In celebrating America’s Independence Day yesterday, it seems only fitting to write about your financial independence day(s). Many people think financial independence means freedom from caring or worrying about money. But your life will never be independent from money (and that’s a GOOD thing!) – you’ll use it to take those dream vacations; you may give some to your children and grandchildren when you pass; you’ll always have to use it in some form or fashion, so you’ll want to have a plan for it.
Here at Custom Wealth Management, we define financial independence as having full awareness and control of your money, such that you know you have acquired enough wealth to do the things most important to you without NEEDING to earn an active income. Yep, that’s right… financial independence requires awareness and control of your money.
Humor me and think back to when you were a teenager when all you wanted was freedom from your parents. If you’re really able to put yourself back in that mindset, you’ll notice wasn’t freedom you wanted but rather it was control of your own life. You wanted to make the decisions and not have someone else tell you what to do (ie independence). Same goes for finances, and having financial independence means you’re in control. So, get in the driver’s seat and buckle up, we’re about to go through taking control of your finances.
Planning for Financial Independence
As I’m sure you already know, being financially independent rarely happens by chance. Unless you win the lottery or come into a big inheritance, you’re going to earn your way to financial independence. Along the way, you’ll consider the things that go into planning for financial independence: determining what life in retirement will look like and ordering your distributions/withdrawals for longevity and tax savings.
For the purposes of this article, I’ll consider retirement to be the time you’re living your financial independence and not earning an active income. While in retirement you’ll consider the following four areas and what assets will be used to fund them:
- Core expenses - food, clothing, housing, taxes, transportation, insurances
- Funding – Employer pensions, social security, personal pension annuities
- Leisure expenses - travel, hobbies, experiences
- Funding – Income, dividends, and interest from existing capital
- Accumulation goals - vacation home, college, boat
- Funding – Sale of capital assets
- Your legacy - gifts to heirs and charities
- Funding - Assets remaining at death and insurance proceeds
Part of piecing together the funding sources mentioned above is to optimize the order in which you withdrawal qualified and non-qualified dollars. Analyzing things such as estate taxes, tax brackets, and cost basis can help determine best course of action for your income strategy in retirement. Volatility also plays a big role – when you’re accumulating wealth for financial independence, you’re in it for the long haul so fluctuations are more tolerable in your portfolio. But when you start drawing on your portfolio, fluctuations can have an exponential impact on your portfolio.
To help put the puzzle together, I use what’s called a Monte Carlo simulation to show your probability of success. Our software uses the last 100 years of data and runs the simulation 1,000 times. It brings it all together to show us the probable outcome in the worst 2.5% of scenarios, the middle/average scenario and the best 2.5%. From those probabilities it assigns you a ‘Monte Carlo’ number from 0-100% probability of success. I plan for you to have no less than an 80 for your Monte Carlo number, and ideally make changes along the way to get to 100.
Living in Financial Independence
Once you’re living your financial independence the hard part (earning and planning) is behind you! But you’ll still want to do periodic check ins to make sure you’re on track, and for that I use the Custom Wealth Inspection™. The inspection includes a summary of your overall progress compared with projections and identifies any discrepancies and their causes.
One of my goals is to plan well enough that you’re able to make major purchases while still maintaining the lifestyle you’ve grown accustomed to. I aim to ensure you’re able to make those bigger financial commitments in a way that aligns with your goals and objectives. The Custom Wealth Inspection™ is a way of adding in the flexibility of life while keeping you in control of your financial life.
Whether being a ‘control freak’ is or isn’t in your nature, it’s wise to take on a control freak attitude about your money. After all, if you don’t control your money, who will? My team and I will be here every step of the way to provide guidance and expertise, but ultimately what you do with your money gets to be your choice. And if being financially independent is what you choose, we’re going to do everything we can to help set you up for success.