The other day at Forbes.com senior writer Richard Eisenberg devoted a piece to this theme, and cited my own recent experience in finally living the life I describe in my book, Findependence Day. Findependence, of course, is merely a short-hand description of the phrase Financial Independence. Findependence Day is the day in the future when you believe that income from all sources — including investments, pensions, rental income, business income, royalties – will exceed income from the single source most of us call a “job.”
So, without further ado. It’s up to you to fill in the blanks to reflect your personal circumstances:
Declaration of Findependence for ________ (your name here)
1.) Based on my current age of __, I believe I should aim for the __ day of the __ month in the year 20__. This happens to be the year I turn __.
2.) I understand that as this milestone approaches, the actual date may have to be revised. If financial markets are very strong, I may even be able to move it ahead by __ years. If markets are weak, I may be forced to move it back by __ years.
3.) I am currently employed by ________________ and am enrolled in a pension plan. The earliest date I can take an unreduced pension is ______. I can also take early retirement by _______, provided I am willing to receive a smaller payout.
4.) As an American with ___ years in the workforce, I am eligible to begin taking Social Security benefits as early as age 62, which is ___ years before/after my planned Findependence Day. The latest I can take them is age __, in which case the payout will be much higher. Based on my annual contribution statements, the optimal time for me to commence Social Security is age __.
5.) Depending on whether I was born before or after Feb. 1, 1962, I will be eligible to take Old Age Security (OAS) benefits at age 65/66/67. (Circle one). If OAS is my only source of income in old age, I will also be eligible for the Guaranteed Income Supplement. Ideally, so is my spouse, in which case the day we’re eligible to receive combined OAS/GIS benefits will be our joint Findependence Day.
6.) As someone who enjoys work but not necessarily all the stresses of full-time corporate employment, I see myself being semi-retired or self-employed by age ___. By adding $_____ thousands of dollars of part-time income a year to all the above sources of income, my Semi-Retirement could begin as early as ____, which is the year I turn _____. I will call this my Preliminary Findependence Day.
7.) Instead of having one long extended Retirement at the end of my life, I prefer the concept of multiple “Mini Retirements,” and therefore of multiple Findependence Days to fund them. I would like to set the year _____ as the year of my first Mini Retirement, and therefore _______ will be my first (but not necessarily last) Findependence Day.
Here’ a post from my Financial Independence blog at MoneySense.ca, posted this week from the Morningstar annual conference held in Toronto on Wednesday. Pictured is Michael Falk, a partner with Illinois-based Focus Consulting Group, and I’m reporting on his talk entitled Prime Minister, There’s a Hole in My Safety Net.
And as promised a few weeks back, here’s the second-chapter summary of financial lessons learned in the second chapter of the new US edition of Findependence Day:
Chapter 2: Money Money Money: It’s a Rich Man’s World
• The best investment is paying off debt
• A line of credit lets you consolidate high-interest loans at one combined lower interest rate.
• A more effective method is to spend less than you earn.
• Avoid paying only the minimum monthly payment on your credit card. Better yet, pay balances off in full and never pay a dime interest.
• Build a six-month cash cushion.
• Mutual funds offer young investors professional security selection and diversification and through equity funds, exposure to the stock market.
• Financial Independence is not the same thing as Retirement. It means you continue to work because you want to, not because you have to.
• As your portfolio grows, you can lower investment management costs by using a discount brokerage, buying low-cost passively managed investments, and engaging a fee-only financial planner.
• During Semi-Retirement or the “First Retirement” you can give back to the community by volunteering, and discover talents you never knew you had.
Since the price of gold crashed a few weeks ago, I’ve twice blogged on the topic over at MoneySense.ca, as you can read here. I’ve also done a bit of radio and TV commentary on the topic. As noted at MoneySense, personally I’m somewhere between the 5% “gold as insurance” camp and the “gold bug” camp that allocates upwards of 15 to 25% of a total portfolio to the yellow metal as a permanent strategic allocation in a well balanced portfolio.
My second MoneySense blog looks at Nick Barisheff’s just-released book, $10,000 Gold, a prediction which if it came true would mean a seven-bagger from the most recent post-correction price of $1460 or so. Of course, gold has started to recover from the shocking drop that grabbed the media’s attention earlier this month.
So how does gold fit in with the concept of financial independence? Historically, it has held its own in providing a degree of capital preservation. Anyone who experienced the hyperinflation of Weimar Germany or more recently Zimbabwe can attest to the value of “real money” when contrasted with mere pieces of paper that once promised to pay the underlying metal “to the bearer on demand,” but today are no more real than digits in a computer somewhere.
