Money & Retire

Follow These Steps to Build Financial Freedom

A recent study finds one in three Americans have less than $5,000 saved for retirement, and that 31 percent of adults could last only a few months on their savings if they had to retire. The research by Northwestern Mutual also finds:

  • One in five Americans (21%) have NO retirement savings at all.
  • One in three baby boomers (33%), the generation closest to retirement age, have less than $25,000 in retirement savings.
  • Three-quarters of Americans believe it is “not at all likely” (24%) or only “somewhat likely” (51%) that Social Security will be available when they retire.
  • Nearly half (46%) of adults have taken no steps to prepare for the likelihood that they could outlive their savings.

This study is only one of the most recent highlighting how woefully unprepared many Americans are for retirement. How did we get in this mess? By following the conventional financial “wisdom” that paradoxically tells us we must accept high levels of risk to build financial security. Clearly, it’s not working.

Think about it: With government-sponsored programs such as 401(k)s and IRAs, your fortunes are tied to the whims of Wall Street, with all its wild volatility, and the will of employers, who can change the rules at any time. Among their drawbacks, these schemes:

  • Provide no guarantees or predictability. They’re tied to the stock market. Along with a chance of gain, you also have a greater chance of loss – and it can take a very long time to recover from a significant market loss. That’s a huge concern if a downturn happens just as you are retiring or preparing to retire.
  • Are subject to fees that compound against you: You pay fees whether your account does well or it tanks, and the impact is much more than people realize. Based on the average fees levied by such plans, if you grow your money 7 percent over 35 years, 28 percent will be devoured by fees.
  • Contain a hidden tax time bomb. The money you put into a tax-deferred tax plan isn’t taxed now but it will be taxed later. If taxes go up and you are successful in building your nest egg, you could end up paying higher taxes on a bigger number.

It doesn’t have to be this way. Many Americans have recognized that investing their hard-earned savings in volatile stocks and other risky investments is not the way to achieve financial freedom. Instead of relying on employers, Wall Street, and the government, they are taking their future in their own hands by following some time-tested strategies for building true financial independence.

Knowledge is power, and lack of financial knowledge leaves you powerless to make good financial decisions for yourself and your family, and powerless over your finances. Conversely, the better you educate yourself about your money, the better equipped you will be to build and sustain financial independence. To protect yourself and your family, I urge you to do your own due diligence by answering these three questions before jumping on the bandwagon of any financial vehicle or product:

  • Will this advice or vehicle give me peace of mind and let me sleep at night?
  • Will it help me get where I want to go without taking an unnecessary risk?
  • Will it allow me to be in charge of my money?

A strong financial foundation must rest on a bed of safe and liquid cash reserves. Having access to your money when you need it gives you the peace of mind of knowing you can weather whatever challenges come your way. Here are three simple steps you can take to achieve true financial independence:

Step 1: Decide Do You Need It, or Just Want It? Before each purchase, get yourself off emotional autopilot. Take a deep breath (and a couple of days) to consider whether you really need whatever you are thinking about buying.

Step 2: Build a Sizeable Liquid Rainy Day Fund: Before you even consider investing, you need to build cash reserves for emergencies and opportunities equal to at least two years’ household income. Put that money in a place that is safe and liquid, so you can easily get your hands on it when the proverbial you-know-what hits the fan. Does it seem impossible? You probably won’t build this fund overnight. But if you increase your savings by even just one or two percent each year, you won’t feel the pinch — and you’ll be surprised by how quickly your rainy day fund will grow.

Step 3: Save more in safe, guaranteed and liquid financial vehicles that increase in value each year – regardless of what’s happening in the stock market or economy. You may want to investigate high cash value dividend-paying whole life insurance.

Being financially independent means having a strategy that allows you to handle whatever challenges life throws at you. The more cash you have that’s safe and liquid, the more options and peace of mind you will have. That adds up to less stress and more freedom to live your life the way you want to.

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