life’s freedoms. 




Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I’m your host, Mike Morton, charter financial counselor, and financial advisor. As we approach independence day, I’m reminded of financial freedom. The ability to choose how to spend your resources of time, money, energy. Matt and I discuss what it means to be financially independent and ways to get there.

I trust you will have a fantastic 4th of July weekend with friends and family. Enjoy the show .

Matt: [00:00:28] . I’m Matt Robinson. I’m joined as always by Mike Morton of Morton financial advice. Mike, how are you doing?

Mike: [00:00:35] doing?

well, Matt.

Matt: [00:00:37] I’m great because we’re approaching the 4th of July and that puts me in mind of freedom, sweet freedom. And you know, I’m being tongue in cheek about this, but, I’m excited about the topic for today’s show because it’s about freedom and it sounds like a philosophical, maybe a political discussion, but really is about finances and about the real core point of financial planning, which is what do you want out of it?

What are you doing it for? it’s a much deeper question about what are your goals in life. And I think that’s. Interesting. And it actually gets to, I’ve known you for a long time. One of the things you do really well as a financial planner, as a financial advisor for your clients, is how people think about what are you trying to do?

And what does having financial assets mean to you and how do you get there? So that’s what I want to talk about today. Freedom, financial freedom. So what is financial freedom?

Mike: [00:01:33] Yeah. Oh, it’s great. I liked how you set that up, Matt, because , everybody has individual goals about where they want their life to go and unfold and how they want to live. And until you know those things about yourself, about your family, or exploring them with a financial advisor or with others until you know those, you don’t know what you’re aiming.

So how can you possibly create a path towards success until you know, what you’re aiming for? We change all the time, so continue to get to know what is most important to you, how you want to be living your individual life with your family, with your community.

And then. Figuring out a path towards that success now. You also mentioned the 4th of July coming up and I immediately went to our unfortunate COVID situation where not only was our parade canceled last year. It’s also canceled this year, which is just killing me because my kids will not be on the side of the road, collecting large quantities of cans.

As they’re thrown from our small town parade. So

Matt: [00:02:37] listen, I got to ask you a question about this. I know this is a side track. But what the hell with this whole throwing candy at children from we spend 364 days a year saying do not pick up food from the ground and do not take candy from strangers. And then on the 4th of July, it’s no.

Take this candy that is being hurled at you by strangers. Pick it up from the ground and eat it. This makes no sense. Can you explain?

Mike: [00:03:03] Of course. I can’t explain that.

Matt: [00:03:05] Yeah. I’ll tell you, what else does it make sense though? Just getting back to our topic for a second, it does seem a little bit like a Hitchhiker’s guide to the galaxy type thing where we all go looking.

When we think about finances, it’s here’s the answer. It’s 42. Okay. But what was the question from the beginning? We think that the answer is.

More money. That’s not actually totally true for most people. It seems like an airy fairy thing to talk about, but you and I have talked about this.

When you sit down with a client, trying to understand what people really want, what their real goals are really matters for the strategy. That you said, now, look, we all have basic financial goals. Of course. It’s a privilege to not have to simply worry about my going to get enough food on the table.

Am I going to have a roof over my head? Am I going to be able to educate my children ? Of course, those are the core of everything. But if you have goals beyond that, which all people do. They can be very different. My kids asked last night, asked my wife, you, where did we get the furniture in this room?

And it’s that’s a hand-me-down my dad made that, and it turns out that our goals do not include having nice furniture. It’s not something that matters to us. One bit. It matters a heck of a lot to other people that’s important to them. Great. So anyway, this is a really core.

Important question and an important starting point for a financial discussion. So the first context that people think about this in, I think is retirement, but is it just about retirement? Is it just about how do you want to live the end of your life?

Mike: [00:04:40] So it’s a great point that you make Matt around. We think we just want to have the most money possible more money, but we know that once you reach a certain level of income, that more money does not bring more happy. And if you truly think about how you want to live your life, the components of your life that are important to you, it’s to bring joy and happiness into your life, whether that’s serving others in your community or family, whether that’s doing certain activities that bring you a lot of joy, that’s what is most important to them?

