Financial Literacy 101: The Rule of 22

 |  General Self-Directed IRAs
Financial Literacy

By Daniel Ortega, Head of Retail Sales

At Vantage, we are passionate about increasing your financial literacy

Before putting your nest egg at risk by investing, it is essential to determine what lifestyle you desire to achieve, by what age you wish to attain it, and how much money you need to accomplish your retirement goal. That is where information on the Rule of 22 would be helpful. Welcome to Financial Literacy 101: The Rule of 22.

I often speak with investors who don’t know how much money they will need when it’s time to retire.

To make it simple, I ask the same question, “What will you need monthly to live off of when you retire?” This question is made for investors to think about the lifestyle they desire and the financial obligations they will have. I never get the same response as numbers range from $4,000 to $10,000 a month. For the sake of ease, let’s say you need $5,000 a month or $60,000 a year. The way the Rule of 22 works is you would multiply $60,000 by 22, giving you the total amount of monies you would need to have when you retire. After doing the simple math, you determine that you need $1,320,000. That is a big number!

If you’re currently looking at the balance of your retirement account and wondering how you are ever going to get there, a Self-Directed IRA could help bring you closer to that number.

With a Self-Directed IRA, you’re able to invest in virtually anything you want outside of the stock market. These include private assets that are not correlated to the stock market and, in many cases, offer higher returns than mutual funds, stocks, and bonds. In addition to the increased level of alternative investment choices Self-Directed IRAs offer, our clients have shared that the biggest thing they value is having the control to direct their money into strategies they understand and feel more comfortable with. After all, money is a very emotional topic for most. Another thing to keep in mind is that number does not mean you must have $1.32 million in liquid cash. It simply means you must have retirement savings equal to that number. Many investors have used real estate as a way of achieving that number.

For example, if you own a rental property that is valued at $250,000 and is generating $1,200 a month in income, that means you’re generating $14,400 annually. With each acquisition of a property, it allows you to purchase another. If you’re able to purchase 3 similar $250,000 properties over time that generate the same monthly income, your total portfolio value is $1 million. However, your assets are income-generating and therefore producing $4,800 a month, which equals $57,600.00 annually. Although you’re $320,000 below your $1,320,000 goal, you’re only $200.00 per month shy of your desired monthly income. Just like that, you’re closer to living the life you dreamed. Just remember that time is always working against you, so now that you have some additional knowledge, it’s time to act.

It’s time to make 2020 the year you turn financial literacy into financial prosperity!   

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