How To Avoid the Top 5 Risks To Your Financial Independence

What are the big 5 risks to your financial independence and how can we mitigate them? 

Call it what you want: financial independence, retirement, the day you no longer HAVE to work because your investments have now grown to a point that they are generating enough income to cover all your expenses. 

This is a great day for many people. But, there are also reasons that some, even if they do all the right things, hit roadblocks and don't make it to where they thought they would by a certain time. 

The purpose of this article is to help you mitigate the most common risks to you hitting your financial independence number. I hope you enjoy. 

1. How long do you expect to work and what happens if you cannot work that long? 

Most of us plan to live a very long time. As financial planners, we use 65 as a retirement age because that’s what the Social Security administration did and then retirement plan providers followed suit. 

What happens if we make a plan for you to work until 65 and base your retirement goals off this number and then something happens to interrupt the plan? 

What are some things to think about? 

Your working years could be shortened due to an untimely death?  

How do you protect yourself against this risk? 

The best way to protect yourself is to buy enough life insurance to cover any outstanding debts and replace the lost income you provided. This $$ amount will be unique to each family. 

Your working years could be limited due to disability. 

How do you protect yourself against this risk? 

Purchase disability insurance. Many times your company offers this benefit at a fraction of the cost you would pay on the open market. Always speak to your HR department before seeing an insurance broker. 

How much should your purchase? Any other considerations? 

If you have the ability to do so if your employer offers it, try to purchase your disability insurance with after-tax dollars. If you do this, your payout will be tax-free generally. If you purchase your disability with pre-tax dollars, you may pay less now from your take-home paycheck, but you will have to pay tax on your disability payout. This could be a huge difference in usable dollars for you and your family. 

What about ill health? 

Well, health insurance is your best bet here. Make sure you have adequate coverage and that you can cover any co-pays you may have. 

I love High-Deductible Health Plans (HDHP) if you have enough savings to cover the co-pay. For example, at the last company I worked for, by choosing a HDHP my insurance was only $20 dollars per paycheck versus $200.

BUT, and this is a big BUT, I had to cover the first $3,350 if I were to get sick. I had cash saved so no big deal. Add to that, I hadn’t been to the doctor in over 10 years. I was willing to take the risk for the monthly savings because, in just about 18 months, I was ahead if you consider the monthly price difference. 

The other benefit HDHP’s have is the access to Health Savings Accounts (HSA). These are an awesome account that have a triple tax benefit and you can actually invest the money if you have enough saved in there. HSA’s are very similar to an IRA but if you have health expenses, you can withdraw the money tax-free. If you don't’ use it and you invest it, the money grows tax-free until retirement. 

If you are young and have an HSA available to you another potential use is to put money in there for your long-term care insurance later in life. You can fund your insurance with the growth from this account and when you take the withdrawal to pay, the money typically comes out tax-free. This is an awesome strategy for people less that 55 or so. 

Another great mitigator for ill health or disability for that matter is extra training and education in a usable skill that even if you were disabled or sick, you would be able to use. 

There is so much potential power of the internet to offer a location independent service that even if you’re not sick, could be a great mitigator in case you get tired if your job. 

You may not die, become disabled, or ill but if you work for someone else, you always have the possibility of losing your job. 

The best mitigator of this is keeping track of your skills and accomplishments and also keeping enough cash to float you for a few months in case you hit such a speed bump. 

2. What if you're retired and/or live longer than expected? 

There is a significant risk you will love longer that “average” life expectancy. 

How can you mitigate this risk? 

Simply, it’s to have enough money saved and invested. 

The best way to make sure you have enough is to estimate conservatively you needs. 

3. What if inflation is more than expected? 

While a lot of things have gotten cheaper with technology, there are many more purchases that have gotten more expensive like food, medicine, health care, education (unless you consider free online education) among other things. 

Using sophisticated financial planning software, you can check to see if you are saving enough and play with and adjust inflation numbers to make sure even if it is higher than expected, you will still be ok. I feel it’s always best to conservatively estimate inflation and needs and I would rather you end up with a little too much saved and invested than not enough. 

What if your retirement needs are underestimated? 

A simple way to increase your chances of success is to do your retirement projections without including social security. 

While there’s a lot of writing online about social security running out, that’s highly unlikely. 

If nothing changed and you’re 35 years old right now, you would still probably have 75% of the benefit you have today. With some tweaks to the program, the government could probably fix this gap but it’s such a touchy subject, most current political candidates are too scared to take this head on. 

Well, if you plan not to have it, and the numbers work out, and you get it, then BONUS!

4. What if you’re investment returns are lower than expected? 

This is a big concern for millennials. More millennials than young people of the past are keeping a much higher amount in cash than previous generations. 

This can be good or bad in my opinion honestly. 

If you’re saving this cash for starting a business or other opportunity, you can potentially get a MUCH higher return than you can get investing in index funds, but there can also be more risk. 

