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Achieving financial independence and leaving the workforce before the traditional retirement age of 65 has become an aspiration for many people.
For Jackie Cummings Koski, that goal became a reality when she retired with $1.3 million at age 49. Koski didn't house hack her way to riches or build a YouTube presence that earns her hundreds of thousands of dollars each year. Instead, she credits the start of her wealth-building journey to her childhood.
Her family, which included her single father and five siblings, grew up poor in South Carolina. According to Koski, it wasn't an ideal situation but her father worked hard and was able to put food on the table.
"What stuck with me from that experience was that I didn't want to be poor when I got older," she said. However, the same sentiment resurfaced again later in life after her 11-year marriage ended. Again, she was determined to never be poor again.
"The divorce was one of the biggest wake up calls I had," Koski explained. "It scared me because now I was alone and I needed to make sure I wasn't going to go back to poverty. So that's what got me started with thinking about my money and building my wealth."
Here are some crucial steps she took that allowed her to retire at age 49 with $1.3 million.
After her divorce Koski became very interested in the stock market, but she was still quite uncomfortable with the idea of investing her own money and potentially losing it. However, she ended up joining an investing club to better understand what to do with her money. A friend from work told her about one group in particular called BetterInvesting, which still exists today (for which Koski now sits on the Board of Directors).
During the club meetings, participants learned how the stock market worked and were even taught and encouraged to invest small, non-intimidating amounts of money.
"I ended up joining [the investing club] and I'm still a member today," Koski said. "That allowed me to increase my comfort level with investing. Eventually, I wasn't scared of investing anymore."
This was around 2007. But even after joining, Koski improved her financial know-how by listening to podcasts. And by 2013 when social media had really taken off, she also joined some online FIRE communities. FIRE, which stands for Financial Independence, Retire Early, is an idea or end goal shared by people who wanted to achieve financial independence and leave the workforce before the traditional retirement age of 65.
"That was my biggest takeaway from this," Koski said. "You don't have to do things in a silo. You can find a community that you resonate with and can learn through."
Even before Koski joined the investing club, she had been contributing to her 401(k) account at work, and she even contributed enough to receive her employer match. However, she admits that at the time, she didn't really know what she was doing.
"I never thought of it as investing at the time," she said. "But my learning through the investment club taught me otherwise, and I started questioning what I was invested in through work. I decided that I should put my money in places where I can get both growth and a tax break, so I started maxing out my 401(k) and contributing to a Roth IRA."
With a Roth IRA, you can contribute your after-tax money to an account and invest it in a variety of stocks, index funds, mutual funds and ETF's. You won't owe taxes on withdrawals made in retirement since you've already paid taxes on the money. This is why a Roth IRA can be such an instrumental part of your wealth-building plan — and there are lots of different ways you can open an account.
You can use a brokerage like Fidelity or Charles Schwab , or download a robo-advisor app like Betterment or Wealthfront, to open a traditional or Roth IRA. Robo-advisors help you determine which investments make sense for you based on your risk tolerance, goals and retirement date. Robo-advisors also take on the task of automatically rebalancing your portfolio as you get closer to the target date for your goals (be it retirement or buying a house). This way, you don't have to worry about adjusting the allocation yourself.
Note that with tax-advantaged retirement accounts, like a 401(k) and IRA, you won't be able to make withdrawals until age 59 and a half, unless you're willing to pay taxes and penalty fees. While saving in these accounts may not allow you to retire much earlier than the traditional retirement age, they are a key tool in building wealth for the long term.
In addition to contributing to her 401(k) and Roth IRA, Koski also invested in one more tax-advantaged account: her HSA (health savings account).
HSA accounts were designed for consumers who have high deductible health plans (HDHP) to be able to save for upcoming medical expenses. Contributions are made pre-tax through an employer-sponsored HSA plan — that's the first advantage of an HSA. Similar to a 401(k), you can also invest the contributions made to an HSA.
The second tax advantage is that all growth of your HSA funds are tax-free. And the third advantage is that you can withdraw the funds from your HSA tax-free for qualified medical expenses. But if you don't want to use the money for healthcare-related purposes, you can wait until age 65 to withdraw funds for any reason.
So an HSA isn't just a way to save for medical expenses; it can also be an instrumental way to accumulate a sizable, tax-free nest egg.
"I had a $500 deductible that I wasn't even meeting so I decided putting money into an HSA was a good fit for me, especially since I could invest that money, too," Koski said. "So I had three tax-advantaged accounts and that came from increasing my comfort with the stock market."
Koski reminisced about how once she started working as a teen, she would save every $2 bill she came across. But the habit unknowingly followed her into adulthood.
"I would get a check and deposit it at the bank and they would give me a $2 bill," she said. "And even as an adult I just kept saving those $2 bills until I decided I didn't need to collect them anymore. I ended up with $3,200 just by saving $2 bills. But I grew into a habit from saving because of that and it stuck with me."
By the time she started getting salary bonuses and bumps at work, she had already built that muscle for saving so it was easier for her to just save the extra income to reach her goals a little faster. In fact, she recommends that everyone build this habit, especially if they feel they have competing priorities and expenses.
"When you're young in 20's and 30's, you're in a bottleneck where you have so many things going on at the same time, like getting out of school, having debt and living on your own. All those competing priorities make it very hard to save," Koski explained. "If you can't save a meaningful dollar amount, think about building that muscle over time by creating the habit of automatically putting something — even a small amount — into your investing account regularly."
It can sometimes be tough to manually move your money into your savings or investment account. Sometimes you may just forget while other times you might get bogged down by other expenses and feel like you don't want to move more money out of your account. But when you automate your savings, you effectively prevent yourself from choosing to not save money. You can usually set up recurring savings through your online bank account, or you can use an app like Digit to automatically save small, random amounts of money each day.
One of the most important things you could do when pursuing financial independence is figuring out how much money you need before you can officially say you never have to work again. This number (popularly known as your FIRE number) is the amount of money you need invested if you want to withdraw a portion of your investments each year without running out of cash.
The yearly withdrawal rate typically goes off of the 4% rule, which says that in the first year of retirement you can comfortably withdraw 4% of your investments then slightly adjust your withdrawal rate as needed each year after that. Historical data shows that living off 4% of your retirement portfolio should allow you to cover your expenses for 30 years.
Koski used this rule to determine how much money she needed to have on hand.
"I came up with my FIRE number by figuring out how much money I spend each year, which was about $40,000, and multiplying it by 25," she said. "I calculated that I would need $1,000,000 to be able to withdraw 4% each year."
To figure out how much money you're likely to spend each year, you'll need to track your yearly expenses. The Mint app does that for you once you connect your bank accounts to the app (you can also connect your investment accounts, credit cards and other financial accounts to see your net worth).
Koski does note, however, that even once you finally reach your FIRE number, you may still face some emotional hurdles when it comes to the idea of walking away from your job and retiring early.
"I actually reached my FIRE number at age 46 but it was still very uncomfortable because I had to get used to the idea that I wouldn't be coupled with a job and would need to pay for my own health insurance," she said. "So I didn't actually retire for another few more years."
Koski was able to reach financial independence through a combination of good financial habits, but it all really started with improving her financial education and understanding what numbers made sense for her.
But whether or not you're pursuing FIRE, turning your financial situation around and investing money can be stressful and even daunting. But Koski leaves the following advice: "Don't deprive yourself and take away your fun because you'll lose the energy to keep making these financial moves. It has to be sustainable. Give yourself credit and celebrate the small wins."