Pieces of our Financial Freedom Plan Falling Into Place
One thing I have been pretty vague so far is how we are going to fund our financial freedom. Just because we have a goal to reach a net worth of $2million doesn't automatically mean we will be anywhere close to our goal of financial freedom. We have to make sure we have the proper mix of assets to produce a sustainable income to maintain a reasonable standard of living so we can call ourselves financially free.
Things are beginning to take a little more shape in how we might sustain ourselves post my career. Since our goal to is to be able to retire or become financially free in roughly 10 years from now (at the age of 45) we will need a plan to sustain ourselves for 20+ years (until retirement age of 65) and then hopefully for another 30-40+ years in typical retirement fashion ;-).
So here are the major components I currently see to maintain a sustainable income as part of our financial freedom strategy :
- Rentals - We've just purchased our 3rd rental property. These properties are going to be a critical part of providing the cash flow needed to sustain ourselves. If we pay off the remaining mortgages and other expenses are subtracted they could be providing us with nearly $30k in rental income per year (in today's dollars). That will likely be a significant part of the cash flow we will need to cover our ongoing expenses. [Projected Annual Income: $20,000 - $30,000]
- Stock Dividends - Today we roughly get $2,800 in stock dividends per year. We have placed a lot of focus on growing these dividends year over year, so far without too much success. We will want to continue to grow these assets as much as possible in the next few years and then begin to taper off our investments a bit as we focus on others.[Projected Annual Income: $5,000 - $6,000]
- Interest - Mainly through bonds, this is an asset we have largely ignored as I've shyed away from bond funds and treasuries. However I suspect this will be an asset type that we will invest in significantly over the coming years. We'll want to get at a lot more income per year than we do today from interest likely in individual corporate bonds and muni bonds. Our primary bond investments to date have been in Markel corporate debt with our current total annual interest earnings at about $1,000 per year. [Projected Annual Income: $10,000 - $20,000+]
- Side Income: One might argue your not financially free if your still working. However I don't want to wait till we have enough assets not to work at all before I leave my career. I'm planning for part time income that my wife and I will make once we are financially free and I end my career job. It won't be a question of survival forcing us to work, rather than pursing what we are interested in or find rewarding driving our side income. Could be as simple as focusing on growing web income or enjoyable as working on a golf course.[Projected Annual Income: $5,000 - $10,000+]
- Retirement Assets: Ideally we wouldn't touch any of these assets until we hit retirement age (65+). However we have a number of ways to extract cash flow from our retirement accounts before 65 if we need to. If we needed to draw on these accounts at this point I would assume we could only draw down less than 3% per year to sustain ourselves long term without consuming our retirement assets. We could potentially drawn down these assets via a couple techniques including withdrwaing Roth IRA contributions before 65, withdrawing post-tax 401k contributions, and substantially equal annual payments from our 401k account.[Projected Annual Income: $0-$10,000]
Based on this rough assessment I would project our annual income at this point in the range of $40,000 - $76,000 assuming we continue to grow our net worth inline with our $2 million net worth goal and continue to allocate a sizable portion of that growth to bonds, stocks, retirement accounts, and mortgage debt paydown on the rentals. There is a lot of assumptions built into this so its just a stake in the ground at this point. I'll need to fine tune this projection and get more specifics nailed down over time.
The good news is this rough assessment of our annual income levels once we are financial free is inline with our current cash flow requirements. We have a typical run rate of about $5,000/mo of expenses. Obviously these expenses will change over time and once we are financially free (reduction in job related expense, and possible increases in recreational expenses, etc). The biggest unknown right now to me is going to be health insurance/health care costs. I do not yet have a good sense of how we are going to handle these expenses and keep costs down to a reasonable level.
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