5 Secret Ways to Get Ready For Financial Independence

By Susan

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Last Updated: September 4, 2021

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Now that almost all countries celebrate their Independence Day, it's a wonderful time to think about having your personal Financial Independence Day. Financial independence refers to the ability to live comfortably without having to work. You can then choose to retire or work because it's something you want, rather than because you have to. Does this seem intriguing to you? The following are some actions to take to make it happen:

 

1) Determine your preferred way of living.

Consider what you will be doing if you're not mandated to wake every morning just to rush out to work. What city would you like to reside in? What would you do if you had free time? Before thinking too much, remember that the more luxurious the lifestyle you want, the more difficult it will be to achieve. The simpler your lifestyle, the quicker you will achieve financial freedom.

 

2) Make a budget for your spending.

Get started with your current expenditure by reviewing the previous three to twelve months' worth of bank and credit card statements and documenting your costs on a spreadsheet. Then consider how your costs could alter as a result of your new lifestyle.

If you're planning to downsize or relocate to a more lower-cost-of-living location, for instance, you may pay less on rent. Hobbies, health care, and travel, on the other hand, these same costs may be more expensive. (using this calculating tool can help you to estimate your health insurance costs under the Affordable Care Act, but you will have to only enter your taxable earnings; other nontaxable earnings, such as withdrawals from tax-free Roth accounts or spending down your principal in investments and savings, will not count against you when determining the subsidies you can receive.)

 

3) Determine the amount of money you'll need to save. 

This calculating tool appeals to me since it is free to use and was created to enable you to simulate situations in which you retire before receiving any retirement fund or Social Security benefits. Begin by inputting your above-mentioned costs, the net worth of your portfolio (pension accounts plus any additional savings and assets you want to use to support your retirement), and also the total number of years you expect to be financially independent. (To be in safe hands, imagine you live to be 110 years old.)

Then, check under the "other income/spending" menu bar, input your estimated Social Security benefits (to estimate your benefits, all that you have to do is input your intended age of retirement on the Social Security official site) as well as your pension or other earnings you foresee (such as from a job, business, or rental property). If you aren't ready to retire yet, go to the "not retired?" page and input your anticipated retirement date as well as how much you expect to save every year between now and the retirement date you input. (Remember to add any payments made by your employer to your retirement plan.) Consider other methods to save. Meanwhile, cutting down your costs may both boost your savings and cut your bills in retirement.

Input an estimate of the charges you pay and how your assets are distributed under the "your portfolio" column. (You may also use it to examine how different investment mixes affect your retirement.) You can include any major one-time adjustments in your portfolio right under "portfolio changes," such as the addition of funds from the sale of your house, accepting a lump sum pension payout, or a withdrawal owing to the purchase of property or paying education fees.

Lastly, on any of the tabs, press the "submit" button to check what the outcomes would have been if you followed your projected plan every single year while considering the historical rates of return and inflation. (Obviously, a lot has happened since then, but the notion is that including more years increases the accuracy of the results.) You can disregard the entire chart and concentrate on the success rate or the proportion of years in which you would not have gone broke. There's no assurance that you won't have a worse situation than the worst historical result within that time span, but it's the best we can do.

If you're not pleased with the outcome, change your savings rate, retirement costs, and/or retirement age to see whether you can come up with a strategy that works. Other options include investing a portion of your portfolio in an instant annuity, earning additional income from a new work or side hustle, or even renting out space in your apartment. (Right under the "other income" column, all of those may be reported as a pension.)

 

4) Take advantage of a tax-advantaged account.

Because there are so many tax-advantaged retirement plans to choose from, knowing how to prioritize them when preparing for retirement is crucial. To begin, double-check that you're receiving the complete match from your employer's retirement plan. It's difficult to beat free cash. If you meet up with the criteria, you should make an HSA your next priority because the contributions are tax-deductible and the funds may be utilized tax-free for eligible healthcare costs either now or in the future. If your workplace provides a 457 plan, you might want to take advantage of it because there are no penalties for taking money out early.

 

Then, for greater investment and payout flexibility, you can aim to max out your employer's pension plan (this includes any after-tax money that can be changed to Roth) and/or an Individual Retirement Account (IRA). Roth IRA contributions, for instance, can be accessed at any time without any tax or penalty. Although the gains may be subject to taxes and early withdrawal fines, the contributions are paid first. You can contribute to a conventional IRA and then later convert it to a Roth IRA if your earnings are too high to run a Roth IRA. If you already have a pre-tax IRA, be mindful of this possible hazard.

 

5) Maintain a well-diversified and low-cost investment portfolio. 

There is no such thing as a magic formula when it comes to investing. Simply diversify your portfolio based on your time period and risk tolerance, and most importantly cut down your costs as low as possible, as low charges have been shown to indicate greater results. A low-cost target-date portfolio is the simplest method to do so. You may transfer all of your funds into the portfolio with the year nearest to when you expect to retire because each fund is properly diversified to be a one-stop-shop. As you approach closer to your goal retirement date, it's going to automatically become more conservative, allowing you to set it and forget about it.

Do you require assistance? Because retirement planning may be difficult, you may wish to seek the advice of an independent and competent financial advisor who can guide you through each stage. In any event, neglecting to prepare might lead to failure, so before giving up or procrastinating, consider what it will feel like if you can get financially independent.

 

Image by Pexels from Pixabay

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