Seven steps to a financial independence day
On July 4, 1776, our forefathers declared that we should be an independent nation. Today, many of us would like to declare our financial independence. As financial conditions continue to change throughout the world, it has become more challenging to attain this goal. While there are no guaranteed methods to become financially independent, here are seven steps to help increase the probability of reaching this goal.
1) During prime earning years, the single most important step that can be taken toward future financial independence is to save at least 10 percent of after tax earnings. If your company 401(k) plan matches your contributions, put at least the amount that is matched into your 401(k) plan each year. This assures an immediate doubling of the amount saved.
Any additional available savings should be put into an “emergency fund.” An emergency fund is an account that can cover at least six months of current expenses. This fund is only to be used for true emergencies such a job loss or a short term disability. Emergency fund investments should be stable in value and highly liquid.
2) When the emergency fund is in place, additional savings, up to the maximum amounts allowed by law, should be put into a tax deferred account such as a 401(k), 403(b), SEP IRA, etc.. This approach provides for a reduction in current taxes and allows the investments in these accounts to grow tax free until they are withdrawn.
3) When buying a house, use the shortest mortgage payoff period that your cash flow will allow. A 15 year mortgage saves thousands of dollars in interest and provides for a much faster pay-down of your principal. If you move or decide to upgrade your home, reinvest ALL of the equity that you receive from selling your previous house into the new house. With this approach, your house will likely be mortgage free by retirement. Remember, a house is NOT a piggy bank (at least at this point).
4) In determining when to retire, financial independence requires that income be maintained for as long as possible. If your work is enjoyable, keep doing it past normal retirement age, while taking more vacations and working less hours. If you dislike your work, explore options for creating a “retirement career.” If you enjoy making furniture, make high quality furniture and sell it on ebay. You will be doing what you love, receiving income and working as much (or as little) as you wish.
5) Upon reaching the age to begin receiving Social Security, carefully examine when you should start receiving these benefits. Just because benefits are available does not mean that they should be taken. A financial advisor who understands the vagaries of Social Security can help analyze your situation to decide the best time to begin taking Social Security benefits.
6) If the previous steps are followed, there should be no home mortgage remaining at retirement age. At this point in life, many people find that they prefer to live in a smaller house. Buying a less expensive house, frees up funds that can help insure financial independence throughout your retirement years.
7) In later life, if funds from savings, retirement accounts and Social Security are not providing adequate income for financial independence, it is time for the house to become a “piggy bank.” Your house can be sold and the funds received can be used for a retirement home or for nursing home care. If you wish to remain in your house, a reverse mortgage will provide funds, based on the value of your home. Reverse mortgages can be obtained through a commercial lender or even through your children. By either selling the house or using a reverse mortgage, the home’s value can often replace the need for long term care insurance, saving thousands of dollars of annual premiums.
While there are many other methods to help insure financial independence, following these straightforward steps throughout your lifetime will dramatically increase the odds of living a lifetime of financial independence. On July 4th, let’s celebrate both our nation’s independence and our journey toward financial independence.
Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor, providing fee-only financial planning, asset management and retirement planning services. He is the author of “Financial Abundance Guide,” available free at www.finabguide.com . He can be reached by email at email@example.com or at 303-554-0309.