Young handsome business man celebrates freedom success laughing arms raised looking up to sky. … [+]
Now that we’ve celebrated our national Independence Day, it’s a good time to contemplate being able to celebrate your own Financial Independence Day. Financial independence is a state of being in which you don’t 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. Sound appealing? Here are some steps to make it happen:
1) Decide what your lifestyle would be like.
Do some daydreaming and think about what you would do if you didn’t have to wake up to an alarm clock each day and go to work. Where would you live? What would you do with your time? Before you go too crazy, just keep in mind that the more extravagant the lifestyle you envision, the harder it will be to make it happen. The more minimalist you are, the sooner your financial independence day can arrive.
2) Project what your expenses will be.
Your best bet is to start with your current spending by looking at the last 3-12 months of bank and credit card statements and recording your expenses on a worksheet like this. Then think about how those expenses may change with your new lifestyle. For example, you may 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 since nontaxable income like withdrawing tax-free Roth money or spending down principal from savings and investments won’t count against you in calculating the subsidies you can get.)
3) Calculate how much you need to save.
I like this calculator because it’s free and was designed to allow you to model scenarios in which you retire long before collecting any pension or Social Security income. Start by entering your expenses from above, 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 in financial independence. (To be safe, you might want to assume you live to 100.) Just don’t enter any commas as they mess up the calculation.
Then click the “other income/spending” tab to enter your projected Social Security benefits (you can estimate your projected benefits …….