Retirement or Financial Freedom

In the past most people never retired. They died. The average life expectancy was much less than it is these days, and there were no financial planners around to help people save up enough to quit work. As recently as the 1960’s, if you did manage to save up enough money to retire, you’d be lucky to live another 5 or 6 years before you kicked the bucket. This made financial planning for retirement a little easier because you really only needed enough income for a few years.

Nowadays, if you retire, chances are you can live forever. Well, it can seem like forever…especially if you haven’t saved up enough money. It is a daunting task, attempting to set aside enough money to supply an income for 25 or 30 years, in the 15, 10 or 5 years you have before you retire. We say this because most people don’t get really serious about their retirement planning until they hit 50…and realize they had wanted to quit work at 55!

This is the standard model that has been followed since we began living long enough to bother with retirement savings. You set aside enough cash to cover things off at some future distant time. You build the nest egg and then hope it lasts, and the financial planning community is right there to help you. And yet this is not how the most successful people in our community do things at all!

Still, most people are busily trading their time for their money. As an employee, you are limited by how much time you can actually devote to your job, and you are limited by how much time you want to devote to your job. Time you give to your workplace is time you don’t get for yourself. It’s similar for self-employed people such as our selves. The more successful we are as financial advisors, the more ‘in demand’ we become, and the less time we have.

Retirement looks pretty good when you’re an employee, or a self-employed person. You’ll have the money coming in, and the time for yourself. The problem is that it is an awful long way off. Is there another way?

The first time Rick read ‘Rich Dad, Poor Dad’, he just got irritated. After all, this was the book that pointed out how he was locked in the self-employed cycle where success leads to less free time. And he likes his free time. However, author Robert Kiyosaki also proposed ‘an out’. It’s called passive income. Passive income is income you have coming in to the household that you don’t really work for anymore. The key is that it is designed to happen in the near future instead of the distant future.

Since reading his books we have begun to change our financial plan. Instead of continuing to organize our finances around future income for a distant ‘retirement’, we are re-orienting things toward near-future passive income and ‘financial freedom’. We have been doing this by purchasing income-producing real estate and by looking to start internet businesses.

The success of our new ‘passive income’ plan remains to be seen, but it is interesting to note how changing our end result from retirement to financial freedom has completely altered the path we’re taking. These two goals are NOT the same. When you build a retirement nest egg you are looking to draw an income from it at some future time. When you are looking to attain financial freedom, you are looking to purchase or create assets which provide you with ‘passive’ income right away.

Should everybody be changing their financial plan? Of course not. For one thing, many people hate the idea of being landlords, and many others don’t have the stomach for business, let alone the technology business. Retirement planning is still needed. RRSP’s, mutual funds, and other longer term savings programs still have their place. There will always be employees and self-employed people who rather like what they do and are quite okay working until their retirement age.

All the same, if you are wondering if there might be a better way to ensure your future financial wellbeing ‘sooner’, perhaps you should pick up a copy of ‘Rich Dad, Poor Dad’… and get irritated. Either way, it will probably turn out better for you than it did in the past.

In the past most people never retired. They died.

Rick Hoogendoorn has been in the financial services business since 1991. Cheri Crause is a certified financial planner in Victoria, BC. .
www.chericrause.com
rick.hoogendoorn@shaw.ca

Major mutual fund and investment management companies now offer
self employed individuals 401k plans that are easy to install
and administer at very low cost. What's more independent
contractors and small business owners can borrow part of
their retirement savings tax-free and penalty free by taking
advantage of a loan provision in these new plans. Depending
on who's offering them, these individual plans are sold under
different trademarked names such as (solo 401k, uni-k plan,
personal(k), one person 401k, mini-401k, solo-owner 401k,
etc.,.)

Small business owners can establish an individual 401k and
transfer their IRA, 401k, 403b, or other qualified retirement
funds into this new retirement plan. Once the funds are in
the plan, owners can borrow 50% of their 401k account balance
up to $50,000 tax-free and penalty free provided they pay back
the loan.

Any business owner with no employees other than co-owners or
spouses can establish an individual 401 k plan. It doesn't
matter if you are a startup or been in business for years.
Your may work as an independent contractor with 1099 income,
freelancer, sole proprietor, or in a partnership, Limited
Liability Company (LLC), or corporation.
.
It is fairly common for employees of large companies to have
the option to borrow from their 401(k). But before 2002, small
business owners were not allowed the same privilege. Instead,
owners needing to tap their retirement funds for whatever
reasons had to take cash distributions from their IRAs or
other retirement accounts. This required them to pay federal
and state taxes on the distributions, plus generally a 10%
penalty if they were under age 59 ½. They also lost the chance
to put the money back into their retirement accounts.

Borrowing from an IRA is still prohibited. But one can
consolidate his individual retirement accounts into a
401 k and borrow from the 401k.

However, the individual 401 k is more than just a good tool
to borrow money. It also lets you contribute more towards your
retirement. You can make tax-deductible contributions to this
plan at levels more generous than other retirement plans such
as the SEP, SIMPLE, profit sharing and money purchase plans.

Every year millions of Americans start new businesses and take
cash distributions from their retirement accounts to keep them
solvent until the business gets going. In the process these
entrepreneurs forfeit a large chunk of their retirement money
to taxes and penalties. From now including a 401 k search will
probably become routine whenever small business owners look
to set up a retirement plan. With all of its features, the
individual 401(k) is bound to be a serious contender when it
comes to choosing a small business retirement plan.