EP #21 - How Much Do You Need to Retire? (Why the 4% Rule is Wrong)

In this episode, Jacob breaks down the path to financial freedom and challenges the traditional 4% rule that many rely on for retirement planning. Discover why aiming for an unrealistic retirement number can keep you trapped and how understanding your living expenses is key to setting a realistic financial freedom goal. Jacob explains how the 4% rule works and why it might not be sufficient, especially in today’s economic climate. He introduces the concept of using real estate investments to generate consistent cash flow, offering a more achievable and faster route to financial independence. Join Jacob as he shares insights, personal stories, and practical tips to help you break free from the corporate grind and start your journey to true financial freedom.

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Transcript

Nancy: 0:00

This is the Financial Freedom Fighters Podcast

Jacob: 0:13

I've got some bad news. We're all being lied to, you know, my whole life, I was told to get good grades, get a good steady paying job and work my way up the corporate ladder. So that's what I did. I went to a decent school and I got a job at a big four accounting firm, the most stable job that I could think of. And I was off to the races. It wasn't long into my stint at the accounting firm, however, that I realized that I hated it. And so, I switched jobs, hoping to find a more fulfilling career. But it wasn't very long until I felt the same at that job. And so I switched, again. And then switched, and switched, until after 10 years, I realized something. I was never going to find fulfillment at any of these jobs. It was the system itself that I resented. The never ending hamster wheel of clocking in and clocking out. You know, how am I supposed to do this until I'm 60, 70 years old? There's got to be a better way. Which, after doing some research, I found out that there is. Instead of focusing all of our energy, trying to find the perfect job, which frankly doesn't exist, we all need to prioritize achieving financial freedom. In this video, we're going to be breaking down what financial freedom is, and more importantly, how much do you need to be financially free? And make sure to watch the entire video, because at the end, I'll be sharing my plan on achieving financial freedom. So without further ado. Let's hop into it. So what is financial freedom? In its most basic form, financial freedom is having enough money to cover your living expenses indefinitely. When you've unlocked financial freedom, you can say goodbye to these unfulfilling jobs forever. You no longer need to trade your time for money. You are completely work optional. Now, while I like daydreaming about achieving financial freedom as much as the next person, we have to get tactical in this video. How much exactly do you need to be considered financially free? Now, if I asked a bunch of different people off the street, how much they think they need to be financially free, I'd probably get a variety of different answers, but I bet a good majority of them would be an astronomically high number, like 50 million or a billion dollars. And there are two things that are wrong with responses like that. First off, that's a very unrealistic goal and unrealistic goals are rarely ever achieved. Number two, if you think you need 50 million or a billion dollars to be free, then you will forever be bound. We all need to have this concept. Of enough, you see achieving financial freedom starts with setting a realistic target. It has to be realistic. It has to be achievable. And this will serve as our North star. If you don't have a realistic target, you're never going to achieve financial freedom. And it all starts with understanding your living expenses. Let me ask you a question. Do you know how much you spend on a monthly basis? Surprisingly, a survey shows that more than 60 percent of Americans can't even tell you how much they spent in the prior month. And this is why the vast majority of people will never achieve financial freedom. You have got to understand your expenses. It is imperative that you sit down and write a report. Every single expense you have on a monthly basis, housing, food, utilities, entertainment, et cetera. You cannot skip this step. If you hope to achieve financial freedom, let's dive into a quick example. Let's meet Maria. Maria is 33 years old and she lives in San Francisco, California, a very high cost of living area. After analyzing all of her expenses, Maria knows that she spends roughly 5, 000 a month or 60, 000 a year living in San Francisco, California. So the question is, if you're Maria, how much do you need to be considered financially free? And the more traditional way to answer that question has been leveraging the 4 percent rule. The 4 percent rule was a guideline developed by financial planner, Bill Benjen in the 1990s to help retirees understand how much can they withdraw from their retirement portfolios without running out of money. His study showed that if you had a balanced portfolio of 60 percent stocks and 40 percent bonds, you can safely withdraw 4%. From your portfolio every single year without running out of money. And that's because your investments would be growing at a faster rate than the 4 percent withdrawal rate. This is a very important point. Investing is what makes financial freedom even remotely possible. You cannot stack cash under your mattress and hope to achieve financial freedom. You need to make smart investments to ensure that your money is growing over time. Now that we understand the basic premise of the 4 percent rule, Let's apply it to our friend Maria's situation. We can do some quick math here. If we take Maria's annual expenses of 60, 000 and we divide it by 4%, then we know that Maria needs a portfolio of roughly 1. 