Using Entrepreneurship as a Means to Financial Independence

Entrepreneurship as a Means to Financial Independence

Today’s post is another on the topic of financial independence.  We’ve had several of these recently, but since that’s the focus of this blog I guess that’s not surprising.

Rather than discuss the fundamental components of financial planning like insurance or investing, today’s focus is entrepreneurship.  Specifically, how entrepreneurship can be a wonderful way to align your career with your lifestyle and become financially independent on your own terms.

Forewarning: today’s post is another that falls on the philosophical side of the spectrum.  I normally don’t write too many of these posts, and realize there’s already been several to start the year.  Read on if you’re OK indulging my abstract (and possibly poor quality) musings.

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How the Trump Presidency Could Affect Your Finances

How the Trump Presidency Could Affect Your Finances

Recently I’ve had a few questions from clients and readers about what they should be looking out for now that we have a new president in office.  As you know, Mr. Trump has had a pretty eventful first few weeks in office.  In fact, as I write this protests are underway at no less than 15 major airports across the country.

In this post I’m going to share some of the trends and data points that I’m keeping an eye on, and on some discuss how they might affect your financial situation.  This post is in no way political.  This isn’t an endorsement or criticism of president Trump or his policies.  My objective here is simply to share some thoughts about how our new president might impact our finances and what you might want to look out for.

As one of my clients phrased it recently, we’re all in this boat together.  Like or not we just have a new captain at the helm.

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The Role of Insurance in the Pursuit of Financial Independence

The Role of Insurance in the Pursuit of Financial Independence

Executive Summary:

There are many unfortunate things that can happen to us that risk our pursuit of financial independence.  Some of them we can manage & control, others we can’t.  For the “stuff” out there we can’t control, insurance allows us to transfer risk to an insurance company in exchange for a nominal premium.

This post covers the role of insurance along your pursuit toward financial independence.  It’ll also cover a prudent risk management framework.  If used correctly, financial independence no longer becomes an aspiration that may happen – it becomes an inevitability.


Financial independence is a goal many of us share here in the America.  It’s also, of course, the focus of this blog.

For the baby boomer generation, financial independence lines up very closely to the traditional American career path: enter the workforce in your 20s, put in 40-45 years, and fully retire sometime around age 65.

Younger generations are starting to explore more creative paths to financial independence, like extreme budgeting and newfangled forms of entrepreneurship.

Whatever your route to financial independence, risk is an important part of the equation.  There are many unfortunate things that sometimes happen in this world that might drag us off course, or even be catastrophic:

  • We could die or become disabled unexpectedly
  • We could wreck our car
  • We could get sick
  • We could get sued
  • Our house could burn down

These are risks that we face every single day. They jeopardize our assets, our ability to earn income or both.

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Social Security Reform Under a Trump Presidency

With Donald Trump now in office, there are a lot of people approaching retirement who are concerned about the state of Social Security.  With Mr. Trump initiating drastic reforms in other areas of the government, the fact that Social Security is underfunded has many current and future retirees concerned their benefits might be reduced at some point.

Social Security is a huge component of most Americans’ retirement plans.  And while I consider myself pretty well versed in the system, I decided to bring in a subject matter expert for this post.  Ben Brandt, of Capital City Wealth Management, was kind enough to share his time and shed some light on the matter.  This post is a quick update of the current status of the Social Security fund, as well as Ben’s insight on what reforms are currently on the table.

 

The Current State of Social Security

We’ll get to my interview with Ben shortly.  For some context, let’s take a look at the current state of Social Security.  Every year, the Social Security fund’s trustees are required to issue a report on the fund’s financial status.  Each report includes data on the fund’s current assets (cash) and liabilities (retirement benefits payable).  They also include long term projections based on demographic data and a bunch of other variables.

The most recent report claims that the Social Security trust is currently taking in more revenue through payroll taxes than it’s paying out in benefits.  It projects this to be the case through 2019.

Social Security Reform Under Trump: What's on the Table

Some key assumptions from the trustees’ most recent report.

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Money-Centered vs. Happiness-Centered Living

Money-Centered vs. Happiness-Centered Living

Today’s post is going to fall a little more on the abstract side of the spectrum.  To date, most of the posts you’ll find on Above the Canopy are somewhat technical, and oriented toward achieving financial independence.

