By Jonathan Chevreau, Financial Independence Hub
There are a lot of distinctions between the terms, many of them subtle ones. I often say that Financial Independence means working because you want to, rather than because you have to financially speaking. In the latter case, the situation is akin to the bumper sticker that says “I owe, I owe so off to work I go.”
I may also say that Findependence (I’ll use the contraction of Financial Independence here now) often occurs years if not decades before traditional retirement. There are several Early Retirement practitioners running websites about how they achieved Financial Independence in their 30s or 40s, although they usually add that they continue to “work” in the sense of doing some work for money. That “work” will typically be as an independent supplier rather than an employee and may consist of writing books, running web sites and perhaps publicly speaking. They call this “Early Retirement” but I’d argue the better term is “Early Financial Independence.”
You can find more on this topic by simply googling the term “Financial Independence vs. Retirement.” You’ll find several results, including a couple of articles by me that have appeared in various web sites both Canada and the United States.
Consider this piece from FI Journey entitled Financial Independence vs Early Retirement: What’s the Difference? Here’s how the writer sums it up: “Financial independence is setting an annual income goal for yourself, and putting your money to work in such a way that you can live off the proceeds from your investments without ever reducing your retirement account. If you started your ‘retirement’ with a million dollars in the bank, the idea is that you would die with a million dollars in the bank, whether that was 5 years or 50 years later.”
Working even if you don’t need to do so
Then there’s an article from a year ago featuring a dialogue between two Early Retirement gurus, J.D. Roth of the Get Rich Slowly blog and the blogger known as Mr. Money Mustache: Coming to terms: retirement vs. financial independence. There, Roth notes that both bloggers have accumulated nest eggs that would allow them “never to work again” yet “both of us have elected to continue doing work for money.” Even so, they still consider themselves “retired.”
Mr. Money Mustache, aka “Pete”, replied that only certain personality types will sit around doing nothing in retirement but for him, retirement “just means you’re free to do what you really want to do.”
Roth said they both think it’s possible to call oneself “truly retired” even if they continue to work for money but added that not everyone agrees. One reader maintained that “retiring is stopping doing work for pay.” Then Roth segued to an excerpt from his one-year Get Rich Slowly Course that outlines four types of retirement: traditional “full-stop” retirement at 65 or so, Early Retirement that can occur between 30 and 50, Semi-Retirement and finally a series of “Mini Retirements” that can be distributed at various points of a long career of work.
Let’s retire the loaded word Retirement
Roth concludes much as I would, saying that because Retirement is a loaded word, he prefers to use the term Financial Independence, which he says “is essentially the same idea but without the baggage.” He also talks about something we’ve mentioned in this blog before: that there are degrees of Financial Independence, ranging from dependency on parents or employers, to dependency on creditors, to freedom from debt, to what I’ve called “barebones” Findependence and finally “complete” financial independence. He decides that once you’ve saved enough to fund 25 years of your current lifestyle, you’ve achieved financial freedom.
Jonathan Chevreau is the author of Findependence Day and runs the Financial Independence Hub. This article originally appeared at MoneySense.ca under the title How ‘findependence’ differs from retirement.
Here’s my latest Financial Independence blog from MoneySense.
Here’s an interesting rule of thumb that most retirees and would-be retirees would do well to adopt. Developed by US financial planner Wes Moss, it’s called the 1,000-Bucks-a-Month Rule. It means that for every thousand dollars in monthly income you want in retirement, you need to have saved $240,000.
So if you want $2,000 a month from your investment portfolio, this rule suggests you’d need to amass $480,000, which just happens to be close to the minimum amount ($500,000) that “happy retirees” in the United States tend to have saved up. Note this rule is to generate investment income that is above and beyond pension income, government pensions like Social Security (in the US) or the combination in Canada of CPP/OAS (Canada Pension Plan/Old Age Security).
This guideline suggests that if you want $4,000 a month from investment income, in addition to the usual alternative sources of income, then you need to have saved almost a million in liquid investments: $240,000 times four is $960,000. If you wanted $10,000 a month, then you’d need $2.4 million, etc. It also assumes you’re at least 60 years old, although it will be a useful benchmark even for those younger than 60 and who aspire to an early retirement.
Close connection to Bengen’s 4% safe withdrawal guideline
Moss uses this handy guideline in his practice (a George-based investment firm called Capital Investment Advisor, of which he is chief investment strategist) as well as on his popular financial radio show, Money Matters. It’s also his number one tip in his recently published book. This is one I think most MoneySense readers would be interested in: You Can Retire Sooner Than You Think: The Money Secrets of the Happiest Retirees, Wes Moss, McGraw Hill, 2014.
So how does Moss arrive at this rule? It’s based on a 5% annual withdrawal rate, which means that $240,000 in investments would spin off $12,000 a year in some combination of interest, dividends and other income (which Moss calls distributions). Divide the $12,000 by the 12 months of the year and there’s your desired thousand bucks a month of income.