Typically, the best strategy is to get as much knowledge about investments as you can and maintain a broadly diversified portfolio of low-cost funds that include different asset classes. 

Being an investment advisor and financial planner, I do have a bias but I truly believe most do-it-yourself investors don’t have a true understanding of their risk tolerance. This is why the average investor that does not work with a financial professional typically underperforms the ones that do. 

5. The last risk of the article that I’ll be talking about today is overestimating your sources of retirement income. 

There are many people out there that have put their whole retirement plans on receiving a pension for life. For many, like those in Detroit, this plan didn't work out. 

While it would be nice to say plan for retirement without including Social Security benefits, pension plans or any other sources you don’t have control of, this can be unrealistic. The reality is, for most people, Social Security and pensions will make up a large chunk of their retirement funds. 

The best way to mitigate risk here is just to plan conservatively and also stay on top of changes in taxation policy. By keeping on top of these things, and having a plan early, you will significantly increase you chances of enjoying many years of financial independence without worry. 



3 BIG Financial Mistakes People on Variable Income’s Make.

1. Not having a plan for every dollar from every paycheck.

Being on a variable income, for example, in a sales role can be one of the biggest blessings to your financial life, or an absolute curse. The great thing about having a variable part to your income is that it gives you a financial incentive to get up and go kill something every day. 

I love the idea of commission or bonuses to shoot for. From what I’ve seen, people that get paid the same no matter what they do eventually become the people that just show up for a paycheck. 

The great thing about getting the same paycheck no matter what you do is that it’s easy to plan for expenses. But, if you are an internally motivated person, this can lead to dissatisfaction and disengagement in the workplace. 

When you are on a variable income, there’s nothing more important than tracking what’s coming in and going out. That’s the only way you can know what your baseline income needs are. 

Why is this important? 

You have to be able to know what your minimum monthly expenses are. What does it take you to live? Then you have to make sure you’re making more than it takes to live so that you have money to save and invest in your and your families future. 

The most common failure that I’ve see from people on commission is that they have no idea of what their minimum expenses are to pay the bills. 

They drift from day to day and month to month hoping that they sell enough to pay the bills. 

If they don’t, they do something stupid like put their bills on a credit card. If you’re doing this, you have to stop this now! You’re basically activating the clock on a ticking time bomb that you have no idea when it’s going to blow up. This behavior has nothing to do with your income in my experience. I've helped with 200k+ in income deal with the same behavioral challenges as those making 75k. 

Three simple steps you can take to help you move forward from this mistake are:

1. Write down the minimum payments on all your bills.

2. Pull the last 3 months of pay stubs/bank statements and add up the total amount of income you made after taxes and divide by 3 and see what your monthly income has been trending.

3. Take your monthly average income, and subtract your minimum monthly expenses. 

Is the number positive? GREAT! We can make some progress!

If the number is negative, you have to have a serious talk with yourself and your spouse if you are married. You have to figure out a way to get your income up above expenses. This may be through a side hustle? You may have to work more hours in the office or making sales calls? You may need to learn more about the product and services you are selling so you can better help your clients make a smart decision to purchase with you? 

What you shouldn’t do is fail to take ownership. If there’s someone in your company that’s doing better than you, it is your job to find out what they are doing. Buy them lunch and ask them what they are doing that is making them successful. Shadow them on sales calls to learn their best practices. To put it simply, don’t just hope IT gets better. Create a plan so YOU get better. 

2. Not having an emergency fund. 

Once you start getting some control over your income on a monthly basis, the next step is to save for an immediate emergency. This is just a small amount of money so that if you blow a tire or have a small breakdown you don't go right to your credit card. What I recommend for this step is usually 1000 dollars up to 1 months expenses to start with a goal to get to 3-6 months expenses. I would recommend leaning toward 6 months if your income is highly variable. 

3. Not having a ‘bad month’ fund. 

Being on a variable income, you’re inevitably going to have some up months and some down months. This is not a big deal if you are prepared and will adjust with the seasons. What I recommend for this is having a fund that you keep separate from your other accounts to fill the gap on bad months. Keep this money in an account that takes at least a day or two to transfer so you’re not pulling on it regularly. This account is meant for when you are reconciling at the end of the month and you realize you’re going to come up short. Keep track of how much you transferred over, and add that amount to your base expense requirement for the next month and replace this as soon as you get your first check. 

Since I’m a big fan of having the ability to earn what you’re worth, being on a commission or bonus structure can be highly beneficial for the motivated person. But, it can also be a curse if you’re not prepared and don’t handle your financial life like a business. Keeping track of income/expenses, having a plan and preparing for emergencies are just as important for our personal lives as they are for our businesses. 

If you like this blog and want more tips for staying out of trouble as a business owner or someone on a variable income, either leave a comment or email me at