CFP ®, AAMS ®, RICP ® President

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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 . Part II 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 a benefit relating to a prior spouse ?

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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