The FIRE Movement – Is It For You?

Due to the nature of my profession, I am solicited for financial advice in all aspects of my life from all types of people. Similar to a doctor who gets asked about symptoms at birthday parties, people often ask for my opinion or input on financial matters, particularly investing. As most doctors will tell you, it’s hard to give advice when you don’t know the particulars.

However, if someone is really eager or serious for guidance on investing, I will suggest that they do their homework. The information they’re looking for isn’t found on the stock exchange or the Finance section of a newspaper.  Most times, the information you need to start with is found a lot closer than you would expect.

The first thing to take into account are your financial goals. As I’ve mentioned before, being aware of your financial “why” can highlight good habits, change inefficient patterns, refocus priorities and ultimately develop a plan to help you achieve your financial freedom. Therefore, you need to be specific. Do you want to retire in 30 years? Perhaps you want to buy a house in five years or start a business in two. In these scenarios, your goals act as targets, and with the help of a good financial planner, you can develop an action plan with measurable steps to incrementally achieve them.

Another thing to be aware of is your risk tolerance. This isn’t a measure of whether you like to bungee cord jump or skydive. Rather, this is an indication of how much volatility in your investments you are comfortable with. This is something that needs to be determined for the individual as well as the household. Risk tolerance is a very personal indicator, and there are times that couples don’t see eye to eye. When new clients come in, we have them complete a risk tolerance questionnaire to not only to see how individuals may or may not be working together but to also figure out the most effective plan to achieve their goals. The last thing we want you to do is tackle investments that won’t achieve your goals in a timely.

As you can tell, these items are all very personal. What you’re saving for, how long and hard you’re willing to work towards your goals, and what your income and lifestyle needs are, both current and future, will all be factors in planning how to invest. I bring this up because so many clients come in referring to the advice their friends, neighbors or coworker gave them. As I’ve mentioned before, I’m all for educating one’s self. Let’s discuss your options. But please don’t think that investing in what your child’s Little League coach is investing in is automatically the best option for you.

Let me put it another way. I’ve been athletic all of my life, playing high school and college baseball and an avid golfer. Knowing that, I’m not going to start a new exercise regime with a leisurely walk around the block or bench pressing 400 pounds. It’s not that I don’t believe these fitness goals are valid – they’re just not valid for me. The same idea can be applied to your finances. If any of the factors I’ve mentioned are not aligned, you may discover that the grass isn’t always greener on the other side, and that you need to be wary of the barb wire in between.

I know it sounds odd, that investing should be more complicated. But the truth is knowing your financial self is much important than knowing the stock market when you first start investing.

Recent market volatility and nervousness of investors seems to make this a good time to re-evaluate our current time frames and allocations for our investment accounts. One of the most important reasons is that our time frames and risk tolerance often clarify and determine the type of investment and allocation we should consider for our money.

Let’s agree that we might feel the market is efficient over a long period of time. With this kind of long-term perspective, should this recent volatility send us into a panic when evaluating our 401k and Roth IRA; investment accounts that possibly will be utilized 10, 15, or even 25 years from now? I anticipate you can come to my same conclusion…no. Let’s take this idea one step further. I would argue that panic should not be the response, but an excitement to save more, invest more, and watch our money possibly work more efficiently for us than if it was sitting in a safe, under the mattress, or at the bank. Market volatility and “correction” is healthy for long-term investors.

Now, I just alluded to two long-term retirement accounts. What if we have a 12-month goal to renovate the kitchen? That is a different time frame. That would result in a different level of risk. In fact, oftentimes, if the assets invested are to be purposed for a capital expense within the next twelve to twenty-four months, I then recommend holding on to cash and savings. The risks and costs of investing might be too high for our level of comfort for that short of a time-frame. Then, when we know the basement is set to be finished, the birth of a child is coming, or a rental property down payment are in sight, then we may want additional funds in the bank outside of our traditional three to six months of savings, especially if the time frame is tight.

And finally, what if we have additional cash that we don’t have a specific priority in mind for, and we have a comfortable amount in our bank savings, and we don’t want to wrap additional money into a retirement account and then not have access to it until after age 59 ½? This idea, this solution, is often unknown to investors. We are taught that we need to save into retirement accounts and make sure we have three to six months of emergency savings…but that’s not all we should consider. A non-retirement investment account helps us be more efficient with our excess cash or monthly cash flow, yet these invested assets are still accessible within 2-7 business days. In the 5, 10, or even 20 years until retirement, do we anticipate having a few non-retirement priorities? I’m confident the answer is “yes” for just about everyone. Or, maybe we run into a few unexpected things, too. Let me name a few examples…anniversary trip, home remodel, broken furnace, family vacation, new car, next down payment, adoption, or caring for our parents. Until we have a time frame, let’s believe in the market, invest our money in an efficient, cost-efficient, diversified portfolio, set to our level of risk and based on our anticipated time frame.

When a priority shows up, or even a BIG emergency, if we have been saving all along, it might make us better prepared. Just like a 401k, we can establish this type of investment account, determine a monthly contribution amount, and we can save and invest on a monthly basis. This could be incredibly impactful, because if we stick to the alternative of trying to over-save into our bank savings account, what might happen? Just prior to the end of the month, we might be too tempted to “slide to transfer” our “extra” funds right back into our bank checking. By establishing this additional, more efficient savings vehicle, funds that are earmarked for a future priority, outside of two years from now, will help us to be better prepared when that priority shows up, AND, hopefully having a stronger earning potential than what is available as interest at the bank.

This last example addresses an intermediate level of planning that tends to get lost in the emergency savings/retirement planning conversation. One consideration, please be aware that since these funds may not be in tax-deferred type of accounts, there may be various kinds of taxation on the growth and trading of holdings within these accounts. You would need to discuss taxation with your tax professional. Short- and long-term capital gains taxes are to be considered. But again, one of the biggest benefits of this type of account is that these funds tend to be more readily accessible. The flexibility of these types of non-retirement investment accounts are considered to be incredibly instrumental.

To summarize, if you are funding your 401k, and you have an adequate level of savings in the bank, and still have additional cash flow that could be used for future priorities, then I encourage you to establish an individual or joint non-retirement investment account for those exact goals. But first, please schedule time to meet with a Certified Financial Planner to help craft a strategy for your financial plan. He/she will help you better understand your time frames, your priorities, which will then determine your allocation, your level of risk, your investment, and the titling of the accounts.

So, despite the market volatility, the encouragement is the same: spend less, save more, start today.