To figure out what those things are. There’s a process for trying to do that consistently, trying to figure that out. It’s part of the financial planning process, trying to figure out those goals, but remember that all of our resources, not just money, but time, energy, money, the human capital, all of those resources combined together.

To enjoy your life. So money is simply trading one set of resource for another. And so the simplest one is like you said, retirement. If I can save enough money, then I can trade having to work every day from nine to five to using the money, to not have to work. So money is a mechanism for trading off time.

In this case, it’s a big, Hey, I worked for 40 years, nine to five, and now for them. 20 or 30 years I don’t have to work at all. So that’s just one way of thinking about it, but you can think about it in micro doses as well, Everything’s a trade off of time and money and energy.

And so that’s where first we try to find the goals like being financially free. And we’ll talk a little bit more about that because of course that’s on everybody’s mind, but it’s really all these different resources you have in spending them in the right way that you are living your best life.

Matt: [00:06:27] Let’s get into just a little bit of the financial nitty gritty I could just picture people listening and saying, okay, I agree makes a lot of sense. I feel the same way.

So Mike Morton, how do you do that? How do you get to a point where you feel.

Independent of financial pressures and you get to make those choices and have those trade offs of time and energy for not having to work or not having to work as much.

Mike: [00:06:58] Right. I think one is just setting the path, right? The mindset and the path towards growing your wealth that gives a lot of stability and comfort to people as you’re growing your retirement funds or just money in the bank, your 401k, your brokerage account. You’re building those over time.

That leads to a lot of confidence. Hey, I feel like I can do more things now. I feel like I can relax a little more on vacation or take more of that time off or do more of these things because , you’re growing that cushion, those accounts. So how do we do that consistently save and invest?

It’s simple, not always easy, but if you’re a young person or even middle career, if you can try to save, I always say 15% of your gross income. 15% of your gross income is being saved in 401ks, IRAs, brokerage accounts, and invested for the future. Then you’re going to be great, especially if you can start that early.

All right. So any young people that are tuning in, if you’re below 15% savings, just come up with a plan over the next one year, five years to grow your percent savings, you’re currently saving nothing or you’re saving 5%. Grow it to 15% over time you can use rates. To do that. Or you can just year in and year out consistently save 1% more, save 1% more, try to target that 10 to 15%.

And if you can do that consistently year in and year out, that’s going to be a really great start. You’re going to.

Matt: [00:08:22] How do you know if you’re staying on the right track as you go through different stages of life?

Mike: [00:08:30] So there’s some pretty cool, studies out there. I want to talk about, . But remember that this is generic advice, which I don’t like, I like everybody to think about their own unique situation because generic advice is just the average.

And remember Matt, even a five foot person can drown crossing a river that averages four feet in depth.

Matt: [00:08:48] One day and flood is enough. Yeah.

Mike: [00:08:52] Because averages and everything, We have to, we take, the population of the U S and say on average, here’s your medium home price, and it means nothing to you. Your house could be half that or two, three times that depending on your situation.

So everybody’s situation is very unique. Now, that being said, let’s talk about some numbers to be financially frailest to use a rule of thumb. You need 25 times. Your yearly expenses in your accounts, your retirement accounts. Okay.

So what does that mean is 4%. If we had a hundred thousand dollars saved up, we could spend 4% of that.

All right. 4% of your portfolio. So let’s use a mil million dollar portfolio in retirement. So if you have a million dollars, we could spend $40,000 a year. And that portfolio should sustain you for 30 years. That’s traditional retirement research. It’s called the 4% rule. It’s a really good starting point just for a framework.

It’s not going to apply to you. So don’t just go out there and be like, Hey, I need 25 times my money and I’m all set. I can retire tomorrow. okay.

You got to work through numbers a little more closely than that, but for people that are in their twenties, thirties, forties, fifties, It’s a good thing to think about, Hey, I need about 25 times my yearly expenses.

Now social security of course comes in there as well. So I’m not saying, if your yearly expenses may be higher than 40,000 and you’ve got 1 million, but you have social security and other stuff. That’s a good starting point. So if we know we need 25 times our yearly expenses in terms of our overall portfolio, how do we build that over time?

