WHEN CAN I RETIRE?
Do your investments match your vision?
Many people invest blindly.
They might choose automatic contributions to a 401(k) plan because they get a tax deduction and might get a company match.
Some set aside an amount they were told they should invest, like 10-percent of every paycheck.
Will they have enough to retire? And will they have enough to live their dreams?
Most people don’t have a written plan or target.
They don’t know when they will have enough income to retire.
Have you set a target date to retire? Or reach financial independence?
THREE STEPS TO FIRE
I love the concept of FIRE – Financial Independence, Retire Early. It does not mean that you have to retire, sit at home and eat bon-bons every day. It means that you have the ability to leave your job if you choose to. You have the security of knowing that you can work if you want, but you don’t have to. You have more freedom to pursue opportunities that interest you without fear of losing your income. If you aren’t worried about losing your job, would you make different decisions?
ONE. KNOW YOUR NUMBER
How much cash do you need every month to cover your expenses? This is actually two numbers because we have our essentials, such as food and housing, and then we have our discretionary spending. The latter might include some vacations and optional entertainment or hobbies.
Take those two numbers and multiply by 12 to figure how much you need each year to cover your essentials and the optional spending. Remember that these are after tax numbers, so you need to increase the total income to allow the tax man to take his share.
For a quick estimate of total net worth required, multiply the annual income required by 25.
If you are receiving steady income that does not require you to work, such as a pension, then you can subtract that annual amount. This estimate assumes that you will earn an average of 10-percent on your investments and allows for 5 percent to live on, leaving 5 percent for inflation..
Note that normal inflation has averaged about 4 percent over the last 50 years. We enjoyed an extended period with inflation remaining about 3 percent, but 2021 and 2022 has shown that we should not rely on inflation staying at 3-percent.
We’ll call the lower number, 25 times your essential expenses, your Financial Independence number. And the higher number, 25 times your total expenses including all discretionary items, your Financial Freedom number. The two may be far apart.
Now that you know your numbers, you have targets.
TWO. CHOOSE INVESTMENTS TO MATCH YOUR VISION
What is your investment objective? Are you looking to grow a nest egg as quickly as possible? Or trying to maximize passive cash flow?
What is your vision of what you want your lifestyle to be?
How soon do you want to start converting your nest egg to cash flow?
Life stage is a huge factor. So is how soon you are trying to experience your vision.
Are you trying to produce passive cash flow now to replace income from working?
Generally speaking, we need to spend our earlier years growing our portfolio. As we get older and seek additional passive income we invest more for cash flow.
I have found leveraged real estate to be one of the fastest ways to grow net worth. Over time, appreciation due to inflation, and loan amortization as the tenants pay a mortgage with rents, both serve to increase equity in a property. As the property increases in value over time, the rents also tend to increase. The increasing spread between rental income and fixed mortgage expenses serves to increase the cash flow. This serves the purpose of focusing more on cash flow as we get older and progress toward our financial independence and financial freedom numbers.
We also have to decide whether we want to be active investors or passive. Do we want to be landlords? Do we want to handle the tenant calls and maintenance requests? Or do we want someone else to do it? Or do we prefer to be passive investors, such as limited partners in a syndication? Or possibly lenders?
Either way, whether we want to be active or passive investors, we can choose investments that emphasize growth or passive income.
For funds within retirement accounts the investments need to be passive.
There are many ways to invest and make money in real estate. We just need to choose something that fits our objectives and vision.
THREE. TRACK YOUR PROGRESS
One of the common habits of people who have attained great wealth is that they track their progress regularly. How often “regularly” is can be a personal decision. My wife and I track ours monthly. It’s important to know how you are progressing. It also provides encouragement as you pass milestones.
It can seem daunting during the early years of investing. The targets seem so far away, both in money and years.
One of the first important milestones is when your investments grow more in a year than what you contribute. A later milestone is when your portfolio grows more in a year than what you earn. This continued growth is what I like to call the wealth snowball. It really does pick up momentum.
You also need to know how much passive income you have and what your expenses are. Both of these will increase over time and your targets may need to be adjusted.
HELP US GET TO KNOW YOU BETTER.
What is in your vision that you would like to share with us? What are you doing to achieve that vision? How can we help you?
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Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.