Building Financial Flexibility Beyond Retirement Accounts

Building Financial Flexibility Beyond Retirement Accounts

In this episode of 'The Retire Early Retire Now' podcast, Hunter Kelly, a certified financial planner and founder of Palm Valley Wealth Management, discusses the often-overlooked concept of financial flexibility outside retirement accounts. He explores the pitfalls that high-income earners face when all their wealth is locked up in inaccessible retirement accounts, stressing the importance of flexible funds for life's unplanned changes. Hunter delves into reasons why building financial flexibility is challenging, such as lack of incentives, emotional resistance, and the delayed validation of non-retirement savings. He introduces the three-bucket framework: spending for today, saving for retirement, and flexibility for life transitions. Practical advice is given on how to start building a flexibility bucket, including mindset shifts and gradual, consistent investment strategies. Listeners are encouraged to evaluate their financial plans to ensure a balance between long-term security and real-life optionality.

00:00 Introduction to Financial Flexibility
00:47 The Trap of Inaccessible Wealth
01:58 Why Retirement Accounts Dominate
03:34 The Importance of Financial Flexibility
04:58 Challenges in Building Flexibility
08:11 The Three Bucket Framework
09:31 Mindset Shifts for Flexibility
13:38 Self-Check and Conclusion

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast, the show where we help high income earners build wealth in ways to support their life today and in the future. if you're new here. My name is Hunter Kelly. I'm a certified financial planner and founder of Palm Valley Wealth Management, And I work primarily with families who are financially successful, but still feel pressure, or uncertainty around their money and want that peace of mind. Today we're talking about something that almost nobody focuses on early enough, and that is financial flexibility. Outside of retirement accounts, a while back we did an episode called, how hard is it to Save a Million Dollars? And what we talked about was the discipline, the consistency required to build long-term wealth. But today I want to ask a different, and honestly, a more uncomfortable question, how hard is it to build wealth that you can actually use? Because what is it? It worth if you can't use any of this money or this wealth that we're building, because here's the trap that many earners fall into. They become extremely good at saving, But they accidentally build wealth that is incredibly difficult to access AKA retirement accounts. And when life changes, which it always does, think about your life five years ago, how it looks now. And likely how it will look in five years from now. They're all going to be completely different scenarios for different reasons. They realize their money is working for their future, but not supporting the present. Let's talk about why that happens and how to think about fixing it. But before we jump in, go ahead and take five seconds. Leave a five star review on your favorite podcasting app and share this with a friend that you think would find this useful. So let's start with why this happens in the first place. Retirement accounts are a fantastic tool, right? They have tax advantages. Your employer is going to match generally, uh, it forces discipline. It's automated. There's long term compounding, just like with all investments, and so they're heavily marketed as the gold standard of responsible financial behavior, rightfully so. So high income earners naturally gravitate toward them. And to be clear, that's not wrong. I'm not here to be one of those crazy TikTok financial quote unquote gurus or Instagram quote unquote gurus that say 4 0 1 Ks or scams or anything like that. They are not, they are great tools for building wealth. The issue isn't retirement accounts themselves. The issue is when they become the only strategy, uh. Just like investing when you're putting all your eggs in one basket. I often see families who max out their 4 0 1 Ks, maybe they're doing a backdoor Roth contribution. They're putting into HSAs. they participate in deferred comp plans and on paper they're crushing it. Their wealth is being built. But when we zoom out, something surprising shows up. Almost all of their wealth is tied up in money. They cannot access easily or it's going to cost them a lot of money and Oftentimes this money needs to be accessed for career changes, life transitions, new opportunities, unexpected challenges, and they're optimized for the future, but unintentionally reduces present day flexibility. And so there's a, there's a problem here. Financial flexibility isn't about having a giant checking account. We want our money working for us, but it's. It's not all about just having that money in a checking account. It's about having it in in a usable option. Flexibility allows us to step away from a job that no longer fits, whether income, volatility, let's say if you're in sales or own your own business, take advantage of opportunities, adjust when your family needs it. So maybe one spouse wants to stay home while the kids grow up, whatever that may be. Or just buy back some of your time and and so. Here's the key insight. Flexibility reduces stress in ways Net worth can never do. two