Focus On Financial Freedom, Not Retirement

The word retirement is emotionally charged. Those who are young see it as far off in the future, usually because they associate it with being old. Others see it as a time of doing nothing and may think, “I’m not ready for that.” Many want to do something productive with their time, so it’s hard to imagine no longer working. But what if it meant work optional? Let’s say that your boss does something you don’t like; wouldn’t it be nice to be able to say, “See ya”?

I’ve asked some people when they would like to be financially free, meaning when they hope they’ll no longer need income from a job. Their answers typically involve some time in their 50s rather than 60s. Yet the original Social Security age of 65 has gotten many people into the habit of accepting that as their retirement age. When some heard that they could get their money at age 62, they felt that was the earliest they could retire. In fact, it just means that’s the soonest the Social Security Department would start sending them checks. There’s no guarantee, however, that starting to receive a Social Security check means one can comfortably retire. All too often, those checks turn out to be much smaller than people expected them to be.

The idea of retirement is a made-up construct, and it isn’t tied to any particular age. It’s interesting that after you attain age 59 ½, you can pull out your tax advantaged retirement money without penalty. However, you can’t get your Social Security money until age 62. Medicare, the federal healthcare program many rely on in retirement, doesn’t kick in until age 65. The increase in Social Security payouts for delaying the start of payments begins at age 70. You must start taking out your retirement money from your tax advantaged retirement accounts by age 72. See what I mean?

How does financial freedom feel?

The concept of financial freedom doesn’t peg you to a particular demographic. The dollar amount required for it and the time you want to reach it are different for each individual. Take a moment to bask in the idea of financial freedom. If money causes you stress, imagine having that weight lifted off your shoulders. Imagine pursuing your passion. Imagine working in a job that’s meaningful to you, no matter how much or how little income it generates.

Pursuing financial freedom likely requires stopping to reevaluate your values and passions. What would you want to be free to pursue? Would you like to go back to school simply to enjoy it, not to increase your income? It’s important to get off the roller coaster of comparing yourself to others’ dreams and aspirations and to lock in your own definition of financial freedom.  

What constitutes financial freedom for you?

Someone I used to know who won the lottery in 1985. He was in is twenties. He began receiving $50,000 a year for the next 20 years. For some, that would be financial freedom. For others, it might be the membership fee to their favorite club. Only you can determine the income number or amount of money you could comfortably live on without needing income from employment. That’s the number that would give you financial freedom. Is it $50,000, $100,000, $250,000, $500,000 a year or more?

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Are you happy with your lifestyle today? If so, figuring out what income you’ll need to feel financially free once you stop working will be simpler. Having all your debts paid off—no student loan or credit card debt, for example—simplifies matters, too. If you have a mortgage, that could affect your calculations. If all debts, including your mortgage, would no longer be part of your cash outflow once you stop working, you can pretty easily understand the number you would want to have to feel financially free. That said, if your goal is to become financially free before Medicare kicks in, you would need to factor in health insurance.

Here’s a hypothetical illustration. Let’s say that, right now, while you’re still working, $100,000 (in net pay) comes into your checking account on an annual basis. Further, assume that, once you stop working, continuing to live as you do now would constitute financial freedom. Knowing that, we can calculate the income you need once you stop working. Today, you have a mortgage for $2,000 per month or $24,000 per year, and your other expenses total $50,000, including a car payment. In addition, you pay $26,000 per year in student loan payments. In other words, you’re spending $50,000 a year on debts that, once they’re paid off, aren’t likely to start up again (mortgage payments and student loans). You’re living comfortably off of the other $50,000 (which is also covering your car payment—a debt that will probably recur each time you buy a car). In this scenario, $50,000 would be your income number for attaining financial freedom. Of course, it’s not quite that simple, because this number needs to inflate, or go up, annually to account for inflation. So, after the first year, $50,000 would need to be $51,500, and so on. And before you run off too quickly, it’s important that you secure your financial foundation and account for the financial risks that may get in the way of achieving financial freedom. My previous articles on financial risks and healthcare cost risks explain further.

The next thing to do would be to target the date you would like to be financially free. (If you’ve read my previous article on target-date mutual funds, you know I’m not a fan of these funds. Despite the seeming logic of targeting a retirement date, these funds do not guarantee that you will have enough money to retire comfortably or be financially free.) Now that we know the income amount that you want to make on an annual basis and when you’d like to be financially free, we need to calculate how much you need to save at what target rate of return in order to create that $50,000 per year paycheck (adjusted for that cost-of-living increases) once you stop working. Rather than focus on a total dollar amount sitting in an account with your name on it, we are focused on the income amount that will provide you financial freedom. There are many thoughts, some of which are research-based, about how to take your savings and create lifetime income for yourself so that you can live your idea of financial freedom. A wide range of books offer suggestions, or you can consult an investment advisor.

Knowing the income number that will provide you financial freedom and having a strategy for achieving it eliminates a lot of the anxiety about being ready to retire. You no longer have to question whether you’re saving enough money or whether the returns on your investments are adequate. Overly emotional reactions to the ups and downs of your account values are calmed, and you’re not comparing yourself to others’ income and lifestyles. Instead, you know where you’re headed and you’re taking the actions needed to arrive at your destination. That clarity is a boon not only to your eventual retirement but to your peace of mind in the years leading up to it.

To arrive at your financial-freedom income number and the investment approach to get you there, you can seek out calculators and may find tools such as Forbes Contributor Laurence Kotlikoff’s MaxiFi software program helpful. Or you may choose to work with a financial professional with a planning background such as a certified financial planner or. I recently worked with someone who was trying to use a free resource I had given her. She had misunderstood one of the inputs, so it overstated her assets. If you decide to fly solo, it may be worth getting a second opinion just to make sure that your inputs are correct and that you’re not getting false readings on the actions you need to take on your journey to financial freedom. One thing is sure, now is the best time to start that journey.

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