Plan for Financial Independence, Not Retirement
Instead of figuring out how much money you’ll need to quit, discover the date when you can decide whether you want to keep working
Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue. Follow Richard on Twitter @richeis315.
Declaring your Financial Independence Day is a better idea than trying to come up with “the number” you need to retire, especially if you’re in your 50s or 60s and don’t have much time to pump up your savings.
What exactly is financial independence or, as some call it, financial freedom? That depends on your own definition.
In a new Capital One 360 survey, 44 percent of U.S. adults said financial freedom meant not having any debt, 26 percent said it meant having enough saved for emergencies and 10 percent defined it as being able to retire early.
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I go with Jonathan Chevreau, the Toronto-based author of the new U.S. edition of Findependence Day, a “fictional finance” book, and creator of the Findependenceday.com site. His novel is about a young debt-ridden couple, Jamie and Sheena Morelli, and their road to reaching you know what.
Chevreau says that when you’re financially independent, you work because you want to, not because you have to. “Findependence is necessary for retirement,” he says. “You can be findependent and not retired, but you can’t be retired without being findependent.”
Chevreau targeted April 6, 2013 – his 60th birthday – as his Findependence Day and reached that goal, but he still edits Canada’s MoneySense magazine. “I have a job I like, so why would I quit?” he asks.
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5 Rules to Declare Your Findependence
Chevreau’s five rules for achieving findependence:
1. Pay off your home in full. “That’s really the foundation,” he says.
2. Find multiple sources of income for retirement. These can include interest and dividends from your investment portfolio; rental real estate; freelance or consulting work; Social Security; an annuity; and perhaps a guaranteed pension.
3. Develop “guerrilla frugality” habits. Chevreau calls this “becoming a Frooger.” Keeping expenses low while working full time will make it easy to live that way in retirement and reduce the amount of savings you’ll need for a comfortable retirement.
“If you spend like a millionaire, you’ll end up a pauper,” says his book’s protagonist, Jamie. "Spend like a pauper and you have a shot of becoming a millionaire."
4. Save 20 percent of your gross income. This will be impossible for many people, but not for others. If you can't save 20 percent, try for 15 or 10 percent.
5. Invest with a “Lazy ETF” portfolio. That means selecting, say, three exchange traded funds – a U.S. stock fund, an international stock fund and a U.S. bond fund – and holding onto them.
Review their performance once a year then rebalance your portfolio if the markets shift and you discover you have a higher percentage in one of these asset classes than you want. (Use index funds instead of ETFs, if you prefer.)
Women, Men and Money
At the risk of overgeneralizing, I think many women gravitate toward the concept of financial independence, while men often prefer focusing on “the number.”
In the initial episode of the two-part Consuelo Mack WealthTrack public television series on Women, Investing and Retirement that premiered June 28, Jewelle Bickford, senior strategist for GenSpring Family Offices, said the first question her male clients ask in their monthly or quarterly meeting is “how has their portfolio done, whereas the women tend to think: ‘Will I have enough?’”
Two Types of Retirement Calculators
If you’re trying to figure out your Financial Independence day, should you bother using an online retirement calculator? I think it depends on the tool.
Most retirement calculators are actually best for people in their 20s, 30s and early 40s who have years to save furiously once they see their “number.” The electronic number crunchers typically ask few questions, partly because younger people can’t possibly determine for sure their retirement income sources or expenses.
“When you’re further away from retirement, these calculators are directional in nature,” says Kent Allison, a PwC partner and leader of the firm’s financial education practice, based in Florham Park, N.J. “When you get closer to retirement, you really have to get into a nitty-gritty cash flow analysis.”
He’s right. If you’re three to 10 years away from retirement, that’s the time to figure out where the money will come from to cover what Pat O’Connell, executive vice president for the Ameriprise Advisor Group, calls the three types of expenses:
- Essential expenses that’ll be covered by guaranteed income sources, like bonds, Social Security and a pension.
- Lifestyle expenses purchased with money from your investment portfolio.
- Unexpected expenses, like health care and long-term care costs, paid for out of your emergency savings fund.
Three Good Calculators for People 50+
There are, however, a few excellent calculators – not always free – that are specifically geared for people in their 50s and 60s. They can help you firm up a retirement cash-flow analysis.
One is Retirement Works2 for You, created by retirement adviser Chuck Yanikoski primarily for what he calls “nonaffluent people trying to play their cards as smartly as they can.” It costs $189 for the first year; annual renewals are $44.50.
RW2, as it’s sometimes called, asks a lot of questions; Yanikoski says you should plan to spend one to three hours answering them. (“Retirement is an extremely complicated thing,” he says.) But the results can be valuable.
As soon as you input your data and answer the questions, you’ll get an online report card with retirement planning advice and letter grades telling you how well you’re set under “normal” circumstances, if you live an extra long lifetime, if your investments don’t perform well, if inflation shoots up and if you run into high medical expenses, including long-term care.
You’ll also see how your cash flow would be affected if you delayed retirement and lowered your standard of living.
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Two other calculators worth considering:
The free Ballpark E$timate from the Employee Benefit Research Institute’s Choosetosave.org site and the American Savings Education Council; Next Avenue has a link to the Ballpark E$timate calculator.
E$Planner, created by Lawrence Kotlikoff, an economics professor at Boston University. There's a free version of E$Planner Basic as well as one that costs $40, with “what if” investment scenarios and Social Security options. The downloadable $149 product also offers “retirement spend-down” strategies, helping you determine how much to withdraw from your portfolio.
Use an Adviser to Plot Your Findependence
Whether or not you use a calculator to come up with your Financial Independence Day, I strongly suggest you work with a financial adviser to run the numbers.
“The decisions are major,” Allison says. “A wrong one could cost you a lot. So even if you don’t normally want to spend money on a financial planner, this is the one time to do it.”