How To Retire Early (If you want to)
He everyone this is Dan with Wise Money Tools –
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I would guess if you asked 1000 people why the save or invest 999 of them would answer “to retire someday.”
Most financial planning revolves around retirement.
However, ask those same 1000 people and very few would know how much they need to save or how much income they will need.
Most financial planners will use the 80% rule.
This rule suggests that you will need to generate at 80% of your current salary at retirement in order to have your same standard of living.
So, if you’re making 100,000 a year, you need 80,000 during retirement.
The idea is by then your kids are gone, you no longer have a house payment, and so you can live on less.
Let me first say that I really don’t like the idea that you’re going to take a pay cut.
In fact, you’ve worked hard your whole life, maybe it’s time for a pay raise! Right?
And what about keeping up with inflation or the cost of living.
If you take a reduction in income, and your expenses continue to rise, is that a comfortable retirement?
Then you have some gurus telling you to shove all your extra money into paying off your home.
Sure, it may reduce your expenses if you don’t have a house payment, but what’s the trade off?
You may have 500,000, a million, two million tied up into a home that can’t produce income.
Always remember, a home although it might turn out to be a good investment, is actually a liability because it produces no income.
You’ll get equity appreciation, hopefully, but it’s dead equity.
It won’t help provide income.
Then you hear about passive income.
Passive meaning you don’t have to do anything. You don’t have to work for it, you don’t have to spend time managing it, it’s passive.
Your money simply sends you income each month or year.
We all want passive income at some point.
In order to get passive income, you need to have your money invested or saved in a location where it’s growing and sending you some of that growth for you to spend.
You’re not as interested in your money growing and building a bigger pile of dough.
You want your money to produce income.
I call passive income the golden goose.
Each month that goose lays more golden eggs and you can cash in those eggs.
Then the next month, here comes more golden eggs.
Now, here’s where the challenge lies.
After talking with thousands of people, there seems to be a common theme with their questions.
The 6 main questions go something like this:
- Where can you put it so that its safe? We call this “no risk.”
No one likes losing money and the closer to retirement the more devastating losses will be.
- Where can you put it where it grows so I’m building assets for retirement?
We call this the “Reward” for investing. If we’re going to invest, we want a competitive rate of return.
- Where can you put it where you can have access to it?
We call this “liquidity or accessibility.” We never know when we may need funds for emergencies or opportunities.
- Where can you put it, so that is produces passive income?
We call this “lifestyle” being able to keep your same lifestyle because your income is at least what you were making while working.
This is kind of the overall objective, right? Being able to get income that will last the rest of your life.
- And then finally, if you want to leave something behind for your heirs, how will all that work?
This is called the “legacy” leaving behind assets instead of liabilities.
And finally, number 6.
- How to reduce income taxes so that you can spend more. Is it possible to live a tax-free retirement?
So, when you’re deciding on an investment strategy, how does it stand up the test?
Risk
Reward
Liquidity
Lifestyle
Legacy
Tax-Free
Let’s think about what every traditional financial advisor will recommend and see if it passes the test?
Let’s look at the safe fixed assets first.
This includes, fixed annuities, CDs, Savings, Treasury Bonds, high grade corporate bonds, and municipal bonds.
Risk, no they are typically insured or guaranteed.
Reward, nope, very low returns.
Sadly, the returns are not even keeping up with inflation right now. That means every year your cost of living goes, and the returns can’t keep up.
Liquidity – you typically don’t use them for liquidity as there could be penalties, however you could sell or surrender them in a pinch.
Lifestyle – right now with these low interest rates no one could really live off the income or returns they produce.
A million dollars in a CD at 1% would pay you $10,000 a year before tax.
Hardly a positive lifestyle changer.
Legacy – you can leave your bonds and bank accounts behind, as long as you didn’t have to spend it all so that you could survive during your lifetime.
Tax Free – Annuities, banks accounts, and most bonds are taxable.
Municipal Bonds are tax-free, but still could be subject to state taxes depending on where they were issued.
Even without tax, the income is still very low to depend on for income.
