Rewiring does require some specific financial planning. Here are some steps to consider:
Evaluate Options for Passive Income
Recognize that cutting expenses is limited, but your earning potential is infinite. They’re both important considerations, but in order to rewire and focus on longevity, you should focus more on your topline. This requires saving money, investing, and planning for passive income.
- A very general rule of thumb that we plan for is a 4% yield from your investments – not to be confused with a rate of return. These are your stock dividends, bond interest, rental income, etc. This is not the value of your stocks, bonds, or real estate. Something else worth noting is that all these yields will differ based on the investment, but we use this as a general rule of thumb. If you plan to rewire, you likely need a sizable amount in savings that will yield income. To take this concept a step further, we frequently advise growing income. That is, using stocks, ETFs, and mutual funds that have a track record of raising income levels year over year. This combats inflation and market declines.
- Diversify your income streams. We won’t explore which types of income are better (dividends, rental income, etc) for the simple reason that one isn’t better than the other. There are pros and cons of each and that’s a separate blog post. What’s important is that you don’t rely on just one. We’ll simply say start with building income from liquid assets, then, if comfortable and appropriate, explore real estate or other non-liquid forms of wealth creation. Most traditional investments that you can think of (i.e. stock, ETFs, mutual funds) can be traded/settled within two days and wired to you the following. Build this form of wealth first and avoid being in a position where you must sell a large illiquid asset for cheap to free up capital.
Reduce Your Expenses:
“Budget” has become a dirty word and seeking ways to lower your family’s overhead without affecting your existing lifestyle is a topic worth exploring. Props to Ashby Daniels and the Retirement Field Guide for these creative solutions:
- Cutting cable/phone and just paying wi-fi. If you just carry Netflix, Prime, and a live streaming service (i.e. Hulu or Playstation Vue), you’ll likely save $40-50/month.
- Shop out your property and casualty insurance rates (especially auto and homeowners). Know your coverages and what you need, but this is a pretty commoditized business. There are plenty of services and agents ready to offer you a lower rate for the same coverage.
- Put more thought into where you do your grocery shopping. The time savings with grocery delivery is pretty remarkable. If you’re retiring or rewiring, you likely have more time. Places like Trader Joes offer comparable or better quality at lower prices.
- Consider energy efficiency. Technology like Nest for heating/cooling control creates similar savings as you keep your home at the desired climate only while at home. There are similar types of technology to explore that require an upfront investment like energy efficient water heaters.
You need runway money.
If you’re rewiring, you need a fund that allows you two freedoms:
- When something significant comes up (i.e. new roof and new car in the same month) you’re not forced to sell assets to cover. This amount is case by case, should be planned for, and will likely reside in some sort of low yield, low risk, short term investment account.
- Let’s assume that you’re not done working. Remember, rewiring simply implies you’re pivoting towards something that’s more in line with your core values or better fits your desired lifestyle. You have investment income from your prior life and the accrued savings. That said, there’s likely a lull in income or other costs. Maybe your new career requires further education (which costs money). Maybe you’re interested in starting a business (usually this costs money).; Maybe you have an opportunity to buy-in to a company where you can consult within the industry you’ve been for years. All of this encourages a runway so that you’re living from the income of your accrued wealth and not selling to live.
Get tax smart
- Just like you diversify your assets and income streams, you’ll want to diversify your taxes when planning for rewirement. Like all scenarios, there isn’t a golden rule, but more importantly, required awareness. Contributing pre-tax dollars to a 401k and/or a pension have been the traditional wealth creation mechanisms for American retirement. This isn’t wrong – this method of savings absolutely has its benefits. Just be cognizant of the age restrictions for accessing penalty-free dollars and the taxability at withdrawal. If rewirement takes places for you at an age before those funds are accessible penalty-free, then considering other options in conjunction might especially be for you. There are several options for tax-deferred savings vehicles that offer tax-free income when used correctly. The mega-back door Roth seems to be an underutilized option within the industry and employers don’t frequently market the program to their employees.
We always like to remind people that the concept of rewirement lives on a spectrum and doesn’t have to be a drastic measure. This could mean teaching new talent within your field of expertise part-time. Or, on the other end of the spectrum, rewiring might be a total transformation that requires new education and training. All rewirement options are unique, exciting and will require financial planning. Schedule some time with us to learn more!
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