families can have an identical net worth only. one feels confident, one feels trapped. The difference is mu how much wealth is accessible when life happens. Flexibility is what allows wealth to feel real. And again, we're not talking about putting all your money into a checking account or, uh, taxable brokerage account or vice versa. Putting all of your money into a retirement account. We want to fine. That healthy mix for your situation. And so here's where the episode gets quite honest. Building flexibility outside of retirement accounts is difficult for three main reasons. One, you're not incentivized to save into a brokerage account. Retirement accounts come with employer matches. You get tax breaks. Uh, it's automatically deducted for your, from your payroll. So it's easy to get this money in. You're incentivized to get this money in and, and so, uh. Flexible accounts, they're taxable. So they could be spitting off interest or dividends that bring you taxes or unwanted taxes. Uh, there's emotional resistance. It often requires more intentional behavior. You have to physically put that money in, whether you're setting up that automatic withdrawal or physically doing this every month. And so human nature naturally gravitates toward incentives, right? So the incentives being those tax breaks, those employer matches, and those automatic payroll deductions. Two, it requires delayed validation, so maxing retirement accounts feels productive and responsible. Building brokerage accounts feels slower and less celebrated even when it's strategically smarter. In your stage of life, flexibility is less visible, which makes it harder to stay motivated. Number three, it forces trade offs. And this is the hardest one, right? And this is where I think a financial advisor or a third party can come in and help you, navigate those trade offs. But every dollar that goes toward flexibility is a dollar that isn't receiving tax advantages. That's a trade off that most people are uncomfortable with because they have been taught that. Retirement is the only way to save for long term. But avoiding these trade-offs doesn't eliminate them. It just hides them. So let me describe a scenario. I frequently see A couple in their early to mid forties. They have strong retirement balances. Maybe they've been working for a company now for 10 or 15 years. They've been maxing out their retirement accounts. Uh, they have a high income in their discipline savers. But they're starting to feel burnout. Their job satisfaction is declining. Their kids' schedules are increasing, whether that be their sports or activities or just life itself, things that they want to do with their kids because they, they see that time with their kids fleeting away. As they grow older, lifestyle priorities are starting to shift. They get older and maybe they're seeing that retirement is, is something that maybe they want to do and they want other, they want to do other things than the career they're currently in. They start asking questions like, could we slow down? Could we change careers? Could we take a risk? Right? They ha they start asking these questions. What is next? Then they realize almost all of their wealth is locked up behind these retirement accounts until they're 59 and a half. They're financially successful. They have great wealth, but they're structurally constrained. This is not rare. This is more common than not, and it usually surprises people because they thought they were doing everything right. This is where the three bucket framework becomes incredibly useful, and I've been harping on this for the last couple episodes. So if you are a Abbot listener, bear with me here, right? The spending bucket that supports life today, the freedom bucket supports retirement security and the flexibility bucket supports life transitions. And sometimes that life transition is that early retirement until you're 59 and a half This is the bucket that reduces your anxiety about these transitions, increases your career Leverage allows real life coast fire decisions. So if you are one of those people that want. To, live the coast Fire lifestyle, having your retirement set up, but uh, kind of reducing your, your saving along the way or reducing your work, whatever that may be. Uh, this flexibility bucket can allow for that to happen. And it, and lastly, it creates optionality before retirement. And that's the biggest thing, right? So if you have questions. Like, can we slow down or can we start a business or change careers? Could we take a little bit more risk and start this business? Whatever that may be. this flexibility bucket is going to allow you to do that. And so how do we start building this bucket? Here are a few mindset shifts that that can help. Think sequencing, not maximizing. You don't have to max every retirement account every year forever. There are seasons where redirecting savings toward flexibility is more valuable, right? So think about in times where. Having more accessible funds or cash, uh, would've been helpful. in my personal experience right now, my wife and I are debating whether or not we should move in three to five years or, and continue living at the house that we're living at and do some, uh, fairly significant upgrades. Right? And one of those things that will ease my anxiety or, uh, or gimme more peace of mind is if I'm