Independence Day?

 It's July 4; 

Thankfully, for whatever reason, I'm not hearing any noise yet to suggest to me or my hounds that random explosions could be occurring all around us. It's hot, dry and I live in a suburban forest, which could easily combust with adequate provocation. 

Independence Day; what does that mean, beyond the strictly historic definition. 

Are we, am I, independent? If so, from what?  Seems to me, I (we) are far more dependent, or inter-dependent than we are independent. As a nation, we boast of our independence. We crave it, believe in it, define our national character by it. But, in order to have a future, we'll have to embrace the fact that our border has little to do with what we need to do to secure a future for ourselves. The underlying forces that define the conditions under which we live do not respect borders. We are both dependent and interdependent on how we embrace changes needed to preserve a world in which we can all live.

An underlying theme of this series of messages has been financial independence in retirement. How sad it would be, after all this time and effort, if I could not support myself and my wife in retirement,  after we launch our son into the world in a very few years hence. 

In our working/producing years, we pay our way mostly by earnings, measured by the size of our paychecks. One goal shared by most earners is to earn in excess of one's basic expenses, so as to accumulate assets, or wealth. If one earns enough and socks away enough earnings, then retirement has far fewer worries. Most of us will not earn enough to put enough away in cash-equivalents to secure a 30+ year retirement. The excess earnings must also earn. Wealth generation is about owning a growing pile of assets. Security in retirement is about the ability to collect cash from those assets, or turn them into cash at a rate that will last to our last breath or beyond. That is financial independence. 

One can define financial independence as the point where one no longer needs to generate earnings by one's labor; i.e. the ownership of adequate assets that their earnings covers one's expenses. Buried under that simple definition are alot of "if's". One is independent IF;

1) Assets are larger than one's current and future expenses

2) Expenses do not grow in excess of assets and/or income derived from them

3) Timeline to one's own demise is equal or shorter than planned

4) One does or doesn't need or desire that assets remain at the date of one's death. 

Couples need to take "last to die" into account. Some expenses are fixed, others are variable, many tend to increase, at least at the rate of inflation if not more. The ideal wealth management strategy is to own enough assets of a sort that generate passive income, that those assets grow in value in excess of one's living expenses and the rate of inflation, so that one isn't tasked with accurately estimating the timeline to death. There's always philanthropy as a means of dispensing with excess assets when they are no longer needed. 

One needs to turn assets into cash flow when no longer laboring to earn wages. The dominant paradigm is to "invest" in a broad spectrum of asset classes, aim for the highest possible value, then turn assets into cash towards the end of life. A different approach could be to acquire assets that generate cash, hopefully growing amounts of cash such that one doesn't need to divest of assets in order to cover expenses. Personally, I like this idea far better than simply piling up assets. I would prefer to own assets that generate a growing stream of income. That's just me. I can choose to take passive earnings as cash to pay expenses, re-invest in additional assets, give away to causes that are meaningful to me, support my heirs while I am still alive, spend a little "mad-money" now and again. I'm past the point in life where I need to accumulate more stuff; in fact I need to steadily off-load the excess stuff I already own that doesn't enhance my life now and into the future. 

I have a wife and one son. For my wife and I, "last to die" is meaningful. Almost certainly, she will outlast me. We have accumulated enough assets to sustain us if we behave reasonably. She is substantially protected by a permanent life insurance policy I purchased many years ago which will substantially recharge her assets on the date of my death. She has a similar policy, albeit somewhat smaller, that could do the same for me if my life extends past the end of hers. We don't have the goal to turn our son into a trust-fund baby. Still, at a point further into his life, I'd like to relieve him of the worry about adequate retirement assets. That'll be the subject of our estate plan, provided residual assets remain after we're both gone. There are others we could also include in that plan. We both have siblings who have had less financial success than us. We have nieces and nephews, grand-nieces and nephews, eventually may have grandchildren. There are institutions to which we owe some of our success in life. 

I may re-enter the workforce, provided I can find an acceptable means to do so. If not, we have entered the consumption phase of our adult lives and must make our retirement assets work for us. This puts more emphasis on the nature of those assets; I fundamentally don't like selling assets to pay expenses. That'll be the subject of my attention in retirement investing going forward. I guess I should pay some particular attention to how distributions from our retirement accounts are taxed to understand the difference between dividends/interest and sales of shares/capital gains.