Bricks & Mortar are another tangible investment I like
So the question isn’t so much whether gold could possibly rise seven fold or ten fold from here, although that’s roughly what it DID accomplish over the past decade. The question is whether paper money backed only by governments with unlimited access to printing presses can continue to be perceived as having value. Just as real estate investors see value in bricks and mortar and the assured streams of income known as “rent,” so too do some investors feel comfortable having at least some of their wealth in tangible precious metals or comparable financial derivatives they hope will retain value if mere paper money falls in value (i.e. ETFs like GLD or SLV). As readers of Findependence Day know, a major subplot of the book is the conflict between Sheena’s desire for tangible bricks and mortar and Jamie’s preference for paper/electronic assets like stocks and bonds.
I’m a Capital Preservation Asset Allocation Bug
Does all this make me a gold bug? No, it makes me a capital preservation asset allocation bug: SOME gold, some cash, some bonds, some stocks and some real estate. And of course, that’s just the investment part of the equation. To this we should add employer pensions and Government pensions like Social Security or the Canada Pension Plan. If someone came to me saying they believed ONLY in their employer pension plan or ONLY in their Social Security or CPP pensions, I’d be just as worried on their behalf as I would be if they told me they had only paper money or — for that matter — only gold coins.
Together, this is my recipe for financial independence.
From time to time I see some in the media asking the question whether people are “giving up on saving.” This was the thesis of a Maclean’s cover story last year and a version came up this week in the Financial Post. It’s not a stance I sympathize with, which is why I wrote a version of today’s blog earlier this week at www.moneysense.ca.
Here, I’ve reproduced and expanded on that blog.
It’s a free world of course and everyone can choose to maximize consumption today, even if it means paying more tax because of foregoing contributions to tax-assisted retirement plans (RRSPs in Canada, or in the United States, contributions to IRAs or 401(k)s.)
But giving up on saving does have consequences. This choice means you’re also giving up on more consumption in the future, and giving up the chance for freedom (or financial independence) while you’re still young enough to enjoy it.
People are perfectly free to spend to the full extent of current income but leaving no margin for error for job loss or other emergencies is just plain foolish. Any financial planner will tell you that enough savings to last six to nine months without employment income is the minimum prudent emergency cushion—an amount that can now be well taken care of by the cumulative $25,500 in TFSA contribution room now available to any Canadian 18 years of age or older. (For the benefit of any American readers, the Tax Free Savings Account is the equivalent of Roth plans, although TFSAs were only introduced in 2009. Same idea but different rules. See also note at end of blog).
Alternative is working till you drop
Beyond the customary emergency savings, giving up on saving for longer-term goals like retirement really means resolving to stay in the workforce (employers and circumstances permitting) right until 65, or 67 in the case of younger people. Indeed, the November issue of MoneySense did show how people can retire in luxury merely by finding a low-cost place to live (most of them outside the country) and living off such government income sources as CPP, OAS and GIS (in Canada) or Social Security (in the US).
While such a strategy is theoretically possible, “luxury” is a relative term and relying only on government money in old age strikes me as dangerous from a diversification point of view. In the U.S. in particular, given the nation’s parlous finances, putting all your eggs into the basket of Social Security seems an overly optimistic gamble. Not for nothing do the financial gurus counsel a three-legged stool that also includes employer pensions and private savings and investments, not to mention part-time work, real estate income and other “multiple streams of income.”
Frenzy of Rationalization
In the end, taking a defeatist attitude to saving is just making excuses. Blaming low interest rates or volatile stock markets is what my wife and I dub “a frenzy of rationalization” or FOR. It’s true that young people today have far more financial temptations than did the baby boomers: we never had to budget for cell phone plans or Internet access, nor were we under pressure to constantly upgrade to newer and better smartphones and other technological gadgets.
But again, if your perceived “needs” exactly equal your income, then the best you can hope for is to break even financially as the years pass, and that assumes steady employment. Lose that source of income and the trouble soon begins. Saving and investing means ultimately benefiting from the magic of compound interest (or compounded reinvested dividends). Giving up on saving and falling into debt should unemployment strike means the reverse and negative outcome: being subject to the disaster of compounding debt—and unfortunately, the interest rates that seem so minuscule if you’re a creditor turn out to be very high if you’re a debtor.
Far better to be a net beneficiary of even modest interest and dividend income than a victim of it. And that’s why, even though I’m personally on the cusp of Findependence I’m still not giving up on saving.
US edition of Findependence Day nearing publication
If you’re reading this blog, you shouldn’t need an explanation of the word Findependence, since this entire web site is dedicated to the book, Findependence Day. The original novel described here can be considered North American in scope but it has a lot of Canadian content with just a sprinkling of U.S. material. This will be rectified in a few months time when I’ll be releasing a new all-U.S. second edition of the book. Watch this space for updates on that.