For many of us, successful retirement is the most important long-term financial goal. In many ways it’s the ultimate form of deferring gratification.
You set aside money now to support a better life years from now. As important as this is, it’s daunting to think about replacing your current income with investment earnings and what will remain of Social Security.
In spite of the challenge of amassing retirement savings, you may be closer to your version of retirement than you think.
Classic retirement had a certain date when you left work behind, and promptly transitioned from harried commutes to days of golfing or traveling around the world. I have heard stories of people taking this to extreme degrees, with retirement calculators ever present on their computer desktop. Imagine watching a countdown for years marking the seconds to go until launching into retirement.
Workers with access to defined benefit pensions such as educators, government workers, or the few covered in the private sector may have the strongest compulsion to do this.
Generally pension formulas consider your age, employment history, and years of service and provide an estimate of your annual payment in retirement. By waiting an additional month, sometimes you can qualify for much higher levels of retirement pay.
Let’s consider an alternate view of retirement. One that is accessible to those who don’t have a pension or don’t want to wait until they qualify for the full benefit.
It works for people who have not saved enough to pay for their living expenses for the rest of their lives. It’s a modern form of retirement called Financial Independence.
Most of my pre-retirement clients are not trying to quit working all together. Instead they want options. They have been working at a company for perhaps a year too long, and want to consider other careers entirely.
They may want to work part-time so they have more time to pursue their hobbies or volunteer interests. They may want to go back to school or live abroad for a few years. They may want to start their own business.
All of these wishes can be reduced to a simple concept: they want to have options beyond working full-time in their current field.
Financial Independence means that your investments can support about half of your living expenses. You reach this stage when your investible assets exceed seven times your annual spending.
Many people reach this stage in their 40s or 50s, far before the traditional retirement age. If you wanted to stop working completely, you might have to wait an additional 10 years contributing to and growing your savings, approaching Medicare eligibility, and starting Social Security.
With Financial Independence, you can repurpose your life today and start benefiting from your careful planning and thrift long before traditional retirement.
The first step to Financial Independence is quantifying your annual spending. If you’re like most Americans, you only have a fuzzy vision of this critically important information. Start tracking it, as it’s one of the most fundamental measuring sticks of your financial health.
Tracking your spending was once done with spreadsheets and later using Quicken. Consider the next step with mint.com, which interfaces with your bank, credit union, credit card companies and investment custodians to pull down real-time data on account balances and spending.
You’ll need to do some work yourself as it can’t decide whether that trip to Costco should be considered groceries or entertainment.
Working with mint.com you’ll know your level of spending and thus how close you are to Financial Independence. While you’ll know your cash outflow today, your level of spending doesn’t have to be static.
You may be willing to tighten your budget knowing it will hasten the arrival of your personal Financial Independence Day.
Dave Gardner, for the Daily Camera.