So, you’re not going to get too far with fixed income products.
Next let’s look at one of the favorite investments for financial planner and that is, Mutual funds.
Risk, yes there is risk, in fact you take all the risk.
Reward? You hope so, I mean your risking your money.
Mutual funds after accounting for volatility and fees they end up on average at about 8%.
Then subtract taxes and you’ll be at 5-6%.
Is risking all your money worth 5-6%?
Liquidity – Yes, you can sell your funds, unless they are in a retirement plan, but you’ll sell them at the current market, might be up, might be down, and then you’ll pay taxes, and finally you’ll give up all future rewards.
The reality, they aren’t made for liquidity.
When it comes to lifestyle and income, you may be able to pull off income from the funds.
But again, you take the risk. What if you take out income, and the market drops 20% in a given year?
That is a double whammy! You may run out of money faster than you thought.
This is why Wall Street uses the 4% rule. You should not take more than 4% out of your mutual funds each year or you may run out of money before you run out of life.
Next, when you die, you can leave your mutual funds for your heirs.
They may have to go through probate, and hopefully you won’t die just as the market tanks.
And finally, are the tax-free?
The growth, dividends, and income are taxable. So, depending on your tax bracket that could take off 2-4% from your return each year.
The last one we’ll look at is real estate.
Because there is so many ways to get involved in RE, from being a lender, an investor, a landlord, a builder, a flipper and so forth, let’s look at having passive real estate into a real estate fund as an investor.
Typical real estate funds or Real estate investment trusts, called REITs, are popular with financial advisors.
These are typically done through hedge funds or partnerships.
So lets apply the test:
Risk? Yes, there is risk, you take all of it. Real estate typically will have some value and depending on the asset may take much of the risk off the table.
Reward – there could be a reward. Depending on management, properties, the economy, and fees, the successful syndicated real estate partnership will return around 8-12%.
Liquidity – not really at all. Some programs offer a buy out at some point, but that typically is not an attractive solution to needing your money.
Lifestyle – the returns if consistent and in a good property could produce income.
The issue becomes how long the program will last; in other words, how long will you get income.
And then the economy and the market, could the income be cut off in down market?
You really must study the program and what they are investing in.
Next, can you leave a legacy. Yes, the asset can be passed with potential probate and tax issues to deal with. Your heirs may not be able to liquidate it either.
And lastly – tax free. There is typically some decent write offs and deprecation with real estate which gives tax advantages early one.
However, at some point the income and any growth could be taxable.
Okay, so that’s a good start – lets end with using Leveraged Life Insurance.
This is a strategy that your traditional financial advisor has no access to nor knows it exits.
We’re running time constraints, so I’ll lightly touch on the 6 keys.
First, risk. All the assets are safe, and even guaranteed. You don’t have to worry about markets and crashes inside a highly rated insurance company.
Next, how about reward? Well, if you use our leveraging strategy, it’s not uncommon to get double digit returns over time.
In fact, higher than your typical mutual funds, where you risk all your money.
How about liquidity? Yes, you can access your capital for emergencies or opportunities, and by using the “loan” feature, your money can continue to grow and compound even when you are in need and using it.
Next is leaving a legacy. Nothing is better for a legacy than life insurance. You’ll leave substantially more death benefit than the amount you invested and all the growth and income.
There really is nothing like it for your estate.
Finally – if you do this right, the growth, the income, and the legacy can all be tax-free!
Think about your money growing tax free, then living off passive income, tax-free, then leaving behind more than your asset is worth all tax-free as well.
Alight, glad you stuck with me.
So, whenever you are thinking about retirement or maybe taking about it at work with colleagues, now you know
You can get double digit returns,
Keep your money safe
Keep it liquid
Create substantial passive income
Leave a legacy for your family
And do it all tax free!
If you want to see how it might work in your situation,
Click below on the link Dansgifts and there you’ll get more information.
You can even schedule a strategy session and we can talk about your situation, it’s certainly worth exploring.
That’s if for this video – don’t forget to like and subscribe so you never miss a video
Until next week –
Take care!
