Maintaining your financial independence

Achieving financial independence isn’t easy.  It’s a challenge to save enough to fund a long, comfortable retirement. Remaining financially independent over many years is also challenging, in different ways. As the saying goes, “What got you there may not keep you there.”  In this article we’ll talk about the strategies, mindset and habits that lead to success in staying financially independent.

We’re not in Kansas anymore…

Step one in maintaining financial independence to recognize that retirement is a major life transition. Successful professionals, executives and entrepreneurs have reached the point of financial independence for a reason: They have been disciplined savers and have kept a long-term focus on their investments. In retirement, it’s still about discipline and keeping the right focus. However, the skills you need and the strategies to employ are different.

Sticking with your financial plan

Just as a financial plan is your blueprint for achieving financial independence, it should also be the blueprint for keeping it. All the actions and habits that brought you to this point are still important to continue. Some of these include:

Stay disciplined

In the working years, you can force saving and spending discipline with “pay yourself first” strategies like automatic 401(k) contributions, monthly mortgage payments, and pension credits. In retirement, a different kind of discipline is needed: a spending plan that keeps your spending to a certain level. This keeps more money invested, which is akin to saving for the future.

Most people hate the “B Word” (budgeting), but that’s exactly the skill that is required. Managing expenses can be harder in retirement. Some are irregular, like taxes, medical bills, home and auto repairs. Some are harder to be disciplined with in your new life as a retiree: lifestyle expenses (entertainment, travel, new interests and hobbies), home improvements, the altruistic desire to help family, friends and charitable causes.

Staying disciplined also means reviewing your plan periodically to make sure it still applies to your situation. It also means not deviating from your plan out of fear when market conditions get scary.

Keep your assets organized

Know your balance sheet well- both the assets and any liabilities such as a mortgage. Always know where assets are held, how they are titled, and how investments are allocated.

Know your withdrawal rate

Your withdrawal rate is the percent of your liquid assets that you draw out to spend over a year’s time. A lower withdrawal rate allows you to sustain your withdrawals over many years. Even if market and economic conditions are challenging, success is more likely with a lower withdrawal rate.

Position your investments for the long-term and the short-term

Your investments have several very important jobs to do:

  1. They need to provide a dependable source of income
  2. They need to allow for that income to increase because of inflation’s effect on your spending needs, and
  3. They need to be able to continue providing that income for many years, to allow for your longevity.

The difference between these jobs is a matter of timing. If you are retired or soon will be, the income you need from your investments has a short-term component, and high-risk or volatile investments are not appropriate. Rather, low-volatility investments like money markets or high-grade bonds are much more suitable. For the longer-term, having some stock market investments can be appropriate. Even though they come with risk of going down in the short-term, they help keep up with inflation and provide growth.

A balanced portfolio of liquid stock and bond investments can be appropriate for both the long term and the short term, and so can do all three jobs well. Or, the short-term and long-term investments can be in two separate portfolios. Either way, the portion of stocks in your portfolio should be based on the timing of your income needs- and your tolerance for volatility.

Tax planning in retirement

Managing taxes is different in retirement than in the working years. When you are working, taxes are withheld from your paycheck. Tax planning is mostly a matter of indicating enough withholding on form W-4 to cover the tax bill for the year. Upon retirement, that paycheck and the withheld taxes goes away. You may have to make quarterly estimated tax payments to avoid underpayment penalties.

Managing taxes also includes a strategic element. In the early years of retirement, your taxable income may be quite low. Later, it may be higher due to things like IRA Required Minimum Distributions (RMDs) and Social Security. In the low-income years, some “Tax-Optimizing Distributions” may be beneficial. Charitably inclined retirees can also leverage their giving for maximum tax advantage.

Tying it all together

Maintaining your financial independence means tying all the areas of financial planning together. Getting help from an expert can make it a lot easier. A professional who can help you bring the many different areas of your finances into one cohesive plan will make the task much more do-able.

At Blankinship & Foster, we specialize in integrating your financial planning and investment planning. We help bring together all the decisions and actions into one action plan. To learn more about how we can we bring clarity, confidence, and direction to your finances, contact us.

About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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