Hey Matt, I’m 29 years old right now. How much should I have. So let’s go through that. If you are about 30 years old, you could have saved one time, your yearly expenses. So if your yearly expenses are $50,000, hopefully you have about $50,000 saved for retirement by the time you’re 30. So one X right then 10 years later, by the time you’re 40, you hopefully have about four X.

Okay. So if your yearly expenses are 50,000, Hopefully I have 200,000 now saved in your retirement portfolio. So over that decade from 30 to 40 you went from one X to 4x. Okay. But now compound is going to start kicking in. So by the time you’re 50, it should be about 10 X and 55. Only five years later should be 12, 13 X.

And then between 55 and 65, you’ll get to that sort of 14.

Matt: [00:11:20] Look, the thing about averages, as you say, is that for almost everybody, the average is not the right answer reminds me of the guy. Head in the ice box and his feet in the oven. And on average he feels fine. Chances are they’re a lot of parts of our listenership for whom these numbers are not going to apply, but that’s a pretty . Helpful rule of thumb.

And just remind me the 4% rule that relates to that 25 X, right? That’s just the math of that.

Mike: [00:11:46] Yeah. So that 4% rule is some research that’s been done. It’s been kicked around. Many listeners may have heard this, and it’s very useful. Again, just as a starting framework, man. I don’t know. Do I need a million dollars? Do I need $2 million? I don’t know. So, so it’s really good.

Just give you a ballpark, and the research goes like this, Matt, if you have an average portfolio, 60, 40 portfolio you could withdraw 4%. Growing for inflation year in and year out. And that. should last you 30 years of retirement, which was a typical kind of retirement. So.

that’s where that rule of thumb comes from.

It’s pretty robust, but of course it’s based on, history of results, not forward-looking results, but past looking results. And I like it again as just a starting point for having a conversation or for people out there that are just doing it themselves to know where they are,

Matt: [00:12:39] now you mentioned to me that there’s something called the fire movement. It sounds like a festival that happens in the desert somewhere. What is the fire movement?

Um, what should people know about that?

Mike: [00:12:49] Yeah, fire. Some people may have heard this is financially independent retire. So it’s a fire community. So you Google search this. You’ll find all kinds of blog posts and communities around us, where people are saving significant amount of their income over a shorter period of time to retire early. Okay.

And so I mentioned before trying to grow to about 15%, if you can save 15% over your working career, that’s going to be fantastic. These people in the fire community are saving 20, 30, 50% of their income. Is going straight towards savings. So they have very low expenses, or they have very high paying jobs or a combination of both.

And they’re just trying to work for maybe a decade or 15 years, and then trying to retire, build that portfolio quickly and retire early and this is a great strategy. If it makes sense for you and what you want to do. And that’s again, why all of these are unique, to your situation, how you want to go through them.

Matt: [00:13:47] Now I’m going to ask you something that I don’t know. It may not jive for a lot of our listeners. We’re obviously we’re broadcast on WKXL and so we’re hitting tens of thousands of people all the time who were listening to this show, we are also in two different podcast feeds.

I assume that people who are going out of their way to listen to this show on radio or podcasts or people who were into this topic, the idea of thinking about saving, investing, maybe they’re into this fire idea. I’m a very unusual in the sense that I actually don’t like to think about all this.

For me, financial freedom means freedom of not having to worry about finances. We talked before about the fact that, for most people look, 80% of Americans live paycheck to paycheck. So for most people, this is about. Hitting the necessities of life and trying to just have enough leftover hopefully to start to build up a little bit and to have that security for later, what I want to do if I have an additional dollar of income is I want to put it away.

In a way that I don’t think about it. I want to touch it as little as possible. I don’t want to sift through lots of different investment opportunities. I don’t want to look at different funds. I don’t want to check my portfolio. I don’t want to do those things because for me, financial freedom means freedom to not stress about finances.

