Very few people talk about this phase of your financial life. There is plenty written on how to pay off debt, making sure you max out retirement accounts, covering kids college and saving up reserves. Therefore, let’s talk about it! You have achieved Financial Independence, now what?
This is the really fun stage of your financial life. First, let’s set a baseline on what your financial considerations should be to protect your Financial Independence for the long run. You should take a fresh look at where you stand. Calculate your net worth and break it down by category so you know what assets you own today. Here is a list of possible categories you may have:
- Personal residence
- Retirement accounts
- Rental real estate
- Book value of business 1
- Book value of business 2
- 529 accounts
For those categories that have various assets within them you may want to have a detailed list to support that category (e.g., retirement accounts, rental real estate, 529 accounts, etc). This will help you keep an eye on what your risk is for all assets. At this stage, you will want to assess your risk being taken by category and overall. Take a hard look at the accounts you will be taking money from in the next several years and determine the likelihood that money will be there for your use the way you intend.
Some possible considerations: If it’s a savings account that is producing interest, how likely do you think that’ll continue? If it’s stocks or mutual funds, how confident are you about the dividends? If it’s a business, how likely is the cash flow? For all categories, what will be your post-tax cash flow quarterly and annually?
Additionally, you may want to consider what financial obstacles you may face and how you’re protecting yourself from them. How many months/years of cash do you have liquid and what types of expenses could they cover for you is a good way to look at it. Take a close look at what types of insurance you have and perhaps reach out to your insurance adviser to have a risk assessment done. When you are Financially Independent you may want to talk with your adviser about health insurance (or good cost sharing plan), umbrella insurance, term life insurance, homeowner insurance on your personal residence, insurance on your rentals that covers rental losses if damaged, flood insurance on your home and/or rentals (ask about private coverage), E&O insurance if needed for your businesses, and anything else your trusted adviser recommends given your situation. When deciding on insurance, look close at the deductible and coverage within the plans to make sure you’re not over, or under, insured. At this stage you can likely self insure for a lot of situations. I prefer to look at each potential risk and see how often I think they could occur in years then times that quantity by the annual premium. That cost, while considering the deductible, helps formulate decisions on what is needed. Some may be so cheap that you decide the security is worth the cost. For example, term life insurance perhaps.
Next, reset your budget. If needed, go back and re-read the budgeting series posts. Then you can project out your cash flow. I would recommend going way into the future so you have a good handle on where find are coming from and when. Don’t forget any estimated tax payments and nonrecurring expenses (e.g., property taxes, car licensing, annual insurance payments, etc.). This will be your tool to reassess each month how real life is comparing to your projections.
We have covered several tools that should now give you the confidence that your Financial Independence will remain in force, welcome to the next era of your financial life!