5 steps to planning your financial independence day

Now that we’ve celebrated our National Independence Day, it’s time to think about being able to celebrate your financial independence day. Financial independence is a state where you do not have to work to pay your living expenses. You may decide to retire or you may choose to work because you want to, not because you have to. Attractive sound? Here are some steps to achieve this:

1) Decide what your lifestyle will be.

Daydream and think about what you would do if you didn’t have to wake up to the alarm every day and go to work. Where will you live? What will you do with your time? Before you go crazy, just keep in mind that the more extravagant the lifestyle you envision, the harder it will be to achieve. the most minimum You, the faster Financial Independence Day comes.

2) Determine your expenses.

Your best bet is to start with your current spending by looking at the last 3 to 12 months of bank and credit card statements and recording your expenditures on a worksheet like This is amazing. Then think about how those expenses might change with your new lifestyle. For example, you might spend less on housing if you plan to downsize or move to an area with a lower cost of living. On the other hand, you may spend more on travel, hobbies, and health care. (you can use This calculator To estimate your health insurance costs through the Affordable Care Act, but be sure to enter only taxable income because non-taxable income such as withdrawing tax-deductible Roth money or spending capital from savings and investments will not count against you in calculating the benefits you can get. )

3) Calculate how much you need to save.

I like This calculator Because it’s free and it’s designed to allow you to model the scenarios in which you retire long before you collect any pension or Social Security income. Start by entering your expenses from the top, the total value of your portfolio (retirement accounts plus any other savings and investments you plan to fund your retirement), and the number of years you may live financially independent. (To be safe, you may want to assume you live to be 100 years old.) Just don’t enter any commas because it spoils the calculation.

Then click on the Other Income/Expenditure tab to enter your expected Social Security benefits (you can estimate the expected benefits by entering your planned retirement age in Social Security website) and any pension or other income (such as from a job, business, or rental property) that you expect. If you’re not ready to become financially independent now, click the Not Retired? tab and enter your planned retirement date and the amount you plan to save annually between now and then. (Don’t forget to include any contributions from your employer in your retirement plan.) Reducing your expenses can increase your savings and reduce your expenses in retirement, so consider more memorization methods.

Under the Your Portfolio tab, enter a rough estimate of the fees you pay and how your investments are divided. (You can also use this to see how different investment mixes affect your retirement.) If you anticipate any major one-time changes in your portfolio such as adding proceeds from selling your home, getting a pension, withdrawing a lump sum due to buying real estate or paying college expenses, you can enter them under Portfolio changes.

Finally, click the Submit button on any tab to see what results would have been based on historical rates of return and inflation if you had followed your plan every year starting in 1871. (Of course, a lot has changed since then, but the idea is that the more The more years you include, the more accurate the results are likely to be.) You can ignore the graph with all the lines and focus on the success rate or the percentage of years you haven’t run out of money. There is no guarantee that you will experience nothing worse than the worst historical outcome during that time period, but this is the best we have.

If you don’t like the results, see if you can make a plan that works by changing your savings rate, retirement expenses, and/or retirement age. Other possible strategies include using a portion of your portfolio to buy instant pensionAnd Take out a reverse mortgageGet additional income from a job, business, or even renting a part of your home. (All of these can be entered as a pension under the Other Income tab.)

4) Use of premium tax accounts.

There are plenty of tax-advantaged retirement plans available, so the trick is knowing how to prioritize them when saving for retirement. Start by making sure you get the full match in your employer’s retirement plan. It’s hard to beat the free money. If you qualify to contribute to an HSA, you may want to make this next priority because contributions are pre-tax and tax-deductible money can be used for eligible health care expenses now or in the future. If your employer offers you a 457 plan, it could be next since there is no penalty for early withdrawals.

Then, you can try to maximize your employer’s retirement plan (including any after-tax dollars that can be transferred to a Roth) and/or an IRA for more flexibility in investing and withdrawing. In particular, contributions to a Roth IRA can be taxed and tax-free at any time. Profits are subject to potential taxes and early withdrawal penalties, but contributions come first. If your income is too high to contribute to a Roth IRA, you can contribute to a traditional IRA and then transfer it to a Roth. Just be aware This potential predicament If you have a pre-tax IRA.

5) Keep your investments reasonably diversified and low in cost.

There is no magic formula for investing. Just be reasonably varied based on your time frame and risk tolerance and keep your costs to a minimum because the lower fees were installed predictor of superior performance. The easiest way to do this is with a low-cost target date fund. Since each fund is fully diversified to be a one stop shop, you can put all of your money into the fund with the year closest to when you plan to retire. It will then automatically become more conservative as you get closer to your target retirement date so you can set it and forget it.

need help? Retirement planning can be complicated, so you may want to consult a An impartial and qualified financial planner To guide you through the details of each step. An employer may even offer access to one for free as part of a workplace financial wellness program. In any case, failing to plan could mean planning for failure before giving up or procrastinating, ask yourself what you would do if you could declare your financial independence and never have to work again…

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