continuing to build the. Flexibility bucket build, building my taxable brokerage account because whether we buy a house or we do some of these changes to our current home, we're gonna need cash on hand, or at least it will help minimize, the, the strain on us financially. so it's never too late necessarily to start the flexibility bucket, but there are certain times where you're going to need it more than others. The, the next thing we wanna think about is redefining efficiency. So tax efficiency is certainly important, but life efficiency matters more, right? Um, so we can, we can optimize and do all these things for tax efficiency, but if we're over optimizing for tax efficiency and we're not allow, we're not able to achieve our goals. And what's the point, right? I use the analogy either the last episode or the the episode before that if we beat the s and p by 3% every year, but we still are unable to retire. What's the point, right? And so there's other things that have to happen in financial planning and in your financial world outside of investments or over optimize or optimizing your situation, uh, to make sure that you can, uh, achieve your goal. So paying some tax in exchange for option optionality is that trade off that would often, uh, be wise, right? Uh, depending on your goals. And so we have to build this gradually. Flexibility rarely comes overnight. It's not like everyone gets a windfall and has a large sum of money that will give them flexibility. You have to build it through consistent brokerage investing, right? So opening up that, that brokerage account, making sure you're invested properly, intentionally giving yourself liquidity and maintaining cashflow, uh, so that you can one, fund that account, but two, still live your life for today as well. Or save for retirement. So small shifts start to compound. So maybe you haven't started a brokerage account before or thought about a flexibility bucket. And you're like, ah, I don't even know how I do this. I'm unsure about budgeting and this and that. I just know that I know that, uh, the max that I can put into my 401k is going to my 401k and that, and I feel like I'm good about that. Well start with something small, even if it's 50, a hundred, uh, couple hundred dollars a month. Start building that. And as you see over time, it'll start to grow. Right? And, and again, make it super simple. Pick some broad base ETF or investment, uh, that that fits your situation. Obviously if you're going to, uh, start picking investments, make sure you ask a professional. But, um. Start with something small and continue to build that up, right? Um, and as you move forward, that will start to build. Maybe you start to realize, oh, I can actually put more into that and still live a certain lifestyle, or maybe I get a boost in income. And then once you, uh. Have, uh, some money in that account, you'll realize, okay, well if, if I do want to slow down, well I have this bucket of money, or if we want to buy this new house or do renovations to our current house, we have the flexibility to do that because we've also been siphoning some money into this flexibility bucket. So. So here's a self-check question. Here's a simple question you can ask yourself. If my life changed tomorrow, How easily could my money adapt, not just theoretically. Practically, your answer to that question often reveals whether your plan is balanced. So do I have a good balance of money that I can access now and money that is specifically meant for retirement? And so. Ask yourself that question. And if you lean one way or the other, maybe there's some adjustments that need to be made. Retirement accounts are incredibly awesome tools, right? Tax free growth, maybe tax free distributions if you're investing in Roth, so on and so forth, right? but they were never meant to be your only source of freedom. True financial independence isn't just about the day you stop working. It's about the ability to make decisions throughout your life without being the limiting factor that requires flexibility. you want help evaluating whether your plan is balanced between long-term security, real life optionality, that's exactly what I do at Palm Valley Wealth Management. I work with clients that have these same questions that I've talked about today, and specifically the questions. Could we slow down? Can we change our careers? Can we take the risk to start that business? Can we bridge that gap from 50 to 59 and a half, whatever that may be, right? And so that's what I help with. And if this episode helps you think differently about your wealth, I'd appreciate it if you. Again, take 10 seconds, leave a quick review on your favorite podcast and app. Share it with a friend that you think would benefit from. If you would like to have a conversation, you can always go to my website, palm valley wm.com, and we will be talking a little bit more next week about. How much should we be putting into this flexibility account, right? Uh, and, and what does that look like? And, uh, what's the framework that I should be using to think about that, right? So, um, again, thanks for listening and we'll see you next week. This podcast is for educational purposes only. It's not meant to be financial advice. please do not make decisions solely based on this podcast alone. Please seek help when your own situation. Thanks.