The term I prefer is “financial independence.” And the question is, “What does it take to be financially independent?” It takes income. Income which is sufficient to meet required outflows, and which is not dependent upon continued employment. Please note that the attainment of some arbitrary age, such as 65, is not what is required. Some folks are financially independent long before age 65, and some must work until they are much older. For most people the challenge is to convert their human capital into financial capital. Some succeed, many do not. Some would say that you are not totally free until you are financially independent. I would agree.
How much (retirement) income is enough?
One traditional rule of thumb is that you need 80% of your pre-retirement income to be financially independent. Many financial planners, yours truly included, would suggest that rules of thumb are a poor substitute for detailed planning. Many people (apparently) wear “medium” sized clothing, but for those who don’t, relying on the rule of thumb would be uncomfortable at best. I have clients who have become financially independent on $25,000 per year, and those who could not live comfortably on $150,000 per year. So, financial independence can be identified by a number, but that number is different for each person, or couple.
Successful planning for financial independence requires an investment of some time. Time invested in …well, planning. Planning for required outflows and inflows, for investment returns, and inflation, and possible problems down the road. Planning for financial independence often involves making irrevocable decisions with little opportunity to correct a mistake once it is made. An experienced financial planner can be worth a lot to you in this process.
Related Posts: