Celebrating the Work Optional Lifestyle
Imagine being an actor about to act out the next scene in your life—part II if you will. The clapper loader is aboutto crack the clapperboard, and the director says, “Part II, Live Life on Your Own Terms. Scene 1” and “Action!” What does it look like for you? Or perhaps, you are in the middle of Part II and want to continue to live the dream.
There are two distinct phases for those striving for the work optional lifestyle and ultimately financial independence. Part I is called the accumulation stage. This is when you accumulate assets to build your retirement nest egg. PartI I is called the distribution stage. This is where you monetize your nest egg for income in retirement. I describe it as the “Income to Wealth to Income Process.” Earlier in life you accumulate income to generate wealth that will then produce income for the rest of your life.
Part II, or the distribution phase, can be very scary. Shifting from employment income—which comes in regularly—to investment income is one of the scariest things you can do. However, it can be liberating and fun. Preparing for a work optional lifestyle or financial independence requires thoughtful planning and strategic solutions. You should explore all income resources, planning, and strategies for this phase.
For example, you will want to think about mitigating taxes. The fewer taxes you pay translates to more of your hard-earned money staying in your hands. Strategies to help mitigate taxes may include Roth conversions, tax deferred accounts or annuities, or even geoarbitrage among many.
Other resources or considerations for part II include Social Security or some form of government pension. While the benefit amounts from these sources may not go a long way in the Bay Area, they can play a key role to help you live financially free or make work optional. You may want to ask the following questions: When is it optimal to start your Social Security? Are you entitled to Social Security if you leave the country? Thoughtful planning about your overall income plan and how your assets can integrate with your Social Security, a State Teacher's Retirement System (STRS) or Public Employee’s Retirement System (PERS) can make a significant difference in the amount of assets you’ll need to support the life you want to live.
It’s also important to consider other sources of income such as rental income or private pension. These should be built into your plan in a tax efficient way. All sources of income need to be carefully blended to help you afford the lifestyle you desire for the rest of your life as well as to support a surviving spouse or partner to live comfortably when planned properly. The coordination of such income sources is key to ensure that work optional and financial independence is part of your family long after you are gone.
Now, how do you take the assets you have accumulated in your nest egg and prepare for the distribution stage? The distribution stage of your assets is an entirely different ball game from the accumulation stage and comes with its own set of rules. There is no room for misstep nor an abundance of time to recover from one. Critical planning and strategic thinking should be devoted to designing the right mix of assets needed to help protect your financial independence.
Considerations that need to go into the mix include your personal income spending plan, age, risk tolerance, how much you have accumulated, inflation, health care costs, disruptions to the economy, long term illness, etc. You need to map out and plan for these items if your goal is to enter into and thrive in the work optional stage of life.
Stepping into the next act in life can be wild and fun when you are prepared, though there is no substitute for careful and thoughtful preparation. And what of those that are already enjoying their next act in life? Your dreams can be realized by continuing to monitor your progress and making sure you are on track to stay the course.
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