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Monday, October 21, 2024

3 phases of my long term financial goals

I have always been in the accumulation mode: do we have enough? It’s a tough question to answer but it’s a well worn path in books and articles. However, as I get closer to financial independence, I realize there are huge gaping holes in my knowledge and financial planning. It’s not enough to think about how much you have. We need to plan for how to keep it and how to give it away. 

As I’m learning, it's never as simple as it should be. There are many regulations and decisions that significantly impact the ideal outcome. Even our ideal outcome should be considered carefully. 

Here are just a few examples that I started asking myself: 

  • What are our values and spending that would bring more sparks of joy in our financial independent days? 

  • Do I have a guiding principle for family giving to ensure their long term happiness and reduce potential squabbling and conflict?  

  • How do I maximize social security benefits for my spouse and I? 

  • If I’m lucky enough to retire before 59.5, how do we use deferred tax retirement money without an early withdrawal penalty? 

  • What is my income tax strategy and how do we reduce our taxable income? 

  • How do we reduce risk of retirement market timing like 2008? 

  • What is the impact of inflation during retirement, and how do we plan for it? 

  • How much money do we really need for health care? 

  • What are many of the expected and unexpected expenses in retirement? And how can we better plan for the unexpected? 

  • How does required minimum distribution (RMD) work and how do those rules affect our withdrawal rate and taxable income? 

  • What are different types of trusts? And how should we use them to our advantage? 

  • What are estate tax and inheritance tax? How are they different?

  • How do we plan to ensure more of my money goes to my loved ones? 


There are no easier answers, and a lot of financial knowledge and planning is need to properly think about each question. However, we should also start with good definitions of our ideal successful outcome. 
For the extremely long time horizon, I use a framework to think about the purpose of the money across 3 phases and my ideal outcome in each phase: accumulate, preserve, and endow. 
  • Accumulate: Make more money, buy more assets, and allocate assets to faster growing valuation with acceptable downside risk that I have time to recover from. 

  • Preserve: The goals are (1) improve and sustain our quality of life, (2) keep more of our money from taxes, and reduce down market timing risk, and (3) not worry about running out of money

  • Endow: Provide a safety net for future generations where each generation will be the caretaker for the next generation. Pay it forward across generations. 


These phase are not independent, decision I make in one phase can dramatically influence the outcome of later phase. A simple example of Traditional 401K vs Roth 401K . These are examples of tax deferred vs tax free (or tax pre-paid, as I like to think about it) retirement accounts. One type is not better than another. The two types of tax treatment plays different role in each phases, and has different tradeoffs. This is the "personal" part of financial. With clear framework and successful outcome defined, I can steer my plans to achieve our financial goals beyond "have more money" to "using money to improve our lives and lives of our loved ones"


What about you? What are your long term financial goals? 


Ricky

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