Financial Independence VS Retirement Date
What’s your strategy? If you’re working towards a set retirement date, you’ll need to have specific financial goals. And if you have financial goals, you’ll need a plan to help you achieve them.
Financial independence and retirement are two very different things. They should not be treated the same way. Most people have a set retirement age in mind, but no idea if they will be financially ready when that day arrives.
Consider Scott, who hopes to retire and start collecting Social Security at age 66. But when asked about his finances post-retirement, Scott wasn’t sure how to manage the 401(k) income he will need. When asked if he and his wife will have enough money to live comfortably for 30 or more years of retirement, he was unsure and without a plan.
Even if you decide to spend most of your working life living below your means and have set up automatic savings plans for retirement, vacations, and college, you’ll still need to keep track of your progress and have specific numbers and goals in mind.
Many people simply avoid thinking about retirement finances because they are daunted by what they hear, such as:
• You’ll need to save up 25x your working income
• You and your partner will need 8x your final gross salary
• If you withdraw 4% of your nest egg annually, you will have a 95% chance of having enough money until your death
If you have been avoiding thinking about retirement, it’s time take a deep breath and take the plunge.
First, you must figure out when you and your partner will become financially independent. After that, you’ll be able to set a retirement age. Here’s an easy formula you can use:
Investment Cash Flow + Social Security > Retirement Expenses + Cash Reserve
Investment cash flow refers to earnings from investments such as dividend-paying stocks and pensions. With smart investing, dividend-paying stocks can work for long periods of time.
In regards to Social Security, each person’s situation will be different. We advise doing some research before deciding when to start taking Social Security payments.
When calculating retirement expenses, sit down with your partner and have an honest discussion. What do you plan to do during your non-working years? Are you hoping to purchase a new boat or vehicle or spend time traveling? For most couples, expenses go up with the additional free time that retirement brings.
Cash reserve refers to an amount of money that is set aside for large expenses and emergencies. Although not strictly necessary, it’s always a good idea to have money set aside for medical or other emergencies.
An investment income plan is vital in understanding how you will fund the 30+ years you may spend in retirement. For many couples, working towards financial independence is the first step in defining a retirement date.
