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Why Financial Independence is a Better Goal than Retirement

Wednesday, August 7th, 2013   10:20 am |  Category:   Finance   |   4 Comments  
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One of the problems with selling the concept of Retirement to young people is that old age just seems so impossibly far away in the distant future. The financial services industry and the mass media love to talk about retirement but let’s face it, if you’re a recent college graduate just entering the workforce, retirement is perceived as something far far in the future, just one step before the equally remote prospect of death.

 

The pity is there’s a much better term that could be substituted for Retirement. It’s called Financial Independence or what I’ve dubbed “Findependence.” (simply a contraction of the two words.)

 

Financial independence is a goal that can be achieved not 30 or 40 years from now but in 10 or 15 years. It’s not unreasonable for a 25 year old just taking their first step on the career ladder and embarking on marriage, family formation and home ownership to set a goal of financial independence (or “Findependence”) by the time they’re age 40.

 

Does that mean “early retirement” at such a tender age? No, because Findependence is not synonymous with Retirement. Most of us know what Retirement is but for a refresher course on Financial Independence, go to Wikipedia and search the term Financial Independence. You’ll find an entry which is simple enough to grasp: financial independence is the state of being able to have enough financial wealth to live “without having to work actively for basic necessities.” If you’re findependent, your assets generate income greater than your expenses. Note that Findependence is not correlated with age. If you have modest means and have been frugal enough to build up a nest egg in 10 or 15 years, you may well be “findependent” by age 40 or so. Conversely, if you’re a high-earning high-spending professional who requires hundreds of thousands of dollars of income a year, findependence may not be in your grasp even by the traditional age of retirement.

 

You can see why people often confuse the terms since two ways of generating passive income is often employer pensions and Social Security or other pensions paid by governments. These particular income sources do not begin until one’s late 50s or 60s. But again, if your needs are modest, you might well be able to establish early findependence solely with a portfolio of dividend-paying stocks, perhaps supplemented by part-time jobs or freelance work.

 

For baby boomers, the so-called “New Retirement” will often prove to be a variant of Findependence and traditional Retirement. Very few boomers, even if they have the financial means, will embrace the traditional “full-stop” retirement of their parents who enjoyed Defined Benefit pension plans. The older generation may have experienced the gold watch and a quarter century of golf, bridge, reading but boomers are much more likely to embrace a semi-retirement that consists partly of employer pensions, supplemented by government pensions, taxable investment income and part-time employment income, and perhaps the fruits of certain creative endeavors: royalties from literary or musical creations, licensing fees from various entrepreneurial ventures, fees from serving as corporate directors and other sources of income.

 

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4 Comments
  1. James Molet Aug 7th 2013  9:12 pm

    An excellent article. I love the contraction of financial and independence to give you findependence! Good stuff.

  2. FI Pilgrim Aug 8th 2013  12:44 am

    Amen to this. My desire is to focus on the long AND short term goals of my family. A massive nest egg as a senior citizen just doesn’t motivate me.

  3. krist Aug 22nd 2013  5:28 am

    I have had retirement on my mind for ten years but only had my eyes opened to independence a few months ago. I was constantly looking at how much I need to retire and the number was huge. I never paid attention to getting my budget to a manageable level and trying to get enough passive income to cover it. This new way of thinking has changed everything and moved my target retirement date up by about 15 years.

  4. Steve Nov 21st 2013  7:44 pm

    The thing that distinguishes retirement from financial independence is, to my way of thinking, this key fact. You don’t need to be 59-1/2 years old to be findependent. Due to the handcuffs of penalties in the US, you need to be that age or older to make withdrawals from traditional retirement vehicles. So, to become findependent, save outside of these vehicles, too.


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