Episode 8 – Reaching financial independence
Episode transcript:
[musical intro]
Jenny
Okay. Welcome back to Fund Your Future with DRS. And so today we’re talking about a little bit financial independence. This is kind of a topic that comes up a lot in the planning for retirement world.
Seth
It’s kind of what retirement is. You no longer need to work and so you’re independent. I used to joke about being “dependently wealthy” when my wife got a job. I no longer need to work, I am “dependently wealthy” instead of independently wealthy. And so yeah…Financial independence is like you no longer need. You’re no longer dependent.
Jenny
Dependent on working. Yeah. You at least have the option to work. Yeah, exactly. So, kind of what is what is financial independence mean to you?
Seth
I think it means different things to different people and kind of different stages of your life. And for, for some people being financially independent means like you don’t rely on your parents anymore. Like, you know, kind of graduating through life in that stage of no longer being once again, no longer being dependent on someone else or being a dependent, I guess, depending on your tax return situation.
So, I think for different people, it’s going to mean different things, like how much flexibility do you have or freedom do you have? Can I take a week off of work? I think for a lot of folks who work like hourly wages or they don’t have sick leave or vacation leave, I think that can be like a form of independence to say like, Oh, I can take two weeks off and still have enough savings to be able to get through that that period of time.
So yeah, I think it totally can mean different things to different people. It probably means different things at different stages in your life.
Jenny
Yeah, Again, it’s like having being at a point financially where you have the option not to work. I was sort of think about like those little dream jobs, like the other day. I was thinking like, if I when I retire, I think I’m gonna just like move to California and work for Disneyland or something, you know? Yeah. Having some kind of fun job.
Yeah. That you don’t necessarily have to feel like you have to make a certain amount every year. And the big goal of financial independence is that you can live off of your investment savings or your retirement savings and not have to worry.
Seth
You can have other sources of income. I think we think we may have talked about this in another episode where we were talking about income that folks, especially folks in the public sector are really used to just having their check. You get paid twice a month or every two weeks or whatever. And that’s just kind of your reliable source of income.
But when you think about financial independence in terms of retirement, that retirement income is something else, whether it’s investments, whether it’s your pension, whether it’s your Social Security or some combination of those things, or if you have rental income or if you have a side job or like working at Disneyland, you know, 10 hours a week or something, you have some other form of income that you’re not necessarily depending on week in and week out to pay the bills.
What that means, once again to different people can be different things depending on how you design and set up your life. One of the ways I thought about this very early on in my life was my wife and I were living in Spokane and it was like our first time on our own completely. And she was in graduate school and we were living in this like really old building that we could not keep hot.
In the winter. There was heat. I mean, we really it wasn’t like a really dilapidated building, but it was it was old and there wasn’t a lot of insulation and baseboard heating and like really high ceilings. So even when you turn the heat on, it didn’t feel like you were warm. Yeah. So it was really frustrating when we would get our electric bill and it was super expensive.
It was like, “But I’m not even warm!” And I got this thought in my mind. For folks who are familiar with the Spokane area, the electric company over there is a publicly traded company, and for whatever reason I looked up this company and realized if I owned some of their stock, their stock pays a dividend. And so I had this sort of perverse thought of if I owned enough of their stock, I could use their dividend to pay the electric bill.
Jenny
I love that.
Seth
And then I went down this crazy rabbit hole of like, Well, what if I owned enough of the garbage company and enough of the phone company and these different companies that pay me to own their stock? And then I turn around and I use that money to pay for my actual bills, my cost of living. And so through those assets I could become independent or semi independent.
Jenny
Yeah. At least from your utility bills. Yes.
Seth
Yeah, exactly.
Jenny
I love that kind of getting on a tangent here. But the other approach to that, a lot of people are doing solar panels on their homes. So same sort of idea where you have these solar panels and then all of a sudden the electrical company is paying you for the electricity. And so you can kind of offset your cost that way.
Seth
I think that’s a really great example of a different type of investment. Where it’s not necessarily you’re putting money into the stock market or into your DCP account and getting gains off of that, but you’re finding ways to lower your bills. So, you know, we’ve talked about income and spending as two parts of the retirement equation. You have to know how much your income is.
