The Road to Financial Independence: What Could Go Wrong?

By Tim Wrobel, based on original content by Sue Stevens.

The word “independence” is defined as the freedom from the control, influence, support, aid, or the like, of others. If you think about that for a moment – it sounds like a pretty great destination. So naturally, finding the road that leads you THERE would be worth following. However, like most roads (at least in the Chicagoland area), they fall in disrepair, are littered with detours, tolls, closures, accidents, and plenty of potholes.

When thinking about that magical road to financial independence then – much like roads in Chicago – consider planning for those detours, closures or whatever else could possibly go wrong. Let’s jump in!

---

So congratulations – you saved a handsome pile of money. You’ve done everything right. You’re home free! All of your aspirations are on the horizon in front of you. Wait – you see some flashing lights and orange cones in the road ahead. Maybe this is a major detour – maybe it’s just going to slow you down – or maybe it’s a strip search and you’re not wearing clean underwear like your mother always warned you about. Brace for it.

Market Instability and Inflation Changes
First things first, let’s talk about market instability and inflation changes. Yawn, I know, but it’s important stuff. Investing is a risk and can be a bit like gambling, so you better make sure you have a plan in place to deal with changes in portfolio returns or inflation over the long haul. Stress-testing your plan and having a solid investment policy statement can help you chart the course in a timely and pragmatic way. Otherwise, you might end up broke and living off ramen noodles for the rest of your life.

Changes in Tax Policy and Government Regulations
If could’ves and should’ves were pots and pans…there’d be a lot of dishes to do. It would impossible to anticipate the changes in tax policies and regulations in any given year so don’t try! As general guidance, focus on what you can control, like your asset allocation and spending habits. And always keep an eye on your retirement projections to avoid any potential problems. Create a new habit to revisit your retirement projections and adjust as you go and as you need to.

Unable to Work
Impossible to anticipate or see them coming – accidents and health problems can throw a wrench in your financial independence plans. Social Security might provide some funds for permanent disability, but you need to understand the rules for early access in retirement plans.

Rising Health Care Costs
And don’t forget about those rising health care costs! Be sure to plan for higher expenses and consider insurance options like long-term care or supplemental Medicare policies. While Social Security provides funds for permanent disability, it’s important to understand the rules in retirement plans that allow early access for disability.

Longevity Risks
“Live long and prosper” – what a concept! Another more common concern to consider on your road to financial independence is longevity risk. People are living longer. It’s hard to predict life expectancy, but by looking at your family history, you can get some clues in order take steps to ensure lifetime income streams through protections such as annuities or cash reserves. Because nobody wants to end up broke, alone, and living with 12 cats in their golden years.

Dementia
Oh, the joys of worrying about losing your marbles! No disrespect intended as it’s a real (and tragic) reality for many who may have a family history. When your cognitive abilities start to fade, managing your finances can become quite the adventure. But fear not, for annuities and pensions are here to save the day. They lock in a steady stream of income, protecting you from market instability (as long as you choose the fixed kind, of course). So even if you can’t remember your own name, at least you’ll have some cash flowing in.

But hold on a second, there’s more to consider than just your money. You’ll need to think about your support system. Who’s going to be there to help you out when you need assistance? And if you’re thinking about moving into an institutional care facility, like a fancy retirement community, timing is key. You wouldn’t want to risk being rejected because your health or finances don’t meet their criteria. It’s like trying to get into an exclusive club, but instead of VIP treatment, you just get a sad rejection letter.

Financial Insolvency: Social Security, Annuities, Pensions
Finally, let’s talk about financial insolvency and the potential nightmare of relying on an income source that goes belly-up. Social Security, for example, has been predicting that their reserves will dry up by 2035. And with the way things are going, it might even happen sooner. But don’t reach for those ramen noodles just yet. Social Security won’t disappear completely because it’s a pay-as-you-go system, so there’s still a chance you’ll get something – maybe just not as much as you were hoping for. So, go ahead and run some analyses with reduced benefits. It’s right there on your Social Security statement, warning you about potential cuts. Visit http://www.ssa.gov if you’re curious.

This picture has nothing to do with insolvency – it’s just meant to make you smile while you limp to the end of this article.

You might also face the delightful prospect of owning an annuity from an insurer that goes under or receiving a pension from a bankrupt company. In some cases, consider that another insurance company can swoop in, buy those annuity contracts, and keep the money flowing. And if you have a qualified pension, the government has your back through the Pension Benefit Guaranty Corporation (PBGC). Head over to http://www.pbgc.gov for the specifics. Sadly, non-qualified pensions won’t enjoy the PBGC safety net, so if your plan heavily relies on them and your employer is teetering on the edge, it’s probably wise to assess the impact of losing that income stream.

Wrap it up…
Obstacles identified – back to the journey. Hopefully you found this helpful and useful. The road to financial independence looks different to everyone – there is no ONE way to get there. Achieving financial independence requires careful planning and preparation for potential obstacles that could arise along the way. By being flexible and adaptable, individuals can better position themselves to achieve their financial goals and live the life they desire.

Truth be told – ramen noodles aren’t terrible…