July 4this America’s Independence Day: the day in1776 that we adopted the Declaration of Independence breaking free from British rule and starting out on our own as a country. We celebrate with fireworks, barbeques and time with family and friends.
On July 4th, we celebrate our ability to live life on our own terms. From a financial perspective, our own personal Independence Day is the day we achieve financial independence, or the ability to choose to work. Quantifying financial independence is one of the 7 key areas of financial planning, along with managing cash flow and net worth, creating cash reserves, tax planning, risk management, taking advantage of work benefits, and estate planning. Just like the Declaration of Independence outlined the framework for our nation’s independence, a financial plan can outline yours! Here are the steps to follow to create your own personal Independence Day.
First, define your target. How much wealth should you accumulate? One approach to this task is to use benchmarks. If you are a 25-year-old, plan to save the amount of your salary by age 30. By 40, aim for having 3 times your salary saved. Double that by age 50 and by age 60 plan for having a nest egg worth 8 times your salary. A more personalized approach looks at what you spend in today’s dollars and projects it out based on inflation assumptions throughout retirement. You’ll also want to make sure you include expenses like new cars, vacations, home improvements, and medical expenses in your calculations. Most people choose to maintain their standard of living, but you might be thinking of increasing or decreasing it.
Once you have your number, managing your cash flow allows you to save appropriately. Examine your discretionary and necessary expenses and aim to save 10 to 15% of your income for retirement. A safety net will give you peace of mind - create for a cash cushion of 3 to 6 months to cover emergencies. Relying on credit should be a choice of last resort. Balance your cash savings with smart debt like mortgages to use leverage to increase your net worth.
The third step to financial independence is to manage risk. You will need proper insurances to offset risks that could undermine your goal of financial independence. We help clients think about risks that can happen to property, like homes and autos, as well as risks to the ability to earn income and transfer those risks to insurance companies for disability and death. Remember to address medical risks through health insurance, health savings accounts and long-term care coverage.
While you are working, it’s important to take advantage of work benefits like retirement accounts, life insurance, stock incentives, etc. We help our clients understand their benefits and make them work best for their situation. For example, take advantage of employer matches in retirement accounts. Maybe you are overspending on life insurance through work that won’t be available to you if or when you leave.
Next, we help clients think about reducing taxes now and in the future as well as creating flexibility with taxes during retirement. Saving in tax-deferred, tax-free, or taxable buckets is part of a comprehensive approach to saving for retirement. You’ll also want to think about protecting your estate with estate documents and make sure assets have appropriate titling and beneficiaries.
Finally, your investment strategy should be long-term and aligned with your values, goals and risk tolerance. Time in the market matters more than timing the market and, with investing, allocation and diversification win the day.
July 4th is a day to celebrate independence won through sacrifice, vision, and strategy. Your retirement day will also be a day to celebrate! And you’ll arrive at it through sacrifice, vision and strategy as well. Take a step towards financial independence today! Call 602-923-9800 for a complementary consultation to start planning your future.
Read more articles by Renee Hanson