My financial independence (FI) plan has a number of moving parts. I have a calculated number which will allow me to consider myself independent on the standard 4% withdrawal rate. However I do not plan to be 100% invested in the stock market like some other financial independence seekers. Since this is the case, I have structured my plan a bit differently. My aim is to have an income of Y annually. This is not a bare bones budget but will allow me to live how I am presently living including taking a few trips per year. To make this happen my cash flow plan is structured like this.
Cash in savings account – This will be one years expenses (1Y). With one year expenses in a cash buffer I am able to weather any irregular cash flows from my other investments and am able to take advantage of any opportunities that may arise in the short term. It also earns a bit of interest while sitting there (currently 1%). This should earn 1% of my annual withdrawal amount.
Certificate of Deposits – This will be 4.5 years expenses (4.5Y). My CD’s are part of my fixed income allocation. I have deposits currently paying between 2% and 2.5%. This is a yield I hope will increase with interest rates over time. The income generated is not as much as I could get elsewhere but I like the sleep at night factor so I will always have funds in CD’s. This should earn approximately 11% of my annual withdrawal amount.
Bonds – I have not bought any bonds as the interest rates have not been very appealing, I am keeping my eyes out for swings in the market and may end up nibbling at a junk bond ETF to start my exposure. My ultimate aim is to have a 4% yield on the bond section of my investments. This should earn 18% of my annual withdrawal amount.
Dividends – I own a number of dividend paying stocks as well as a few ETF’s. I am more focused on building out my stock portfolio with income paying stocks. While I do like the diversification of ETF’s to one extent I also like to invest in businesses that are growing and reward shareholders with an ever increasing piece of the pie in the form of dividends. I am divvying up my portfolio amongst both but ultimately, the larger amount will be in diversified dividend stocks. I am projecting this section of the portfolio to earn 40% of my annual withdrawal amount after taxes. As an international investor I am subject to foreign withholding taxes in certain jurisdictions so I only count my income net of taxes.
Rental Properties – I have two rental properties that are generating steady positive cash flow. I have owned these properties for a while and consider them a significant part of my FI plan. They have been cash flow positive from day one and has allowed me to build up a buffer for repairs and large expenses without having to tap personal income. I don’t see any significant changes to this in the near term and I am projecting this section to earn 40% of my annual withdrawal amount.
If you do the math, you would realize my portfolio projection is to earn 110% of my annual FI number. This excess is purposely built in the plan as I do want to have some buffer in the base income amount in the event that one of the income streams do not perform as expected my plan would not be derailed in an instant. For peace of mind, I love a margin of safety in anything that I do in finance.
Do you have a FI plan? What is your comprised of? Share your thoughts in the comments.