That’s a great place to reach, and I’d like to reach it before retirement. So with so many choices out there, and so many of them being pretty good choices. How do you handle that? What do you do to achieve the freedom of not having to stress about all this?

Mike: [00:15:34] right. That’s one of the areas actually where financial advisors can be very useful. Is for exactly that because there’s overwhelming number of choices and people come to me all the time with Mike. I just want to make sure I’m doing the right choices. Literally that’s what they walk in.

Like I just want to be sure I’m making smart choices, from tax planning, investment strategies, whatever it is, all those things. Having someone alongside, to comfort you to say oh Yeah,

this is great. Do these four things and I’m set it and forget it and you’ll be fine.

That can be really comforting to have someone there. So that’s one thing the other is to recognize that it’s not that complicated. Okay. So here’s what you can do. Matt is like I said, save 15% of your gross, right? For the future, put it in a low cost portfolio. Put it in the U S total us stock market.

You’ll be fine if that’s, as far as you want it to go automate as much as possible automate your savings your 401k is automatically taken out. Save into your individual retirement accounts, your brokerage or whatever it is, make it automatic. And have it invested automatically. And you’ll be in good shape, and that’s what it comes down to.

But I understand the concern is because the news and the industry is making you fearful, right? So that you think you have to move things around and do things. And it’s just not the case. You can stick with some pretty simple strategies and you’ll be successful.

Matt: [00:16:58] You mentioned earlier that there’s good research. We actually were exposed to it early in our academic lives on the fact that too many choices is actually overwhelming. It’s not something that leads to greater happiness, greater satisfaction. We think that it does. We think that being presented with 15 different kinds of mustard in the grocery store, it’s ah, I get to choose exactly what I want for most people.

It’s now I’m a stressed about this because I’m in a mess. I’m going to get Dijon. I really I’m not going to like it and you get worried about it. And that is the way I feel when it comes to, Hey I’ve got this option of an index fund. That’s good. It’s low fee.

I like that. There’s an option over here where they’ll time it to my retirement age, but maybe that makes sense. But wait a second. If I do that, What about when the stock market goes haywire for a year? Like it did over the last year. It sounds like what you’re saying is there’s a shortlist.

If you want to be on the path to financial freedom around independence day there’s a checklist of basic things you could do. So one of them is you could talk to a financial advisor, you could talk to them once you could check in with them every six months that would take care of it.

You can make sure that you’re saving 15% of your gross income. would be another thing. Easy check mark. And you can make sure that your money is in broad, low fee index funds. Is that sort of the right checklist? Is there, anything else that people should be doing? That’s an easy layup that takes away this conundrum of choice.

Mike: [00:18:34] Yeah, no, I think that’s a great list, Matt. I mean, I always start with, saving is about 80% of the game, so you have to do the savings otherwise you don’t have an opportunity to invest for the future.

Matt: [00:18:45] Even if you save and put it under your mattress, that’s better than not saving.

Mike: [00:18:48] Yeah absolutely. It goes without saying almost, so you have to do that savings and that’s why, I really target that 15% of your gross income, because if you can do that, And I you’re already on your way. All right. And then you also mentioned the target date fund, and I really like target date funds.

And in your 401k, we should limit investments. There should only be some and target date funds are fantastic. You can just put all your money into that 2040 fund that 2050 fund. And again, you’ll do just fine now recognize there’s always the fear of missing out you know, News is created so that you will read headlines and tune in and read again tomorrow.

That’s why they’re there. And so you’ve got to try to recognize that, mentally and say, okay, but I’m Okay.

because I’m saving my 15% automatically invested and there you go, move on to more important things in life.

Matt: [00:19:37] I like the idea that one idea of freedom is the joy of you. Don’t have to worry about these things because you’ve saved and you’ve arrived there. Another form of freedom is the joy of missing out. Not the fear of missing out the joy of missing out. I don’t have to deal with all these little details because I know I’ve done the big, important things.

Mike Morton. Thanks for all the fantastic financial advice and happy 4th of July.

Mike: [00:20:02] same to you. Thanks Matt.

Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or I’d love to get your feedback. If you have a comment or question, please email me at . Until next time thanks for tuning in

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