Financial independence is the ability to do what I want, when I want to do it, and enjoy the people I love and the things that I care about. What we really want is to have enough money to do that.
Financial Independence, for some, means you continue to work because you want to work, not because you have to. For other people, they have that target in mind of when they can quit working all together. They think, “I just want to enjoy my life. I want to travel. I want to visit family. I want to do all the things I’ve been foregoing because I’ve been working hard and saving money.” That is financial independence.
The Importance of Financial Independence
Many people feel like, after working for 30 or 40 years, they deserve a good retirement and some freedom. Quite frankly, a lot of people have been putting off a lot of purchases or travel as they’ve been raising their kids or putting their kids through school. Even if they don’t have children, they’ve just been working hard to get their financial house in order and there needs to be a reward at the end of that.
Some people actually say we should be experiencing the reward while we’re working, maybe in our 40s and 50s. The problem with that is you’ve got to be really disciplined saving because we want that point where we don’t have to work if we don’t want to. Our health can also sometimes prevent us from being able to do the things that we used to do.
So, the importance of financial independence is making sure that we have the money so that we’re in control of what we want to do and when we want to do it, not having to work or having to serve a different master because we’ve got to continue to generate income. In order to do that, we’ve got to have some short-term goals. It’s really important psychologically that you have short-term wins when you’re building your financial independence.
In order to have short-term wins, you need to have short-term goals. It can be 90 days, six months, or a year, and so on. It might be something like paying off a credit card or a car loan, getting to the end of a car loan, or refinancing your mortgage. With the way our minds work, it’s hard to be motivated for the long-term if we don’t have these short-term wins. It’s hard to have that motivation where we can continue working when the ultimate goal of financial independence might be 5 to 20 years away.
Long-term goals entail doing some financial planning and income projection where you know exactly how much money you need to generate the income you want. We like to tell people at our firm during financial planning, “Pretend you’re retired today. How much money do you want coming into the house every single month to do all the things you want to do?”
Don’t worry about inflation; I know inflation exists. Don’t worry about what rate of return you need on your money. Just start with choosing a long-term goal: “When I get to retirement, I want $10,000 a month coming into the house.” Then, if you work with a financial planner, they’ll figure out the inflation, how much you need to save, and so on.
Again, ask yourself, do you want to continue working or do you want to retire early? If you’ve built up that flexibility, saved early in your life, haven’t taken on more debt, haven’t upgraded your house every two years, then maybe you have the choice to retire early. That’s a wonderful position to be in; when you can retire right now but choose to work because you’re enjoying it.
It’s critical to eliminate debt going into retirement. The only debt you should have going into retirement is the debt you might have on your house. Remember that a house is an asset that holds its value or increases in value, so that would be what we call “good debt.”
Bad debt is what you want to eliminate. That would be things like car loans, any kind of credit card debt, and purchases that you’ve financed over a period of time. If you’ve helped your kids or your grandkids go through college and you’ve borrowed money to do that, get rid of all that debt before you retire.
You’ve got to have some type of a budget, or at least have a rough idea of a budget, going into retirement. What do you want per month? Your budget can be as simple as that. My wife Wendy and I have a monthly budget that doesn’t break everything down by how much we can spend on going out to eat or what the cable bill is. In our minds, we just know this “budget” is what we need to pay all the bills each month. All of this means you can set yourself for some wins when it comes to retirement.
Guaranteed Sources of Income
When we get within five years of retirement, that’s when we really want to start analyzing where this income that we’ve talked about is going to come from.
First, look at guaranteed income sources. That might be Social Security, pension, some kind of a trust fund, or an inheritance. Those would be, for the most part, guaranteed income sources. Although with a trust fund or inheritance, you have to analyze that a little bit. For most people, we have Social Security, or some type of pension, or both. Those are guaranteed sources of income.
If my goal is to have $10,000 coming in per month, and I’m getting $3,000 a month from Social Security and another $2,000 a month from pension, that’s a total of $5,000. I’ve met half of my income goal.
Second to that is we’ve got to look at what kind of money we need to get off our investments to go ahead and pay that $10,000 per month. We want to build a flexible plan. The key here is when we plan, we’ve got to look at that lifetime income. Get rid of that debt, do some kind of an income projection, but there’s got to be flexibility. One of the mistakes we see people make when we work with them, especially when they’re younger, is they think they’re going to come up with a plan at age 45 that’s going to last for the rest of their lives and they’ll never have to change it. That is not the case at all.
You’ve got to be flexible with your financial planning and whoever you’re working with has to understand that they have to build a plan that’s flexible because things in life are going to change; you’re going to have a family crisis here and there, some unexpected thing is going to happen, you or your spouse might have some kind of an illness. All of that has to be planned for.
So, any kind of financial plan needs flexibility built in. When it comes to flexibility, many of us need to change our mindset. We think that we’re going to come up with this perfect plan. Forget about perfect; it’s never going to be. We’re just trying to get on track. We also have to be able to change and really almost expect that crisis to come in life.
Expect the Unexpected
My mom and dad retired in their 60s and by the time they passed in their 80s, there were a number of things that happened in that 20-year period that nobody could have expected. There were family situations where they had to help out, they both had had different illnesses, they ended up moving unexpectedly, and brother passed away which created another move later in life that was very stressful for them. So, it’s important to have the mindset that we’re just building a road map but that road map is going to have to change and sometimes, those changes come because things can be very unexpected.
Achieving Financial Independence
Decide when you’d like to retire, build an income projection, identify your guaranteed sources of income, stick to a monthly budget, and build a plan and change your mindset.
A lot of you don’t like the word ‘budget,’ but at least have an idea of what you need every month to pay your bills. Even if you’re 20 years from retirement, you can get a good financial planner to work inflation into that picture. Then, build a plan and change your mindset.
One of the things that we’ve taught clients is when building a plan, write out your dream plan without worrying about whether or not you can afford that. Then, work backwards and maybe you can build a financial plan that will help you afford that dream plan.
From watching so many clients prepare for retirement and go into retirement, I know that the peace of mind and relaxation that’s created by having your financial house in order is just amazing to see. However, it takes planning 5 to 20 years before retirement. Here’s the good news: if I say that and you get a little nervous because you just retired a couple years ago or you’re only within two years of retirement, that’s okay; There’s still time. What you want to do is sit down with your financial planner, get the truth about where you’re at, and then build a road map to the future. And that’s what financial independence looks like and it’ll create a tremendous amount of peace of mind for you.