7 Tips on how to Achieve Financial Independence
Financial independence is something we are told to aspire to, but what does it really mean?
Financial independence is having enough capital to enjoy your life without the necessity of working. It gives you the freedom to choose how you would like to spend your time, whether it be travelling, on the golf course or continuing to work knowing that it is your choice.
Preparing for the future in this way also provides an additional layer of protection in the event of ill-health, care costs or whatever else is thrown in your direction.
Most of us agree that financial independence is something of importance but how do we actually achieve it?
SEVEN STRATEGIES TO ACHIEVE FINANCIAL INDEPENDENCE
1) How much will you need? Before you can put a plan in place, you need to establish the level of income you will need to stop working and the capital pool you will require to generate the income for the rest of your life.
2) Put a plan in place. As Antonie De Saint-Exupery once said, “a goal without a plan is just a wish”. Saving aimlessly without a strategy will fall short of helping you achieve where you want to get to. We would recommend meeting with a financial adviser to build and implement a long-term plan.
3) Challenge yourself on a realistic time frame to achieve your goals. Can you achieve this whilst your children are in full-time education? With proper planning, could you reach your goals earlier than initially thought?
Aim to reach financial independence 5 years earlier than your desired age. If you think 55 is realistic, aim for 50. This will allow some time for any changes to your overall circumstances / unforeseen circumstances.
4) Consider where you might live in the future. If you plan to retire in Spain, does it make sense to invest in the currency you will require? You should take into consideration the currency of your desired location, the cost of living and levels of inflation.
5) Start as early as possible. Regular investments and reinvesting income will give your portfolio the best chance of growth over the long-term. Making regular contributions will allow you to take advantage of compounding interest. As Albert Einstein said “compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it”.
6) Take appropriate risks. In the early years of your investments, you can afford to take more risk in the hope of generating a greater return, allowing you to take advantage of any volatility in the market. As you move closer to financial independence, your ability to withstand volatility in the portfolio reduces therefore you should look to reduce the risk.
7) Keep your plan under review. Life doesn’t always go the way we expect it to. Ongoing monitoring can ensure that the appropriate changes can be made to achieve your goals.
HOW MUCH WILL YOU NEED?
• As a rough rule of thumb, we would suggest 70% of your income in today’s terms. If your current income is £100,000, you would require £70,000p.a.
• You then need to consider inflation. If you plan to achieve financial independence in 15 years, you will need to increase your income by inflation over this period. Typically we would use a figure of 2% – 3%p.a. If your required income is £70,000p.a. it may be closer to c£94,211p.a. in 15 years’ time.
• To work out the capital pool required to provide this level of income, multiply your estimated annual income at financial independence (£94,211p.a.) by 25. You would therefore require a capital pool of £2,355,270 (£94,211 x 25) at a drawdown rate of 4%p.a.
The rate at which you drawdown from the capital pool will depend on a number of factors such as your other assets and income, specific objectives or risk tolerance to name a few but typically this would be around 4%p.a.
Working through the calculation and building a tax-efficient strategy can be overwhelming, particularly as an expat. You need a strategy that is flexible and one that can be accessed, regardless of your location.
How much income do I need in retirement?
Typically people require around 70% of their current annual income in retirement however this should be reviewed on a case by case, depending on your overall asset base and other income sources. We would recommend speaking with a financial adviser to review your personal circumstances
How do I know what timeframe is realistic to achieve financial independence?
Typically it is unlikely people achieve financial independence until their children reach tertiary education.
How should I invest to achieve financial independence?
You should invest in line with your risk tolerance. You can review this by completing a risk questionnaire which will generate a result based on your answers. You should look to diversify your investments across a range of geographical locations and asset classes.
What if my circumstances change?
No plans are set in stone. People’s circumstances are likely to change therefore ongoing monitoring and regular reviews are important to ensure that the plan can be adapted to suit your requirements.
Why do I need a financial adviser?
Putting a plan in place and continuing to monitor it requires time and an interest in stock markets. Whilst a lot of people have an interest, they do not typically have the time to keep on top of this. A financial adviser can build a holistic plan on your behalf, helping you achieve financial independence.