Like so many topics in the financial world, the answer to “What is the Meaning of Financial Independence?” depends on your situation. Most of financial planning is highly personalized. Your goals, your priorities, your values, your limitations, your opportunities are often very unique to your family.
One trendy topic in recent years has been the F.I.R.E. Movement (Financial Independence Retire Early). Members of this movement seek to aggressively save and aggressively reduce their spending in order to accumulate enough savings to retire at a very young age, often before age 40. Achieving financial independence and retiring at age 40 is a VERY aggressive goal and few people have the motivation or discipline to achieve it.
What is Financial Independence?
When I discuss financial independence with clients, I focus on goals and family priorities.
- Do you have kids that you want to help with college?
- Do you have parents who will need your help?
- Do you have monthly spending that you can eliminate in pursuit of independence?
- Do you have earnings that can grow to increase your savings rate?
The answers to these questions help shape the path toward independence. So, you can see that the plan can easily look very different for different families.
In general, I would say this is a decent definition of financial independence.
- Reduce living expenses to only the “basics”.
- Have passive income to reliably meet your basic monthly needs.
- Real estate rental income or other business fees and royalties.
- Distributions from savings (4% of total account value per year)
- Social Security benefits at age 70. Based on 35-year income history. Guaranteed for life. Cost of living adjustment increases.
- Have insurance to protect against common financial risks.
- Automobile insurance.
- Health insurance.
- Homeowners insurance.
Financial Independence Plan
If you are “fired up” and want to retire “early” here are some benchmarks to think about.
First, get your expenses down. Cut out unnecessary spending. Clarify your needs for the longer term to be sure you budget for what you “need.”
Second, using the annual living expenses as your guide, you start to save to build up the “nest egg”. You will likely need 25 times your annual living expenses in order to “live off” this savings. That’s based on the traditional rule of thumb that targets a 4% of the savings balance as a target distribution rate.
- If you save 10% of your annual expenses, it takes 9 years to save for one year of living expenses. It would take 225 years to save up the 25 years of nest egg. (Assuming no investment growth on the nest egg.)
- If you save 25% of your annual expenses, it takes 3 years to save for one year of living expenses. It would take 75 years to save up the 25 years of nest egg.
- If you save 50% of your annual expenses, it takes one year to save for one year of living expenses. It would take 25 years to save up the 25 years of nest egg.
- If you save 75% of your annual expenses, it takes four months to save for one year of living expenses. It would take 9 years to save up the 25 years of nest egg.
Pursuing financial independence will go better with some great advice and assistance to keep things on track. A great place to start is to talk to a great financial advisor. I recommend you look for a CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
If you would like to talk with me about your financial independence goals, follow this LINK to find a time for us to talk.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor paid by clients, not a financial product manufacturer or distribution network?
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-first, CFP® professional can help you make great financial indepence strategy choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.