What are your biggest dreams for your life? One of my favorite things I get to do with my clients is dream alongside of them. One recurring theme among the life dreams my clients share with me is financial freedom.
Financial freedom can come in a variety of forms and mean completely different things for different people. For some, financial independence means the ability to stop working if a person decides. For others, financial independence means actually stopping working and ceasing all earned income. I look at financial independence in three main sectors. Retirement is a form of financial independence, and traditional retirement I look at as age 65 as that is when Medicare begins for most. This is the simplest of the three versions. Retiring at age 59.5 is the second easiest. The reason this can be easier than retiring prior to age 59.5 is that this is the age when most of you can access your retirement assets without penalty. Retiring prior to age 59.5 is the crazy hard version of financial independence and the version that most people think about when they think about financial independence.
The mindset to achieve financial freedom is like that of a professional athlete. It takes focus, drive, patience and commitment. You are exchanging all excess that you could obtain now for a lifestyle in the future that does not include employment. No pain, no gain? That is definitely true for financial independence. You will have to forgo all of your extra income into investments that will help support your financial needs. Those investments can come in the form of traditional investments like stocks and bonds, mutual funds or other investment solutions. They can also come in the form of rental properties or passive business interests. For the strategy to work the best, I feel that the income needs to come from a variety of sources, not just one. Diversifying works. Investments outside of your retirement accounts must be managed in a different manner than those within your retirement accounts due to capital gains and dividends being taxed. If financial independence prior to age 59.5 is your goal, you need to start now and invest in a number of different asset classes to provide that income in your future. This is on top of being completely debt free and maximizing all of your retirement accounts like those regular chumps who want to retire at age 65.
There are some significant challenges you will face if you hope to achieve financial independence. The most common challenge can be health coverage. Health insurance is a necessary evil and can be a real drag on your monthly budget. While the ACA guarantees affordable coverage for all Americans, to retire early you will soon find that you may have a difference of opinion from what the government considers to be affordable. The costs of coverage vary depending on your income and your desired level of coverage. Be sure to include this in any of your planning as it will be important. Longevity is also something to be considered. A person born in 1900 had an average life expectancy of 57.2 years. That is a far cry from the 78.7-year estimated life expectancy for a child born in 2016*. Be sure if you are looking to walk away from your earned income, you could have to make it last a long time.
Financial independence gives you the freedom to design your own day every day. Sounds great, right? Much like the retirees I work with, this is a major change in one’s life. Likely, your career takes up a ton of your time. If you stop working, that time void will have to be filled. I can tell you that if you plan to fill that time with time on the couch, the good news is your life expectancy will drop. The bad news is, so will your happiness. While this may sound like obvious advice to some of you, the goal of doing nothing should not be your pursuit. Travelling, pursuing your passions, spending time with family, and contributing to your community all come to my mind when I think of passions that I plan to do when I stop working in the way off future.
When are you financially independent? You are financially independent if the sum of your passive income can cover your annual financial needs. Don’t forget to include taxes and insurance as we discussed previously. You should also budget to give yourself wiggle room. While you can get a budget put together that looks very low, actual expenses every month tend to include the odd home repair or the unplanned big dinner out. Be sure that you are calculating actual expenses to avoid spending your highly anticipated early retirement eating ramen.
As for myself, I am lucky enough to have found a career that is far from feeling like work most days. I get to have a ton of fun with my work family and my clients have become some of my best friends. For me financial independence would mean the ability to walk away from my job and to live off of my assets if I ever desired. I am not quite there yet but I am well on my way.
Matt Logan Inc. is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.
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