Freedom Account Calculator

The freedom account calculator allows you to determine exactly how your personal situation will apply to the freedom account concept as it is described in chapter 4 of Poor No More. It allows you to enter your current income per year and your current savings in both regular and retirement accounts. You may project how much you believe your employment income will grow per year. It also allows you to project how much your various freedom accounts will grow per year.

The calculator allows you to project how much you hope to save each year combined into all your freedom accounts followed by how much will be subdivided into traditional retirement type accounts. Since the funds going into traditional retirement accounts (IRA & 401k, etc.) often may not be withdrawn without penalties, it is important that we don’t put too much into these accounts. Also remember that these retirement accounts offer significant tax advantages, so we typically want to maximize these contributions. I recommend that at least 5% of our contributions go to non-retirement accounts. Thus, if we plan to save 20 percent per year to our combined freedom accounts, 5% should go to a non-retirement account and 15% to a retirement account (IRA or 401k). If we plan to save 25 percent per year to our combined freedom accounts, 10% should go to a non-retirement account and 15% to a retirement account (IRA or 401k).

We should enter all of the following information into the downloaded spreadsheet.

1. Starting income per year
2. Starting regular freedom account balance
3. Starting 410(K) / IRA freedom account balance
4. Income growth rate per year (percentages, recommend entering 0 to 10)
5. Starting freedom account total savings rate (recommend 20% to 25%)
6. Part of freedom account in 401(k), IRA or other retirement account
   Note, must be at least 5% less that total amount or not more than 15%
7. Maximum % of 401(k) contribution that is match (typically 3 to 6%)
8. 401(k) / Simple Matching percentage (typically 50 to 100%)
9. Annual % gains in regular Freedom Account (typically 4% to 10%)
10. Combined tax rate for growth in regular taxable Freedom Account (typically 28%)
11. Annual % gains in 401(k)/IRA Freedom Account (typically 4% to 10%)
12. Current Year

The Freedom Account Concept

By applying proper financial management skills and improving our spending decisions we can find ways to save 20 percent of our income. I am not suggesting we make major sacrifices to make this possible. In fact, I believe we can increase savings while improving our lifestyles. The book Poor No More focuses on ways this can be done without diminishing our current lifestyles.

Most people truly waste more than 20 percent of their income. With the help of the tools and techniques suggested in Poor No More, we can learn how to identify and recapture this waste. Recapturing this waste will not diminish our lifestyles. In fact, our lifestyles will improve as we gain financial serenity.

The Freedom Account concept differs from traditional savings or retirement accounts in several ways:

1. We learn to trust that our investment income will pay our living expenses.
2. We learn to view employment income as only a vehicle to expand our Freedom Accounts and thus our independence.
3. We start making withdrawals in the second year and increase them each year.
4. Our contribution rate increases each year.
5. The benefits are not at some distance retirement time but more immediate – starting in the second year.

We should begin by saving 20 percent of our income into our Freedom Accounts. Next, increase this by 5 percent each year. Some of us may be asking, how can I afford to save 20 percent? How can I possibly save more each year? The answer is simple: income from our Freedom Accounts increasingly replaces our employment income thus allowing us to save more.

Each year we save more into our Freedom Accounts. If we increase by 5% a year this would mean our savings rate will start at 20%, then 25% the 2nd year, and 30% the third year, and continuing until all our employment income goes to our Freedom Accounts.

We can afford to invest the extra 5% each year because we will also be withdrawing an increasing 5% each year from our Freedom Accounts. In year two, we will withdraw the equivalent of 5% of our employment income from our Freedom Accounts. This withdrawal will grow to 10% in the 3rd year, 15% in the 4th year, and will continue to grow at 5% per year. This withdrawal from our Freedom Accounts supplements our current income and allows our savings rate to grow. Our effective net savings rate continues at 20%, where effective net savings is defined as the difference between the total amount of employment income we save less the amount we withdraw from our Freedom Accounts.  More importantly, we have learned how to live off and manage our investments.

The reasonable question is, why the shell game of moving money in and out of the Freedom Account? The answer: it’s nearly impossible to suddenly switch from living off our employment income to living off our investment income. This sudden change often results in disastrous retirement mismanagement for some unlucky people. It takes time to learn how to manage our investment accounts.

Switching from living off employment income to living off investment income should be a slow gradual process.

Do not go to a bank or brokerage firm and ask to open a Freedom Account. Unless this book, Poor No More, becomes extremely popular, they will have no idea what type of account this is. A Freedom Account is only a concept. Our Freedom Accounts could be composed of several types of accounts. We need to choose which types of accounts are appropriate for our situations. I suggest we consider a combination of 401K accounts, SEP IRA accounts, Roth IRA accounts, Traditional IRA accounts, and standard brokerage accounts.

For people with a 401k program available, I suggest investing 15% per year into their 401k, plus another 10% into a brokerage investment account. Although this totals 25% per year, it only cost 20% a year after taxes due to the tax deduction for the 401k contribution. The 401k matching plans that some employers provide make our 15% contribution even larger with the matching.

Freedom Accounts work because the benefit we receive is in the very near term not multiple decades away like retirement accounts. Freedom Accounts work because we feel, almost immediately, the growing ability to live off our investments. Freedom Accounts work because they make us feel less dependent of our paychecks and contribute to our feeling of financial serenity.