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To Seek Financial Independence or Retirement: That is the Question?

Financial IndependenceAs life expectancy increases, and pensions decrease, there comes a time when you might start to question what your retirement is going to look like. Today the average man turning 65 will live to be 84.3 years old. Of those numbers 25% will live past the age of 90 and 10% will live past 95. For women the news is even better with the average age being 86.6, according to social security administration calculators¹.

This means if you work from 25 to 65 you have 40 years to save. These savings must pay for an average of 20 years in retirement. If you have good genes it could be closer to 30 years. One of the central questions is, what will you do with your time for 20 to 30 years when you are officially “retired?” For many retirees the idea of lounging on the beach or playing golf every day sounds more boring than blissful. As a result more and more people who reach retirement age are continuing to work, whether they have the financial means for a traditional retirement or not.

These factors are changing the look of retirement. Instead of the ultimate destination being to work at an unfulfilling job for 20 plus years and then “retiring” and doing the things you love, many are now seeing life as a journey. This journey should be fulfilling along the way, not just after retirement. These changes in thinking are leading to a new way of seeing retirement and financial independence.

Traditional Retirement

In 1935 Social Security was established in the US and set the retirement age for workers at 65. The life expectancy at the time social security was enacted was 60 years old for those born in 1935. Based on life expectancy figures the average worker would receive a social security benefit for 12 years².

One of the features that promoted traditional retirement was workers who stayed with the same employer for most of their working career. Then at age 65 they were able to collect the company pension along with social security. If they managed their resources well they could have a comfortable retirement without ever having to worry about running out of money.

Today, this is no longer the reality. Workers today only stay on their jobs an average of 4.6 years according to the Bureau of Labor Statistics³. This shorter career path has a significant impact on the ability to save for a long term retirement that is 30 or 40 years away. Shorter employment has the consequences of less stability, more part time job stints and periods of unemployment where savings must be used to pay bills. This new reality also makes it more difficult to buy a home, start a family and do other traditional things that lead to stability.

As pensions decrease, and even social security and Medicare have become questionable safety nets, Millennials must fend their way through their career with different expectations.

Financial Independence

By definition, financial independence, according to Wikipedia, is having enough financial means to cover basic needs without actively working⁴. In the past, the goal has been to become financially independent by the time you reach retirement age. Today, becoming financially independent can happen at any age but means finding passive income beyond traditional pensions and social security.

For young investors it means thinking in terms of monthly income, rather than a set cash lump sum that must be accumulated over your working life. It is much easier to get your head around earning $3,000 or $4,000 a month, than it is to save up a million dollars in savings to fund a retirement of an uncertain length of time.

Gaining financial independence can be accomplished at any age and is very personal when it comes to creating an effective strategy. It must be flexible enough to account for real life events but effective enough to produce an ongoing income not too far into the future. If you live frugally and invest consistently you can create a residual income each month that will develop a higher level of security than traditional employment.

To learn more about establishing a plan for your financial independence contact the specialists at Sherman Wealth Management at 240-428-1622. They can assist you with putting a plan into action.