You have to know how much you’re spending is, and you can increase your income by putting money into investments. Like I was talking about, buying these investments that they were going to pay me money and that was going to increase my income. But you could also buy solar panels and decrease your electrical costs or whatever other opportunities are out there.
I think that is different. Once again, different ways to approach financial independence or growing more of a gap between your income and your spending. So that way you can save even more.
Jenny
Yeah. Another great example that we actually we have a really old house and it’s the same sort of thing where we had these little baseboard heaters and we have like a wood fireplace, but the baseboard heaters were just costing us so much money and our house is old, it’s not very well insulated. And so we did some research and then ended up getting this each HVAC system put in, it’s like a ductless heating.
So it was a large upfront cost, but we’re like in the long term, this will help us a lot with our energy costs.
Seth
That I think is a really good way to think about just kind of financial independence in general. It’s sort of like the difference between being cheap and being frugal in your thinking about what is the overall long term expense of this. It might be really, as you said, more expensive upfront, but over time you’re actually going to be saving money and lowering your costs or increasing your savings depending on what sort of path you take there.
Jenny
Yeah, I kind of wanted to mention I had found this little graph online. We were talking about how, you know, financial independence looks different for everybody and they were kind of talking about the different levels of financial freedom with the level one being where you kind of figure out where you are financially. Maybe you’ve moved out of your mom and dad’s house and you can cover your own expenses to kind of the middle level of you pay off your debts, and then that upper range level of you can live off the income that your investments generate or off of your retirement savings.
Seth
Yeah, I think the term financial freedom is oftentimes used different than independence, but in a lot of ways similar in that different levels of freedom, especially thinking about that, you know, 16 year old who gets their first job and that is a different level of financial freedom, like being able to say like, hey, I can spend this money on what I want.
I was thinking about this in terms of like nephews around the holidays, around birthdays, they get some money and then that that feels like freedom. Like, yeah, like I get to choose what candy I want to buy or what video game I want to buy. And I think that’s in some ways one of the reasons I think we started this podcast to talk just more about money in general and kind of how it can be a tool and not necessarily something to be fearful of.
Jenny
Yeah, Yeah. So I think the next step then we wanted to talk about some, some of the steps that people can take if they’re thinking about, Oh great, yeah, this sounds awesome. It would be great to be financially independent, but then what? What are those next steps that people can do? And obviously the first one spending less than you earn.
So really taking a hard look at your budget and making sure, obviously, that you’re not spending as much as you’re bringing in, that you’re able to put some aside into hopefully your DCP savings or your retirement savings.
Seth
Yeah, it’s really back to what we’ve talked about in previous episodes is really having a solid understanding of what the income side of the equation is and what the spending side of the equation is, and then figuring out how to grow that gap over time, whether that means spending less. And I think sometimes that feels intimidating to people.
But there are also ways to increase the income as we’ve talked about already. But, you know, for a lot of public employees who get regular income increases if you can keep your spending stable, you are going to increase your income every year or two years or whenever you hit some of those steps or additional qualifications or when you get a promotion, if you can figure out how to help maintain some of that level spending.
Jenny
Also, one of the other steps, too, is making a point to pay off credit card debt and student loans and things like that. And putting money towards retirement.
Seth
I think that’s a really good point in that it helps you keep in mind what the long term goals are. I’ve read stories where folks will pay off like tens of thousands or hundreds of thousand dollars of debt in the course of months or years and then not quite know what to do next. And I think by thinking about retirement savings or other personal savings at the same time, then then you already have that vehicle.
Oh, well, I’ve stopped paying on this credit card because it’s paid off and now I can move that additional savings, or at least some of it into a retirement account or a personal savings account or an account to replace my roof or emergency fund or all of those different savings vehicles.
Jenny
A big debt for a lot of people is obviously their mortgage. And I hear from a lot of these like financial advisors and things that are people just that are striving towards financial independence and they’re trying to pay off their mortgage or they’re. But I think for me personally, that always kind of seems strange because the mortgage is just a loan that I have from the bank and my house isn’t going to necessarily go down in value.
