Financial Independence by 50 (or 40) for Regular People

What does Financial Independence mean to you? “Financial Independence” is what we used to call “Retirement.” So if you like that word better, so be it. What does it mean to you? For older generations, they may have looked forward to stopping work and relaxing – and seeing that we had a larger blue collar workforce in the 1950s and 1960s, and that that type of work is much more strenuous, I can understand that.

However for many younger people, financial independence often means one simple word – FREEDOM.

Interestingly, I conduct “Values Conversations” with new clients and this word “freedom” seems to pop up all the time. The problem is, many younger people have made lifestyle decisions to make sure this happens later rather than sooner. So what steps can a regular person take to help ensure that they can get into position to be financial free by age 50 or 40, and what are the financial strategies and tax strategies available to help make this happen?

Some Financial Strategies

1. Acquire assets that provide growth and income – the obvious choice here is real estate. And why not? People always need a place to live. And real estate is accessible to the average person (with good credit and financing!). But why not also a mini

Photo Courtesy of 401(k) 2012

business? Or a regular  business? For example a hot dog or ice cream stand – could present a seasonal, part time opportunity or a full time one. And if you do ok, it might be a liquid (ie sale-able asset) later on.

By developing an asset like this, you can provide income now AND later. Some of these types of assets can also be run while working your full time job. If you buy investment property at age 25 (live at home with mom and collect more rent!) and your goal age is 40 or 50, that gives you 15-25 years of compounding wealth, paying off the loan and building net worth and income for your financial independence.

2. Compound financial assets that provide growing streams of income – this idea, like idea number 1, both may require some decision-making prowess on buying but nonetheless, there are some financial assets that have shown a long history of compounding. Some dividend paying stocks or real estate investment trusts, have shown over a long period of time (hmmm say 20 years?) to compound the initial income paid in dividends tremendously. For example, saving roughly 260 dollars per month will compound to ~$200,000 over 20 years at 10% return. And what if that asset kicked off a 5% annual dividend? That would be $10,000/annual income in 20 years. And this would compound unfettered in an IRA/Roth IRA or 401k (see below for more).

3. Become a free-lance consultant, or develop a skill that can be freelanced and develop a consultancy practice on the side. Yes working in some capacity can be a part of a financial independence plan, especially if you set the hours and make the rules. If you are a regular guy (or gal, and meaning no significant inheritance coming, no huge IPO of your company stock, etc) then having some active income will be not only good for your mind, as you’ll be challenging and stimulating your intellect, but it will take the strain off having your financial assets provide all your income. And hey if it gets you out of your boring and restrictive job sooner, why not?

Tax Strategies

Younger people may not be aware that you can access retirement funds before age 59 1/2 without penalty. And many people may not be aware of the tax advantages of running their own business and of owning real estate. Let’s outline these 3 topics.

1. Retirement account access – two points to know here, and you can follow up with an advisor (like me!) by phone to go more in depth. First point – you can access your retirement account at work without penalty as early as age 55 if certain rules are followed. Second, following provisions of 72(t) mean you can withdraw at a much younger age.

Photo Courtesy of 401(k) 2012be taken much earlier than 59 1/2 if the 72(t) distribution rules are followed.


2. People who work for themselves do indeed have some extra taxes to pay but there are also many legitimate tax deductions that make it quite appealing. The ability to fund a retirement plan and get tax breaks, along with home office deductions (if you legitimately work from home), and other expense deductions can make it a tax-advantaged way to have a career.

3. The tax advantages of real estate are numerous. Not only can you deduct maintenance expenses for the property against the rental income (you can write off the money you spend to keep your investment looking nice!), but the passive income from rents is not subject to FICA tax like your salary at work is (let’s not get into the Obamacare 3.8% surtax), so by building passive real estate income to replace work income, you are potentially saving the 15.3% of taxes that get slapped on earned income. Also and this is a big kicker for down the road, the appreciation of the value of the real estate isn’t taxed on sale and if you sell and buy another investment property (say you upgrade), and follow the exchange rules of section 1031, you could sell with no tax if you buy another property within a certain time frame.

Photo Courtesy of 401(k) 2012

All in all, by acquiring assets with compounding income growth, and restructuring your career to allow freelancing and flexibility, you could create a tremendous tax-advantaged financial, tax and life plan to be on your way to financial independence at an early age. If you’re older and not yet financially independent, why not start now? You might say “if Istart at 50 I’ll be 70 before I hit the goal.” Well let’s agree on one thing, some day, if you’re lucky, you’ll be 70 anyway right? Why not 70 with goals achieved as  compared to 70 with no goals?

If you want to get started on your financial independence plan, call me. I run my own business, own my home (with plans to buy more real estate in the next 3 years), own investments, and have other side business projects. We can talk together about developing your 40 or 50 plan. Office: 781.393.0021. Or use my contact form HERE. I can meet you in the Boston area, the San Francisco Bay area or South Florida. West/Central new England is covered by Alfred Angelici our awesome new Managing Director.

Thanks for reading!