But for many thousands of people in America, the traditional career trajectory (working for 30-40 years until fully retiring around age 65) is a poor fit for their values.  The pursuit of financial independence often compromises the important parts of our lives, leaving us overworked and unhappy.

So in today’s post I’ll examine the difference between money-centered and happiness-centered living.  We’ll cover what we actually need to be happy, and the role money plays in fostering a happy life.  Finally, we’ll cover how you can arrange your finances to support a life focused on happiness & fulfillment.  If you’re up for a “deeper” post and don’t mind me waxing philosophical, read on!

 

Traditional Financial Independence

Usually when we hear about financial independence, it’s used in the context of having enough assets to live off of comfortably.  Whether they produce enough income to fully cover our living expenses, or the withdrawals from principal are small enough that we’re confident we’ll never run out of money, the idea is the same.  Financial independence means we’re no longer beholden to employment, since we could live off our own assets if we wanted to.

This idea of financial independence also fits pretty nicely with our traditional view of retirement here in America, where there’s a stark contrast between “working” and “being retired”.  Our working years start when we first enter adulthood.  While we usually don’t have much to our name, we do have (hopefully) some ambition and a few skills we can use to earn a living.  We go out and market these skills to potential employers and eventually get a job.  If we’re lucky, it’s work that’s interesting to us and pays a decent wage.

Once we start our working years we begin to collect paychecks every other week, which we use to pay taxes, rent, and other living expenses.  After the bills are paid we use anything left over to pad our retirement accounts, bank accounts or both.

At this point we’re in the phase of life affectionately known as the accumulation phase.  We earn an income, use it to pay our living expenses, and save whatever is left over.  Our savings grow with each paycheck, and our net worth accumulates over time.

We invest our savings in order to accelerate growth, and sooner or later we reach the holy grail – financial independence.  If we wanted to, we could discontinue our employment and use income and withdrawals from our savings to pay our living expenses.  We’re no longer reliant on our job for income.  We can do whatever we want.  We’re financially independent.

Money-Centered vs. Happiness-Centered Living

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What Will Healthcare Cost In Retirement?

What Will Healthcare Cost in Retirement?

Planning for retirement takes careful preparation and a decent idea of what your budget will be once you stop working.  This can be a pretty scary process with so many unknown variables.  How much will groceries, travel, and utilities cost in 15-20 years?  How long will you live, exactly?  What if you get hurt or need help with everyday activities like getting dressed or paying the bills?

Arguably the biggest variable when we talk about retirement is the cost of healthcare.  It’s no secret that the cost of coverage and prescription drugs is increasing at an uncomfortable pace.  This post will cover the current research on what healthcare will cost in retirement, as well as the best way to put money aside for it now.

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401(k) Auto Rollovers: A Convenient Safe Harbor for Small Business Retirement Plans

401(k) Auto Rollovers: A Convenient Safe Harbor for Small Business Retirement Plans

OK – with a new year upon us it’s time to clean up that rusty old 401(k) plan at your small business….right?  Let’s say that you work in or own a small business, and are responsible for operating the company’s 401(k) plan.  To put it lightly, it’s probably a massive nuisance.

401(k) plans can be a wonderful benefit to your employees AND a great opportunity for you to put more money away for retirement in a tax deferred account.  But as you may now, operating a plan can be a real bear.

I’ll be covering the finer points of operating small business retirement plans throughout the year.  Today’s post will focus on what to do with departed employees.  Employees will come and go to and from your business over time (hopefully not too often), and it’s not uncommon for them to leave money they’ve accumulated in your company’s qualified retirement plan.

 

ERISA & Fiduciary Responsibility

As you probably know, departed employees always have the opportunity to pull their money from your plan after they leave, either directly or via a trustee to trustee rollover.  But many employees neglect to do so.  Whether it’s because they don’t know how, don’t care, or are simply lazy, it’s very common for departed employees to “accumulate” in your 401(k) plan, long after leaving the company for greener pastures.

