What it Will Take for You to be Financially Independent?

It all comes down to spending. Your ability to be financially independent is primarily based on your overhead.

On one end of the spectrum, you could live in a trailer park, paying cash for your trailer and live on groceries and minimum utility costs.

On the other hand, some people buy their dream house in their mid 50’s with a big 30-year mortgage, high property taxes and utilities.

Chances are your plans are somewhere in between those extremes.

When planning for your financial independence (I hate the word “retirement”) you would be wise to take out some paper and make a list of your discretionary and non-discretionary spending.   I have a spreadsheet below that you can use.

Non-discretionary bills are those that are built in. Think mortgage, car payment, insurance and utilities. Those are the easy ones to compute. The non-discretionary (think “I have a choice”)  expenses are the ones that are hard to figure out and make planning more difficult.

Making planning a little more challenging is computing how expenses may change in your future. For example, how much might you want to spend in travel and dining out. What expenses will go down? Gas and business clothes costs may drop significantly if you won’t be commuting or working anymore.

These non-discretionary monthly expenses are part of your monthly overhead, but you have a choice in what you are willing to spend in these areas and they will GREATLY IMPACT your ability to be financially independent.

Basic Living Expenses:

Groceries, housing, transportation are the most basic expenses.

Debt: Car loans, mortgage debt and possibly credit card debt may make up part of your future bills. Imagine how much sooner you can be financially independent if these expenses were all zero.

Taxes: Even as a retiree, you will still have tax payments. Where you live matters. For example, some states tax your pensions and IRA distributions. Some state do not have have a state income tax. Property taxes very a ton from state to state. Illinois is the second highest property tax state with many people paying 2-3% of their home value while in a state like Florida it’s closer to 1%.

Insurance/Healthcare: It’s dangerous to use averages when it comes to healthcare costs. How healthy are you compared to the average person your age? Are your habits (smoking, drinking, overweight) likely to catch up to you? Medicare premiums are rising rapidly and it may get worse as there is not enough premium money going into the system to pay all the claims going forward.

Discretionary Expenses:

Discretionary expenses are optional.

Any expense that’s not a bill would be discretionary. Dining out, anything you shop for or buy. Take a look at your credit or debit card(s) to get a firm idea of how much money you are spending (or blowing) every month.

Understanding or managing these expenses is probably the number one key to having peace of mind and being financially independence.

Travel: Some retirees plan to spend time traveling. This can mean visiting family, trekking across the country or taking trips overseas.

Hobbies: If you plan on spending money on hobbies, it’s important to include this too.

Luxuries: Joining a country club, a second home or some other large ticket items should be included too.

Children and Grandchildren: Perhaps you plan to spend more on your children or grandchildren through travel costs for frequent visits, more gifts or by passing on a legacy.

In each discretionary spending case, you need to think about how much growth, income or cash flow these goals will require from your investments and accounts.

So how can you begin planning now? Review your current savings and assets. And don’t forget to review your overall asset allocation. Does your current allocation account for an appropriate amount of growth to support your spending needs and goals?

Planning for a successful retirement means taking a critical look at how discretionary and non-discretionary needs may change over time. Your spending needs may change when you retire, over time due to the effect of inflation, or due to unexpected circumstances.  Appropriately planning for what you can predict, and building in a safety net for the unpredictable, may help you on your path to a successful, enjoyable retirement.

What happens if you fall short of your target before you retire? You may not know whether your saving or investing efforts were adequate to provide enough for both types of spending. To prevent this from happening, your retirement portfolio should account for all the growth, income and cash flow you may need as a retiree in order to achieve the lifestyle you envision.

I’d be happy help you take a look at your progress toward being financially independent. The chart of spending categories should help you determine your current and future income needs. My email is [email protected] or call me at 630-942-9007.