In the September/October column of the Mind Your Money 2020 series, we covered creating long-term goals. 

Now that we’ve discussed cash flow, taxes, practice-planning, and a number of other money topics, where do we go from here? What’s the end game?

While you are likely passionate about the work you do, there will come a time when you are ready for something different. You may want to scale back your hours and work with a few select clients who bring you joy. You may want to close or sell your practice and spend more time with family and friends. You may want to travel, garden, start a new business, or become active in social causes or volunteer opportunities.

Whatever you decide to do, you will need money. The traditional term for this is retirement, and we will use this term to describe certain types of savings vehicles, but when it comes to saving for the future, we prefer the term financial independence. We would define financial independence as reaching a point when work becomes optional.

The term retirement is a bit reminiscent of a prior era when people worked for 30 years at the same job, clocked out at age 65, received a pension, and then played golf for the rest of their lives. While there is nothing wrong at all with this dream for some, it is not always the reality for everyone today—especially massage therapists.

As solo business owners (as most massage therapists are), the typical retirement plans like pensions and 401(k)s are not readily available in the same way. The path to financial independence is up to the individual. There is no one offering a 401(k) with a match that automatically squirrels away money from every paycheck. If you don’t save, no one is going to do it for you.

For this reason, it’s crucial to have a plan. Let’s discuss three components to a financial independence plan for massage therapists: how much to save, what tools to use, and how to invest.

How Much to Save

So how much do you need to save in order to achieve financial independence? Here’s the short answer: “as much as possible.” We say this because never in the history of humankind has anyone ever saved “too much” for retirement. So if you want the most basic approach, just save as much as you can. But that’s not very scientific, so let’s get a little more strategic.

The goal is to have enough money to reach financial independence at an age that is comfortable for you and maintains a reasonable lifestyle. So how do we calculate this? First, be aware that we are entering some areas of controversy. Retirement planning is not an exact science, and there are a number of unpredictable variables that exist. That said, the following basic principles are meant to give you a starting point and are not to be taken as specific financial advice.

Many experts recommend we use the “four percent rule” when calculating income at retirement. This is not a one-size-fits-all rule, but it is a reasonable baseline for doing some planning. It simply means that you would expect to withdraw 4 percent of your investment balance for income while your investments are (in theory) earning 4 percent interest on average, thus never depleting your balance. We encourage you to search the term “retirement four percent rule” online for more information on the pros and cons of this approach, as well as caveats and factors for consideration.

Now, let’s decide on a monthly income that would achieve the lifestyle you want. Let’s say it’s $4,000/month. How much money do we need to save to get there? We would multiply $4,000 x 12 for an annual income of $48,000. Next, we would divide $48,000 by 0.04 (four percent), which gives us $1.2 million. This tells us that we need $1.2 million to achieve financial independence.

That sounds like a lot of money! How do we get there? Answer: compound interest. Saving $1.2 million is a pretty tall order, but the good news is you have some help in the form of interest on your money. We’ll get to the specifics in a bit.

When saving for financial independence, you generally don’t want to just plunk money into a bank account. This won’t even keep up with inflation. You want to invest it in a way that earns interest and helps your money grow.

What rate of return should you plan on? You really can’t plan on a specific number (sorry!), but you can use historical information to get a reasonable estimate. Many experts suggest a range of 7–9 percent.

To calculate how much you need to be saving, you could do a bunch of fancy math, or you could use one of the hundreds of tools available to help you calculate it. Our favorite is the Compound Interest Calculator from Investor.gov. To find it, do an online search for “investor.gov compound interest calculator.” Plug in your information and see where you end up.

For example, let’s say you are starting at zero, you would like to reach financial independence in 20 years, and you think you can save $500/month. You would enter “0” as the initial amount, $500 as the monthly amount, 8 percent as the rate of return, and possibly a variation of 1 percent to see other scenarios. You will end up with a final number of $274,571.79. Now you can adjust the numbers to see different results.

If you increase the monthly amount to $700, you end up with $384,400.50. If you then increase the time to 25 years, you get $614,089.90. This will help you visualize different scenarios.

What about social security? This is a whole can of worms—and there are differences of opinion on what social security will look like in the future—so we say just plan without it, and then if it’s available to you at retirement, you won’t be mad about having extra money.

What Tools to Use

Where do you put this money you save? While the typical corporate retirement plans are not available to you (unless you work as an employee at a corporate massage entity), you do have some great options.

We won’t be digging into the nitty-gritty details of each option in this article, but we recommend reviewing our other resource on this topic titled “The Definitive Retirement Plan for MTs” available in the May/June 2018 issue of Massage & Bodywork magazine (page 84) in which we dive deeper into the details of each account type. There is also a webinar (“Saving for Retirement as a Massage Therapist”) on the topic in the ABMP Education Center (www.abmp.com/learn/course/saving-retirement-massage-therapist).