And so I can just pay off that loan whenever I sell my house. And so I would rather be able to put that money towards vacations or retirement savings than trying to worry endlessly about paying off my mortgage before…
Seth
Yeah, I don’t think it should be a worry at all. We talked a little bit about this in a previous episode when we were talking about knowing your interest rates and knowing how much loans or debt is costing you. Yeah, for a lot of folks who locked in mortgages, you know, 3% or 4%, the interest cost is relatively small.
Yeah, in comparison to the total amount you’re paying where as a person who’s got a credit card that’s got 18% cost on it, you know that that is a much more significant it cost that you’re paying for that debt or for that loan. And so I was I was actually talking to a person that I just met randomly running about personal finance, which is what I tend to where the conversation often goes, that he was a math teacher and he was sort of making the argument that you were that paying off a loan that is really low is like not mathematically optimal at all.
He would much rather go invest that money somewhere else where there’s a more likely rate of higher return. And what I think we ended up agreeing to disagree on, there’s a difference between what’s most mathematically optimal and what is psychological and what helps you sleep at night. I think for some people they don’t want to have any debt and they want to feel like, oh my gosh, if I lost my job, I would I could keep my expenses as low as possible and I think that’s perfectly reasonable as well.
And I think the other thing to keep in mind for a lot of folks, they don’t have a mortgage. They pay rent. Sure. And so sometimes people feel like I’m not using my house as an investment vehicle. I’m not saving money. You know, when I’m when I’m paying a mortgage, I’m eventually I’m earning principal, I’m building up this value of this asset.
But when you’re renting, you can also be putting money in DCP or some other savings account. There was an article just in the Seattle Times, I think, last weekend about this, about saving money while you’re renting. You don’t have to like, check these boxes in certain order. Yeah, you know, like, well, yeah, it’s a good idea to maybe eventually move out of your parent’s house.
But if you’re 22 and living with your parents and you’re saving money for retirement, like your expenses are really low.
Jenny
Sure. Right. Like, let you live there. I mean, why not? Yeah. Yeah.
Seth
So it doesn’t necessarily have to be in a specific order is what makes the most sense to you.
Jenny
Yeah. And then in terms of paying off student loans, we kind of just wanted to mention that state of Washington does for at least public employees, has this great student loan forgiveness program. And we’re actually going to have a future episode about this. Yeah, some special guests.
Seth
So I think student loans are oftentimes the thing that are one of the things that are preventing people from saving more for retirement or is this kind of expense that is hanging over people’s heads. And I think if there are ways to consolidate those loans or refinance those loans or ways to pay less or get them forgiven, that can have a huge impact on people’s long term financial success.
I think sometimes people will get resigned and say, Oh, it’s just going to take me two decades to pay these off or I’m going to I’m going to be paying these off when I’m actually retired.
Jenny
Yeah, it’s important for people to know that there are options out there. And so for listeners to have questions about that in the meantime, you know, we, of course, encourage you to talk to your HR department. The other one I was going to mention and this is just a public company which is called Juno.com. Their web address is JoinJuno.com.
They help people refinance their student loans so that they can pay them off faster. I’ve heard that resource from a number of different financial advisors, and creating an emergency fund is one of those steps towards financial independence. We, of course, had a whole episode about that. Having that extra pillow to be able to lean back on in case of an emergency.
Seth
Yeah, I think for a lot of folks that is kind of like the first, how would I say it? Like adult level of financial independence or financial freedom to realize like, oh, I’m not having to scrape by or wait for the next paycheck to arrive or, you know, I get really nervous that I’m not going to make it until the next payment.
Jenny
Yeah, that point that you’re not living paycheck to paycheck and you can actually start putting stuff towards savings.
Seth
Yeah, exactly. I know Dave Ramsey’s a really popular personal finance sort of person and he’s got all of these different baby steps towards I don’t think he uses the term financial freedom of financial independence, but it is sort of the same idea of these little steps along the way to check off in a basic emergency fund is one of the very first steps to make sure that you feel like you’ve got that breathing room.
