July is a month where we celebrate our independence, both as a nation and as individuals and families. It’s a month of ice cream, swimming pools, movies, fireworks, relaxation, and fun. School’s out, vacation is the priority and we’re free! All that makes July a great time to reflect on the concept of independence — specifically financial independence.
What does financial independence mean to you? In my practice I see hundreds of different financial situations and as many definitions of what financial independence means to my clients. They’ll frequently describe it as a status founded in certain financial milestones: “Paying my mortgage off,” “Being debt-free,” or “Having one million dollars.”
Those are meaningful goals and understandably popular ones at that, but as an advisor I believe there’s a more thoughtful way to approach the idea of financial independence. In my world, true financial independence is defined by three foundational concepts.
1) Having enough income for life to pay your expenses in perpetuity. To be financially independent, obviously you need to feel confident that your income will always be adequate to support your needs — and comfortably so. This is more nuanced than a simple “million dollars in the bank” plan. It’s important to structure your money so that it aligns with your needs and provides optimal value in your lifetime income plan. For example, if you need income in retirement, you may want to consider making sure your stock investments are producing significant dividend income along with any fixed income investments you hold. BUT… it’s critical that you still maintain the proper risk profile within your account. That means don’t go buying high-risk bonds or stocks in order to get more income in an account if its intended purpose calls for moderate risk.
2) Making sure your planned income reflects how you truly want to live your life. Planning for a realistic income to support your future lifestyle is tough. Be honest with yourself about the costs of your current lifestyle (spoiler alert: it probably costs more than you think it does). At our firm we’ve observed hundreds of clients transition to the work-optional lifestyle over the years, and our experience suggests that people don’t actually spend less in retirement, even without lifestyle creep. Rather, their expenses morph, shifting more to healthcare and travel. Updating your expenses each year is key to structuring your financial accounts to accommodate your true financial needs.
3) Having a legacy plan in place that can withstand the buffets of time and tragedy. Leaving certain assets to a spouse or partner, family members and favorite causes is a cherished personal goal for many of us. However, most people we see haven’t honestly run the numbers to model the impact of an extended healthcare event or untimely death on future cash flows. These unfortunate events can erode assets, as can a persistent bear market or general economic downturn. To ensure your legacy is strong regardless of market conditions or how long you live, it’s crucial to stress test your plan for a high probability of success no matter what happens down the road.
Financial independence is more doable than you may realize. It’s really all about controlling the three foundational concepts above, in balance. The good news is that each one is fully achievable with strategic financial planning fully customized around your unique lifestyle, family, risk profile and financial picture. The bad news? None are possible without that kind of planning. So this July I ask you, what’s your plan for financial independence?