As you also know, as the sponsor of a qualified retirement plan you have certain fiduciary responsibilities when it comes to managing the plan on behalf of your participants.  It’s for this reason – fear of repercussion – that many sponsors feel stuck when it comes to managing assets of employees who long ago left the company.

Fortunately for you, ERISA was not written with the sole intention of making your life hell.  There are six safe harbors written into the law that free you from fiduciary responsibility if you follow a few step by step instructions.  And one of them conveniently covers departed employees.

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What's the Optimal Portfolio Rebalancing Frequency-

What’s the Optimal Portfolio Rebalancing Frequency?

If you’ve read the blog for very long, you probably know that I’m a big proponent of thoughtful and customized asset allocation.  The percentage of your portfolio invested in stocks, bonds, cash, and real estate should vary based on your personal financial objectives and tolerance for risk.

In fact there are plenty of studies contending that asset allocation determines the vast majority of your portfolio’s return.  In other words, it doesn’t matter as much which stock or bond you choose to invest in.  It matters far more how much of your portfolio is invested in stocks or bonds in the aggregate.

 

The Importance of Portfolio Rebalancing

If you’ve ever managed your portfolio (or anyone else’s for that matter) you also know that over time your portfolio’s asset allocation will change as the market fluctuates.  If you start with 60% in stocks and 40% in bonds, you might find your portfolio weighted 70% in stocks and only 30% in bonds after an appreciation in the stock market – especially since bonds tend to fall when stocks rise.

This is why it’s important to rebalance your portfolio over time.  The whole point of building a customized asset allocation is to match the risk in your portfolio to your personal risk tolerance.  As your individual investments fluctuate in value, selling some of the appreciated positions and replacing them with some of the depreciated positions brings your portfolio back to its intended allocation.

For example, if a 60/40 portfolio became 70/30 after the markets moved, you’d want to sell stocks that represent 10% of your portfolio and use the cash to purchase bonds – returning to your original 60/40 allocation.  Without rebalancing, your portfolio would continue to stray over time, ensuring a level of portfolio risk that’s higher or lower than you’d like.

 

 

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The Top 7 Mistakes People Make When Planning for Retirement

The Top 7 Mistakes People Make when Planning for Retirement

Hello ATC Readers!

This post is to announce that I’ll be hosting a free retirement webinar in a few weeks.  I’ve been getting a lot of questions recently to the effect of “what am I doing wrong?” when it comes to retirement planning.

As you may know, we’re often our own worst enemy when it comes to retirement planning.  As human beings we tend to get emotional when it comes to our finances.  Rather than remaining logical, balanced, and objective, we often make poor decisions because our emotions get in the way.

I wanted to cover this issue in more detail than a traditional post, so I decided to focus a 60 minute webinar on the topic:

The Top 7 Mistakes People Make When Planning for Retirement

Presented by Grant Bledsoe, CFA, CFP®

In this live webinar we’ll cover some of the most pressing issues retirees face today:

  • The top retirement mistakes made today and how to avoid them
  • How to understand the fees you’re paying your advisor
  • How your emotions can affect decision making & how to overcome them to make consistently smart investment choices
  • The 5 components all effective retirement plans must have
  • How to tell whether your retirement savings are enough for you to stop working

There are two separate dates you can attend:

  • Tuesday, December 6th from 10:00AM – 11:00AM PST
  • Wednesday, December 7th from 1:00PM – 2:00PM PST

Even if you can’t attend at these times, make sure to register anyway.  After the webinar is over I’ll email you a replay copy you can watch at your own convenience (for a limited time).

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401(k)s, IRAs & Tax Deferred vs. Tax Exempt Investing

401(k)’s, IRAs & Tax Deferred vs. Tax Exempt Investing

Should I contribute to a traditional or a Roth IRA?

This is a big question I get asked fairly frequently.  And really, the conversation expands beyond individual retirement accounts.  The decision whether to invest on a tax deferred or tax exempt basis is one you’ll likely make many times over your investing career.  Some people prefer a exempt account to “get taxes out of the way”, while others prefer to defer taxes as long as possible in order to “let their money work for them”.

In this post we’ll explore the topic and discuss which situations may be best for either strategy.  But first, let’s review exactly what tax deferred and tax exempt investing actually are.

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