In general, as an independent massage therapist, we recommend considering three types of retirement/savings accounts: the IRA (and Roth IRA), the Solo 401(k), and the taxable brokerage account. Also, keep in mind that you can mix and match, as well as set up one or more types of accounts to use in tandem.

IRA

For the most part, the IRA (individual retirement arrangement) is going to be your first go-to. And specifically, the Roth IRA is pretty popular. An IRA allows you to save money in a way that is shielded from taxes. If you use a traditional IRA, the money you save is tax deductible, but it will be taxed when you withdraw it at retirement. A Roth IRA is the opposite. The money you save comes with a tax deduction, but it grows tax-free and is tax-free at retirement. This is why many people love the Roth IRA, especially as a long-term savings vehicle. There are contribution limitations on the IRA, so be aware of the rules that apply in the current year.

Solo 401(k)

Another great account type is the Solo 401(k). A Solo 401(k) is sort of like a “mini” 401(k) that is designed specifically for single-owner businesses. As a solo massage therapist, you can set up a Solo 401(k), which allows you to save more money than you could with an IRA, and also have both a traditional and a Roth option. It’s not as well-known as other types of accounts, but it’s a great option for massage therapists who want to save more than the IRA limits allow or if their household income is high enough that they don’t qualify for a Roth IRA.

Taxable Brokerage Account

Finally, a taxable brokerage account can be worth a look as well. This is simply a generalized account that can hold the same types of investments as an IRA or a Solo 401(k), but it is not tax sheltered. While the lack of tax savings is not great, it has the advantage of being free from savings or withdrawal constraints. You can save as much as you want into it, and you can withdraw money whenever you want with no penalty—unlike an IRA and 401(k), which can have penalties for early withdrawal. It’s a great option if you want to plan for financial independence earlier than the traditional retirement age or you want more flexibility with your savings and withdrawals.

So how do you get these accounts set up? There are lots of options. You can go to any of the major providers like Vanguard or Schwab. Or you can work with a financial advisor for more personalized help. There is no right or wrong.

How to Invest

What is your money actually invested in when you save? It’s up to you! An investment account, like an IRA, 401(k), or brokerage account can contain anything you want. It can contain cash like a bank account (though not the best choice), or it can have stocks, bonds, mutual funds, and other types of investments.

The choices are vast and confusing, and it can quickly get overwhelming. This is why we generally recommend keeping it simple by investing in mutual funds. Mutual funds are “collections” of stocks and bonds pooled together into one fund that spreads out the risk by investing in lots of companies. This makes mutual funds generally more stable and lower risk than investing in individual stocks.

How do you know what mutual funds to invest in? There are thousands of funds to choose from, and many financial professionals make a career out of researching and analyzing mutual funds. But for most people, there are some simple guidelines for choosing your investments. Remember, this is not specific advice but is meant as an educational overview.

One thing to keep in mind is that you want to have diversification. This means that you generally don’t want to invest all your money in small companies, international stocks, or any one sector. Many experts suggest investing in mutual funds that cover a broad range of companies, such as a total market index fund.

If you DIY your investing, all the major providers will give you the option of using “models,” which are predefined portfolios designed to give you a good, basic mix of investments based on a few facts about your life. They are usually pretty reasonable and in the absence of more hands-on advice, they can serve you well. If you choose to work with a professional, they will likely customize your investments to match your life and your goals more closely.

The Path to Financial Independence

As humans, we are wired to focus on what’s in front of us right now. That usually means things like getting clients, marketing our practices, and all the little things that keep us busy as massage therapists. Retirement or financial independence is not always at the forefront of our minds. But here are a few tips to help you make it more of a priority.

Make saving a habit. Put your contributions on autopilot. Don’t plan to save chunks of money here and there when you can, but rather set up automatic transfers every month so that it becomes a habit and something that just happens without intervention, like your mortgage or rent.

Visualize the future. It can be valuable to take time here and there to close your eyes, clear your mind, and picture what financial independence looks like for you. What will you do? How will it feel? What impact would it make in your life or in your community if you were truly financially independent?

Use a budget. Work with a tool like You Need a Budget (www.youneedabudget.com) to track your spending and cash flow so that you can see where every dollar is going. This helps you get intentional with your savings plan and creates room to make it a priority.

Above all, remember that saving for financial independence is financial self-care. It is a commitment to prioritizing your security and your future so that you can build a strong foundation from which to help others.

 Allissa Haines and Michael Reynolds can be found at www.massagebusinessblueprint.com, a member-based community designed to help you attract more clients, make more money, and improve your quality of life.