There might not be fireworks, but any day is a good one to celebrate financial independence — even if you’re not quite there yet.
What is financial independence for you? For many people, it’s being able to live a good lifestyle without having to work for money. For those folks, they might still have a career because they love what they do and have control over how much they work. But their work is no longer about the money — it’s about interesting activities and a sense of purpose.
There are several methods of assessing financial life cycles. The Alliance of Comprehensive Planners (www.acplanners.org) has one metric. This assessment says that when household net worth — that’s assets minus debts — is three to seven times the annual household income, the household is in rapid accumulation mode. This is generally a time when the individuals’ careers are at their peak. This financial stage is the precursor to financial independence. Generally, folks in the rapid accumulation stage of their lives are usually in their 40s or 50s.
Financial independence is measured comparing living expenses and investable assets. Investable assets are generally assets that could be invested in cash, stocks, bonds or investments composed of those. In comparing investable assets to living expenses, look first at sources of income that can cover expenses. These sources of income can be Social Security, pensions that pay regular payments over a lifetime such as military pensions and the Public Employees’ Retirement Association. Uncovered expenses are the living expenses over and above these sources of income. Financial independence is when investable assets are approximately seven to 10 times uncovered living expenses. Many folks in financial independence are in their 60s or older.
For instance, if your living expenses are $8,000 per month, and you receive $2,500 a month in Social Security, your uncovered living expenses are $5,500 a month or $66,000 a year. If your investable assets are approximately $460,000 to $660,000, you may be financially independent. People who have high income, low expenses and are good savers may reach financial independence before their 60s. If the financial metrics suggest financial independence, have a financial planner do some retirement projections to help you see if longevity or potential medical expenses might have a negative impact on your ability to have your money last the rest of your life.
Lifestyle is a factor in financial independence. People with low living expenses generally have their money last throughout their life. Flexibility can also be an important financial management skill. During the Great Recession, many people who were planning to retire had to rethink the timing of leaving the workforce. If they had a balanced portfolio and flexibility in their expenses that didn’t require spending money that was in the stock market, they might not have needed to work longer.
Take the opportunity to celebrate financial independence, whether you’re there or working toward that goal.
Linda Leitz is a certified financial planner. She can be reached at linda@peaceofmindfin.com.
