Financial Freedom Blog

This article, originally written in September 2005, is republished with minor editing.

“If I had known grandchildren were so great, I would have had them first,” goes the bumper sticker. Grandparents think their grandchildren are grand and grandchildren think their grandparents are grand. At least, that’s the way it should be. 

But how would you like for your grandchildren to think a little less of you? Only because of two words you omitted?  Would you want some of your grandchildren to end up with more of your assets after your death than the others? There could be reasons you would want that; but assuming that’s not the case, how could a careless error cause this?

I recently helped a grandmother who was vulnerable to this happening. Her primary beneficiaries were her children. On her insurance contract, if one of her children had died before her, when she died, the surviving children would receive the deceased child’s portion in equal shares. If, for example, a common accident had resulted in this situation, two of her grandchildren (the children of her predeceased child) would have received none of the insurance proceeds. All would have gone to her other children.

This is not what she wanted. The insurance company default was “per capita” instead of “per stirpes”. Her Last Will and Testament would have had no power over it. Insurance contracts, 401(k)s, and IRAs typically transfer directly to designated beneficiaries—not through probate. 

The Latin phrase “per stirpes”, meaning  “by branch” were the instructions the insurance company needed to correct the problem. Have you checked your will or trust lately? Have you checked your primary and contingent beneficiaries on your retirement plans and insurance policies?   Don’t tarnish a good legacy with confusion and disappointment. Leave a legacy of thoughtfulness regarding the distribution of your assets to your heirs.

This article, originally written in May 2005, is republished with minor editions. 

One of the greatest financial planning tools our benevolent representatives in Washington have ever granted us is the Roth IRA. (Half sarcasm, half sincerity)

The Roth IRA allows after-tax money to grow tax free. (Remember an IRA does not refer to the investment—it refers to the tax treatment. You can have all kinds of savings and investments inside your IRAs. Also remember, IRS eligibility requirements apply. You also must have earned income to contribute and higher income levels can limit your contributions.)

With a Roth, there are no Required Minimum Distributions (RMDs) at age 70.5 as with traditional IRAs.

Also, consider the tremendous tax-free wealth building potential for your heirs by “stretching” the Roth.

Having a bucket of tax free money in retirement can also give you some control over your taxable income when you are drawing from your assets in retirement. This could make a significant difference in the amount you are taxed on social security  income.

Why wait until April of next year to make this year’s contribution? Invest early in January and get a 15.5 month tax-free advantage. If you do this every year, the compound growth on the tax savings can be significant.

This article, originally written in May 2005, is republished with minor editing. 

My definition of financial freedom is being able to enjoy a nice lifestyle without having to work for income, and without being a financial burden to others. 

I didn’t say you would not work. I said you would not have to work for income. Work is honorable. It is usually hard work that enables people to achieve financial freedom. The idea is to work hard and be wise with your investments, so you can enjoy the fruit of your labor now and later in life. 

Financial freedom means being free from the pressure of working a job you don’t enjoy. You can take the time to do more meaningful things—more time for God, more time for family and friends, more time for church and charities, more time taking care of yourself, more time enjoying life. 

Achieving financial freedom is simply balancing two things: passive income and expenses. When your sustainable passive income equals or exceeds your living expenses, you’ve arrived. 

So you can attack it from two angles: 1) increasing passive income (income you don’t have to work for from sources such as pensions, investments, rental real estate, social security, etc), and/or 2) reducing your living expenses (just make sure you still “enjoy” a “nice” lifestyle).    

It’s not necessarily about amassing great wealth, per se. What good is wealth that does not benefit your life? But the aim is ultimately to have positive cash flow to free up your time. After all, isn’t time our most precious resource?  

However, for most people, building a nest-egg is one of the best ways to produce passive income in retirement. And the bigger the nest-egg, the larger the cash flow. This is why saving and growing your money is important.  

By understanding the formula, and thinking more about building passive income and reducing unnecessary expenses, you may be surprised how soon you can achieve financial freedom.  

For those who have already achieved financial freedom, your challenge is to give yourself the best chance of maintaining it. You may also want to think about expanding your giving and/or lifestyle, as well as planning for what your assets can do for others when you are gone. Helping others now and in the future is the highest and best use of money.