Let’s face it: Everyone would like to achieve financial independence.
But saying it is one thing. Getting there is a whole other story.
First off, what exactly is financial independence?
Irving, Texas, optometrist Alan Tilson, who’s working toward that goal, described it this way:
“It’s having a certain level of comfort, knowing I’m going to have the financial resources to cover all facets of my life, without having to rely on a steady paycheck.”
Tilson and his wife, Karen, an optician, co-own Tilson EyeCare in Irving. They’ve been planning and working toward financial independence, knowing that they love to travel and want to visit Europe when they retire.
“I’ve always had an exit strategy,” said Tilson, who plans to sell his business in five or six years. “I’ll never fully retire, and I do plan to work part time, but I want to be in a situation where if I didn’t want to work, I don’t have to.”
If achieving financial independence is your goal, here are factors you should consider:
WHEN DO YOU WANT IT? Ask yourself: When do you want to be financially independent?
“There are lots of way to approach financial independence at different points in life,” said Jean Keener, certified financial planner at Keener Financial Planning in the Dallas area.
“For some, getting to financial independence as soon as possible is really important. To others, they’re perfectly fine with just saving up to be independent in time to retire. There’s nothing right or wrong with these preferences; it’s just about knowing what’s important to you and then creating your lifestyle and financial plan around those priorities.”
If your target date for financial independence is unrealistic, you could find yourself in the opposite situation — financial dependence.
“I’ve noticed over the past 10 to 20 years that the average age that people tell me they want to retire has come down — routinely in the mid- to late 50s,” said Bryan Clintsman, certified financial planner at Southlake, Texas-based Clintsman Financial Planning. “They explain that they want to have enough healthy years to actually enjoy their money. The irony is that with life expectancies increasing and now pushing 90, this elongates the retirement years and amount needed to successfully fund a lengthy retirement.”
WHAT DO YOU NEED? Once you’ve decided at what point in your life you want to be financially independent, you need to map out a plan to get there.
The first step is to figure out how much you will need to live on. Start by seeing how much you’re spending now.
“If you don’t have a good idea of what you are spending today, it will be difficult to know what you will need to achieve financial independence,” said Wade Chessman, certified financial planner at Chessman Wealth Strategies in Dallas. “The worst thing you can do is to wing it in that area once you quit your job and are truly on a fixed budget.”
He suggests recording current expenses in detail for two to three months and then categorizing those expenses.
“Then create a future spending plan based on anticipated changes in your spending once your situation changes,” Chessman said.
Try to anticipate future expenses. You may discover you will need more money than you think to become financially independent.
Your future expenses should include such things as health care costs, home maintenance and repair, dental insurance, insurance policies to supplement what Medicare doesn’t cover, new vehicles and travel costs, Chessman said.
“It is important to think through future expenses in detail and not to have unanticipated expenses that derail your plan,” he said. “As we age, there are certain things that can’t be done as easily — yard care, minor home repair, cleaning out gutters.”
WHAT DO YOU HAVE? You’ll also need a clear understanding of what income, savings and other resources you have today.
“List all the resources available to you including retirement accounts, businesses and future income sources such as pensions and Social Security,” Chessman said. “Also make a note of what you are currently saving. Do some calculations to determine if based on your current asset level and level of spending you are on track to achieve financial independence.”
Be flexible because you may determine that you need to adjust your spending, delay your decision to retire or save more to achieve your goal.
“I have an idea of what I want to save per month,” said Tilson, 56. “Sometimes I may put more in; sometimes I may put less in. You have to be disciplined about that and be flexible enough to realize sometimes it can change.”
WHERE CAN YOU CUT? Live below your means now to achieve financial independence later.
“The fastest way that’s available to just about anyone who really wants financial independence is to keep your fixed expenses very low,” Keener said.
“It doesn’t mean you will never splurge and for example go on a big vacation, buy a luxury car, or send your child to an Ivy League school. It just means that you don’t commit yourself to expenses that require you to maintain a certain income, so you save up for these big expenditures in advance.”
This approach means having little or no debt because debt service is a fixed expense, she said.
Living within their means is key to becoming financially independent, said Karen Tilson, 59.
“You just don’t overspend,” she said. “I do a lot of thrift shopping. I don’t buy expensive clothes.”
Living below your means also enables you to save more.
“Another way to get to financial independence is to accumulate a lot of savings and get to a point where you can sustainably live from your portfolio and income sources for the rest of your life,” Keener said. “This is the goal for individuals entering retirement.”
Financial independence is certainly achievable, but you have to lay out a plan, take the necessary steps consistently and stay focused on your goal.