Why planning ahead for financial independence is important

Having a plan to meet your financial goals is important, but also knowing how much you’ll need to have saved for when you hit your goal to be financially free and ‘retire’ is crucial in taking the right steps to get there.

We’ve all grown up with the understanding that we work until a certain age (generally to around 65 years old) and then we retire on the savings and the super we’ve worked had to accumulate.

But many of us want to fast track this process and hit financial independence much sooner, meaning we’re not tied to a job for income and get be financially independent and financially free at any age we choose.

So it’s important to be strategic and take action now in order to accelerate your savings, investments and assets to ensure they work as hard as possible so you’re able to hit your goal age and be financially independent.

Step 1: Calculating how much you need for financial independence

To take the first steps with calculating how much you’ll need, start with your current annual income and adjust it with expected financial changes to your current situation.

This includes removing mortgage costs (assuming a 30-year loan) and then thinking about how your lifestyle will expand with extra spending once you’re no longer working for income.

Think of these as extra travel and holiday costs, increased costs in health care and health insurance, more time for hobbies and discretionary spending, etc.

We’ll also add a very conservative estimate for the before-tax income by multiplying by a tax factor of 1.45. For example:

Example:

Example result: Your required income is $77,579

Step 2: Calculating your net worth requirements

To calculate the net worth required to generate the calculated income from step #1, you can use the following formula and a widely accepted 3% Safe Withdrawal Rate (SWR).

Example:

Example result: So, you would need a net worth of $2,585,966 to generate your desired income.

Don’t be overwhelmed with the numbers

Seeing a big figure in the example for target net worth above in step #2 above may seem overwhelming and impossible to achieve. However, breaking it down into smaller milestones can make it much easier to work towards and help with deciding on the right strategy.

One milestone could be to focus on paying your home off sooner, which gives more cash flow to invest, saves total interest paid, and provides security. Another could be removing large portions of personal debt or selling assets that have ongoing costs that no longer serve you.

Calculate your needs for financial independence in just a few clicks with our Australia Wealth custom build financial independence calculator.

https://australiawealth.com.au/guide/financial-independence-calculator

What traps to avoid when planning for financial independence

Getting stuck in traps is really easy when you’re pushing hard to hit your financial independence goals. So a few tricks that can help you avoid these traps include:

• Don’t “Set and forget” your money, debts and investments. Instead try and review how your money is performing quarterly and annually, ensuring your assets are on track and be sure to adjust if your plans change. or your financial institution is not performing to market conditions.
  
• Not investing in yourself and continuing to upskill in all areas of your life is something a lot of people miss when it comes to accelerating your financial freedom. This includes areas like upskilling your career to increase your salary and income, learning ways to build additional income sources like property investing, a side business, and investing in high performing stocks and ETF’s and also managing your wellbeing, etc. All of these areas can generate additional income, skills and knowledge that can pay off in the future come financial independence.
  
• Finally, avoid being rushed into any decision you don’t understand especially when it comes to your finances. In the same token, it’s also important to make sure you’re taking action to progress. Decision fatigue can also hinder your financial growth.

Related: How to start on the right path to retirement

Next steps to success

Deciding on your strategy to reach your retirement goals is where most get stuck and sometimes delay making a start. Try talking with a financial advisor to get advice and a helping hand, but also invest time in do your own research so you can truly understand the options that are available.

If you have any questions, don’t hesitate to comment below or reach out to us on our Facebook page.