Financial Independence: Is your income futureproof?

time impacts income streams
Have you thought about how your income streams could be impacted by outside forces over time?

A lot has been said and written about the amount of money people need to squirrel away in order to be financially independent. At the end of the day what it boils down to is this: do you have enough to pay your bills if you were to suddenly be unable, or unwilling, to continue working to make a living? Would you be able to support a satisfactory (a highly subjective measure) standard of living?

This sounds like a pretty simple proposition. Tot up your costs, take a look at your alternative sources of income and conclude whether you are, or are not, financially independent.

The answer, however, is a lot more complicated and to a certain extent dependent on what you plan to do once financial independence is achieved. The more drastic the changes planned, the more certain you must be that all bases have been covered.

If you are aiming for financial independence as one of the milestones on a path to wealth and prosperity, then you need not worry too much about moving goalposts i.e. income and annual costs. If the numbers change then it is not a major crisis.

Try out the following decision tree to see what I mean.

 

If, on the other hand, attaining financial independence is seen as the last milestone prior to making big changes in your life, then the decision process will be a lot more complicated, with more checks and balances to ensure that you and your family are safe.

If you are someone like me you will end up with several spreadsheets and you will trawl through the internet looking for retirement calculators that will help you make sure that what you have is really enough. In other words that your financially independent status is future-proof.

The following decision tree will give you an idea of the different questions I ask myself  when assessing whether our finances can withstand the shocks and stresses of future events.

 

I guess that I am a worrier by nature. When I am making a decision I make sure I identify and plan for the worst case scenario prior to committing myself. This has stood me in good stead when running my business. Nobody has a crystal ball so while one must forge ahead with a positive Can Do attitude, it would be foolish not to take into account all the things that could go wrong and have in place a Plan B.

So when I sit down and assess my family’s financial position I consider various outside forces that could impact us in the years to come. These include issues such as:

  • Major political or financial turmoil which would impact the markets and could possibly decimate our investment portfolio for a lengthy period of time (think GREXIT or BREXIT)
  • New tax laws that would affect my in-hand income. To give you an example at the moment the tax rate on dividends and rental income is 15% in my locality. This is much lower than the rate paid by salaried workers, so I think that there is a high likelihood that a future cash-strapped government will increase it. If I base my financial independence workings on retaining 85% of my dividend and rental income and the tax rate is suddenly increased to 25% or higher, I would be up shit creek without a paddle!

Apart from outside forces I also consider possible changes in my family. I have three children, which is an expensive proposition. At the moment they are in school and we bear all their expenses. The hope is that in 10 years or so they will become more independent and will be able to pay their own way. However am I willing to bet on that? What if they find it impossible to get a job, or decide to embark on a career as eternal students? Will my husband and I be able to support them, or at the very least assist them? After all what is the point of financial independence if you are unable to help the people you love?

So all in all my take on financial independence is that it is not a fixed state of being. I consider it a journey, with several interesting twists and turns along the way. The important thing to keep in mind, however, is that with the right level of flexibility and ingenuity it is possible to overcome a great majority of obstacles. So while I advocate caution, once you believe that you have covered as many bases as possible, do not hesitate to take the leap.

Expect the best, plan for the worst, and prepare to be surprised 🙂

Author: Mrs Smelling Freedom

After selling my business my priority is consolidating my family's financial independence. I blog about Entrepreneurship, Financial Independence and living life to the full!

2 thoughts on “Financial Independence: Is your income futureproof?”

  1. most of the FI bloggers mostly ignore the possibility of changing laws. I share your worry about the possibility that governments can raise taxes on capital gains anytime. I think governments will always assume that capital gains are either extra income of average earning people or income of rich people so raising the tax on that significantly, I think is likely and can happen quickly.
    I also like the idea of being flexible and moving to another country if you need to/if you like to. We have 3 citizenships. Our kids 4. Laws changing in one country is a lot more likely than the same lawas changing (i.e. higher taxes on capital gains) in all the countries you can imagine living in at the same time.

    1. Hi Mr W 🙂 Thanks for stopping by! I could not agree more – one needs to be flexible. Moving country is a good way of tackling the problem, not only from the point of “tax regime shopping” but also from the perspective of cost of living. I have been following the Gocurrycracker blog and found it very inspiring. My one comment is that it gets a little more difficult to move as your kids get older. I would not feel comfortable yanking my teen out of school and changing country at a critical time in her schooling.
      American FI bloggers do not discuss changing tax domicile because it does not work in the same way for them as it does for Europeans. The American tax regime is not based on where you are domiciled. Americans have to pay their taxes to the IRS even if they have been living permanently outside the US for a long time. So moving to another country does not sort out their problem, as it does for us. One advantage of being on this side of the pond 😉

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