5 million allocated to stocks and bonds to be financially free. If she had that, then she can withdraw 60, 000 a year to pay for her living expenses without running out of money. Now I know what you're thinking. Where in the world is Maria going to get 1. 5 million? Dollars. And that is the sobering reality of achieving financial freedom. It's not going to be easy, and it's definitely not going to happen quickly. If Maria was starting from 0 and she invested 2, 000 a month into the S& P 500 at an annual growth rate of 10%, she would hit 1. 5 million in roughly 20 years. And this is why it's so critical to get started on your financial freedom journey as early as possible. If you want to retire before your sixties, you need to get started now. And since Maria is 33 years old, if she follows the 4 percent rule, she can still retire in her early fifties, which isn't that bad, but luckily there is a better and faster way to achieve financial freedom. And one that I'm following myself, the problem with the 4 percent rule is that it assumes you're only investing in stocks and bonds. But what if you're investing in other things? Like real estate, for example, real estate has been one of the most proven vehicles for helping people achieve financial freedom. For one very specific reason, cashflow at the end of the day, financial freedom is a cashflow problem. You need a vehicle to pay for your living expenses and real estate has proven to be the most efficient investment at generating cashflow. When you own rental properties, you collect rent from your tenants. And if it's the right property, then the rent that you collect is more than the expenses it takes to operate that property resulting in net profit. Profit or net cashflow. And what's even better is as rents increase over time, as they do in the United States, then your cashflow or your profit is increasing over time as well. So from a real estate standpoint, all you need to do to achieve financial freedom is to build a rental property portfolio that is generating enough cashflow that can cover your living expenses. Now make no mistake about it. Building a rental property portfolio takes skill and effort, and it's going to be no walk in the park, but it should be faster than simply relying on the stock market. And I'll prove it to you. Let's say that Maria worked super hard and on her journey to financial freedom, she has 750, 000 invested. According to the 4 percent rule, Maria would only be able to withdraw 30, 000 a year without running out of money. But let's say that Maria had 750, 000 invested and she owns a rental property. Property portfolio. If those rental properties were generating an 8 percent cash on cash return, then that rental property portfolio will be generating 60, 000 a year in cash flow, which would mean that Maria is financially free. Now I'll dedicate another video to real estate metrics and analyzing deals, but just know today that an 8 percent cash on cash return. Is very achievable for a rental property, especially as the rents increase over time. So in the 4 percent rule scenario, Maria would only be halfway to her financial freedom goal, but if she implemented a rental property strategy, she would have already achieved financial freedom. And this simple example shows that real estate will help you achieve financial freedom much more quickly because it is a better vehicle for generating cashflow. And that's why I'm acquiring one rental property a year, every single year until I hit my financial freedom goal. And I know this is not going to be a walk in the park. Real estate investing is a skill and it's going to take a lot of hard work to achieve my goals, but I'm trying to achieve financial freedom as quickly as possible. And I think real estate is a vehicle that's going to help me get there. If you're interested in learning more about real estate investing, I built a bunch of free tools and resources that will help you on your journey. And you can get those for free in the link in the description below. I'm also super pumped to be launching my six week program rental property, investing one Oh one, where I'll be teaching you step by step how to acquire your first cash flowing rental property. I've learned so many things, building my own rental property portfolio, and I made a ton of mistakes. So I built a program that I wish I had when I was starting out. You can join the wait list for rental property, investing one Oh one, my course by heading to the link in the description below. And you'll be the first to know when the course launches. That's all I have for you guys today. I'll see you in the next video. Peace.

Nancy: 8:20

Goodbye