Jenny
Yeah. And then we also wanted to mention estimating your retirement benefit as one of those steps for planning for financial independence, which is for our public employees, knowing how much exactly you can expect to receive in retirement. And so this is really easy to do if you sign in through your online account, through DRS, and you can put in your factors for your age.
And when you plan to retire and it can actually give you an estimate of how much you can expect to get in retirement.
Seth
Yeah, I talk about this tool all the time with all sorts of people because it uses your own data. It’s really accurate and it helps you think about those different dates, like, Hey, maybe how do you want to stop working early and start drawing a pension and retire at 55? What’s that benefit going to look like? And I don’t know if I’ve ever told you this, but at DRS, one of my previous jobs, I used to retire people and work with individuals as they were going through the retirement process.
And I think you’d be surprised by the number of people who, when they retire, they get a raise. Their pension is actually paying them. When they add their pension and Social Security together, they’re actually going to get more than they were getting from their job. And oftentimes it’s a surprise to people. They hadn’t done those sorts of calculations.
And then I think sometimes there’s a little bit of regret like, well, some people love their job and some people are going to keep doing it and want to do it forever as long as they possibly physically and mentally can. But I’ve definitely talked to people in the past like, you know, if I would have just run those numbers, I could have stopped work a year earlier.
Yeah, I didn’t have to work to 67. I could have stopped at 66 or what, whatever those ages are for folks. And I think that’s where understanding the different pieces of the calculation are really important. And having that number in your pocket using the benefit estimator tool, I think it’s really beneficial whether you’re 55 or 25 just to get an understanding of what that could look like.
Jenny
Yeah, and then of course, the final step of just taking steps to be able to increase your retirement savings, whether that’s putting more towards DCP or investing in the stock market or working with a financial advisor to see what the best options are for you.
Seth
Yeah, Yeah. Whether it’s buying solar panels or panels.
Jenny
For your house. Yeah.
Seth
Once you’ve kind of grown that gap between your spending and income, you really have could feel like limitless options. And sometimes I think it can become overwhelming for people because it’s like, Well, do I, do I put money in DCP or do I start a Roth IRA or do I pay down my mortgage or do I invest in my kid’s college fund?
And a lot of that, I think, once again comes back more to psychology than what’s mathematically optimal, What’s going to help you sleep better at night, what’s going to make you feel like you’re on track or that you’re doing the most good for yourself and for your family and for humanity?
Jenny
Yeah, it’s about a personal choice of what kind of life do you want to live and being able to make those choices freely of saying, Great, do I want to live in the city or the country? And I’m financially able to to to make the choice that I feel is best for myself.
Seth
You know, I love that in that financial freedom, financial independence is really about choice. Yeah, it’s really about having the flexibility. I think when folks are kind of earlier on in their journey through money, it can feel like those choices are so far away or that I don’t have the flexibility or freedom. Yeah, exactly. It’s like I have to show up at work today because if I don’t get this paycheck, I’m not going to be able to pay my rent or I’m not going to be able to buy food.
And so I think having those goals along the way is really helpful to think about those steps of, okay, I’ve got that emergency fund built, I’ve paid off some high interest credit card loans or, you know, whatever those steps are that you can check off along the way. And then you start to get more and more of those choices.
And it can be really enlightening or really a reliever of stress to realize, like if I invest in this versus if I invest in that, like what’s the worst that’s going to happen? I can still pay my bills. I can still put food on my plate like I’m in a much more secure place than I was five or ten or 15 years ago.
Yeah. So anything else we wanted to talk about? I feel like we hit everything on our list, so, yeah, we’ll talk more. I’m certain this topic will come up in future episodes because I know we both are very interested in it, so I’m excited about that. But thanks for chatting.
Jenny
Yeah, thank you so much. All right. And we just wanted to remind people that if you have questions for us, you can email us at DRS.podcasts@drsretirestage.wpengine.com. And we’d love to hear about your journeys towards financial independence and some of the choices you’ve made or questions that you have for us and how we can help you with your retirement.
Seth
All right.
Jenny
Thank you.
[music outro]
Disclaimer
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The of the Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy. References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
