Six Degrees of Financial Freedom
By: Philip "Flip" O'Toole
The Difference Between a Train and a Drone
Our high school senior and I recently visited the Engineering School at Purdue University. With a passion for math and physics, he has decided that he would like to study engineering in college. As we continue to schedule college visits, I learn more about engineering, especially mechanical engineering. One of the terms I continue to hear is “degrees of freedom”.
The Webster’s definition of degrees of freedom is “the ability of a rigid body to move in three-dimensional space”. A rigid body can have up to three translational movements (x, y and z axis) and three rotational movements around those axes.
For example, a train engine has just one degree of freedom as it can only move forward down a fixed track. By contrast, a high-end drone has the maximum SIX degrees of freedom as it can move forward and back, left and right, up and down, and rotate around all three of those axes. As a result, a drone can adjust to any scenario on the fly. It can move up or down, left or right, forward or back, can hover, accelerate and decelerate to adapt to any situation. And it does all of this while delivering the most stable video you have ever seen.
Which one are you?
Degrees of freedom can be used as a metaphor in Wealth Management. One’s spending and savings goes a long way to determining their financial freedom. But if savings and investing is on a limited number of tracks, degrees of freedom to live a desired lifestyle in retirement could be limited.
Some questions to ask:
- How are we utilizing different types of qualified plan accounts (Traditional 401k, Roth 401k, 403b, Government Thrift Savings Plan, Traditional IRA, Roth IRA) to manage one of the largest expenses in retirement, taxes?
- How are we allocating our investments in each account to help offset a second large expense, inflation?
- Do our company retirement plans allow Roth contributions (80% of 401k plans allow Roth Contributions) of up to $23,000 in 2024 or $30,500 if over age 50 and are we taking advantage?
- Are we utilizing Health Savings Accounts through work to help meet a third large expense in retirement, health care costs?
Appropriate answers to these questions may not only allow one to live their desired lifestyle in retirement, but also be able to leave a meaningful legacy to future generations. What track are you currently on? Are you a train engine on a fixed track heading toward a pre-determined outcome? Are you a drone that can pivot instantly in any direction, and accelerate or decelerate when circumstances suddenly change?
As my son and I continue to visit engineering schools over the next few months, I will continue to keep an ear out for concepts that are synonymous with Wealth Management.