But 5%? Who can get 5% these days from bank deposits or even stocks? This is where it gets interesting. Note first that 5% is close to the 4% safe withdrawal rule made famous by financial planner William Bengen. He found retirees could withdraw 4% a year from a balanced portfolio and not run out of money for at least 30 years. (he includes an inflation adjustment but we’ll ignore that here). Moss is a big fan of income investing so right off the bat you can get close to 5% in certain high-yielding dividend stocks (telecom or utility stocks for example, or REITs.) You’ll get perhaps 2 or 3% from fixed income, depending how much risk you want to take but what about the rest? How does Moss stretch Bengen’s 4% to 5% in this low-yielding world?
The rest comes from growth or capital gains, which year by year will fluctuate or even be negative, but over the long haul can be another 1 to 3% on top of the more assured yield from income investing. At worst, it may involve cutting slowly into capital but as long as your income investments are generating by themselves 3 or 4%, Moss assesses that such a nest egg would easily outlast the average 30-year retirement time frame.
There’s plenty of other stuff in the book but I’ll close with just two more points. Like myself, Moss believes retirees should have completely paid off their home mortgage. And he’s not a big fan of annuities.
This week, I did a guest blog on Roger Wohlner’s blog, The Chicago Financial Planner, which you can find here. As I note there, Roger [pictured on the left] is the kind of fee-only financial planner I recommend in Findependence Day. By the way, Roger is a must-follow on Twitter as @rwohlner
As you can note in the comments section which follow that post, people are becoming more aware of this paradigm shift and the distinction the book makes between traditional “Retirement” and Financial Independence (or “Findependence”).
As one commented, by viewing the goal as Findependence rather than full-stop retirement, he was able to move his “retirement” date up by 15 years.
Related to this concept is a blog I did here a few months ago about Early Findependence being a more achievable goal than Early Retirement. I note in this weekend’s Financial Post, a package of stories about extreme saving (I’d call that ‘guerrilla frugality”) by Melissa Leong, including a profile of a couple who supposedly “retired” at 35.
We’ve seen these stories before of course: Derek Foster and Dianne Nahirny both wrote books describing how they retired in their 30s. But of course, they were really describing Findependence since if nothing else they were still “working” by writing books how about how they stopped working!
While most of this blog emphasizes wealth creation, it should never be forgotten that every once in a while, once you’ve earned, saved and grown your money, there come times when some of it can actually be spent.
Yes, a luxurious vacation! Our family is currently in the second week of just such a vacation, in a Scandinavian adventure encompassing Sweden, Norway and now Denmark. Here’s a sample photograph of myself kayaking in a Norwegian fjord with daughter Helen. The rainbow says it all (it’s barely visible here smack in the centre of the photo where the slope of the mountain hits the water!)
Before this episode near Bergen, Norway, we had just completed an 11 kilometre bicycle ride through equally wonderful scenery: numerous waterfalls tumbling from tall cliffs, many trees and lakes almost reminiscent of Ontario’s Muskokas, and even porpoises and otters in the fjords. After this kayaking trip, we donned wetgear and went deeper into the fjord in a speedboat, which you can view with a photo I posted today on Twitter. (See my Twitter feed @jonchevreau).
Memories like these transcend financial considerations, especially when they are shared with family. But of course, experiences like this do require generous dollops of cash flow. It’s good to remind oneself during long stretches of earning, saving and investing that at some point there’s light at the end of the Findependence tunnel!
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My latest Financial Independence blog at moneysense.ca looks at BMO Retirement Institute’s study showing there is a big discrepancy between the retirement aspirations of young Canadians and their savings habits to date. Click here for my take on it.
On Friday, veteran CBS broadcaster Andy Rooney passed away at the age of 92, just a month after retiring. This news came too late for a package of stories in the FP this weekend about retirement but it could easily be added as an example. As I wrote here, if you have passion about your work, age is almost irrelevant, assuming you still have your marbles physically and mentally.
When I flagged this story on social media, one family member seemed to be relieved by this theme, since her own finances are in such a state that she doesn’t expect to retire any time soon. But even if you take the case of Andy Rooney to heart, that doesn’t mean you should see this as a license to stop saving and investing for the future.
For one, there may indeed come a time when you do lose your marbles — physically or mentally or both. The years when that occurs will be costly and you won’t be generating new income.
Second, even if you’re ready, willing and able to work (As the EI forms ask), you may not always be able to find a willing employer.
So even if you don’t think you’ll ever retire, you still need to shoot for a degree of Financial Independence. The book to which this web site is devoted makes continued reference to the distinction between Retirement and Financial Independence, or what I call Findependence.
In short, plan to work as long as you’re passionate about your calling, even into your 90s. But that doesn’t mean you can take a pass on saving for the future. It’s still prudent to cut debts and maximize pensions, RRSPs/IRAs, TFSAs/Roth plans and even keep adding to your taxable accounts.
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