Ten Keys to Financial Independence in Retirement

by Robert Powell

It’s easy for a country to celebrate a day of independence. There’s a clear marker—for the U.S., July 4 is the anniversary of that day in 1776 when the founding fathers voted to declare independence from England.

It isn’t so easy for average Americans to celebrate a day of financial independence. There’s not one marker, but many. What’s more, the markers vary from person to person.

“Part of the challenge is that the definition of financial independence is as unique as the individual,” said Dan Veto of Retirement Spark, a research and consulting firm. “The topic doesn’t easily lend itself to a hard and fast equation.”

Still, experts say it’s possible for those planning for or living in retirement to declare financial independence, provided they achieve most, if not all, of the following goals.

1. Set aside 11 times your salary

You need to set aside at least 11 times your final year’s salary in your nest egg to maintain your pre-retirement standard of living in retirement, according to a recent Aon Hewitt report. The good news? That figure includes inflation and post-retirement health-care costs.

Knowing that you won’t be a burden on your children is of course part of the reason for setting aside this much in your nest egg.

“Not having to rely on my children for financial support is one aspect of financial independence,” said Meir Statman, a finance professor at Santa Clara University. “This was very important to my father who supported his mother- and father-in-law when we came to Israel, penniless, in 1949.”

Don’t fret if you don’t have exactly 11 times set aside. David Laibson, a Harvard University economics professor, says you should be able to get by with 10 times your salary.

2. Match income and expenses

The experts don’t quibble about this: You’ll need enough income to cover your expenses over the course of retirement. “You should have enough income in retirement to maintain your standard of living and, with the proper estate planning, an ability to leave an inheritance to your family or charity,” said Victor Ricciardi, a finance professor at Goucher College.

Put another way: “Financial independence in retirement is not having to follow the performance of the stock market 24/7 or track interest rates on your savings to make sure you can pay your day-to-day expenses,” said Dan Keady, CFP Board ambassador and director of financial planning for TIAA-CREF.

“For many retirees, we suggest figuring out how much money you will need for fixed costs such as food and shelter, and then calculating what Social Security and any pensions will provide,” he said. “Then, annuitize enough of your nest egg to bridge the gap between those fixed expenses and what’s provided by other sources of retirement income. This provides an income source similar to that enjoyed by previous generations, who received payments from pensions that lasted as long as they lived.”

Others agree. “Financial independence is really a surrogate for independence, so this is both a philosophical and societal question,” said Larry Cohen, director of the consumer financial decisions group at Strategic Business Insights.

“Outside of being a pretty poor insulator and fire starter, money in itself has little value, but what it represents is the ability to do things,” said Cohen. “If you have your health, food, clothing, shelter, family, friends, activities, and a support network, and you had all these things but not one dollar, in many ways you are as rich as the richest person, perhaps more.”

Given that what we think of as retirement is drastically changing, perhaps you are talking about a smaller life stage—the stage past career, but before the nursing home. “To feel secure in that stage, you need to have everything set up for the final stage,” he said. “Financial independence for the new ‘retirement’ stage of post-career means enough income to cover one’s costs, enough assets to tide one over for uncertainties and occasional indulgences, enough diversification to protect one from the ravages of the markets and inflation, yet enough simplicity so that it can be managed effortlessly.”

What Financial Freedom Really Means

by J. D. Roth

This guest post from Sue is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income. Want submit your own reader story? Here’s how.

I’ve always been a saver. Even as a child, my pocket money was more likely to end up in my piggy bank than in my purse. I’ll admit that living in a remote English village with little opportunity to make impulse purchases probably helped.) But I’ve often wondered why I saved.

My savings tended to build up and never be spent. I lived within my means. But I never had a use for all the money I was saving; I never knew why I was doing this. Then, last Christmas, I discovered what financial freedom really means.

My younger brother has been ill for as long as I can remember. From birth, he had complex medical needs, as well as physical and learning disabilities. He spent much of his first few years in hospital, and was frequently rushed back in with serious infections, or deterioration of his medical conditions. Over the years, these emergencies became less frequent, partly due to advances in medical care, and partly because we were better at managing his health out of hospital. However, I always knew that the call might come.

Last year, my brother became increasingly unwell. He was on antibiotics a lot of the time, and his quality of life was decreasing. Although we didn’t want to think about it, we knew that he was nearing the end. In November, he was admitted to hospital with a severe infection, needing more intervention than he could get at home.

What is Financial Freedom?

by Scott H Young

Financial freedom isn’t the same as being rich. Although people often confuse the two, they are completely separate goals. One person could be completely financially free earning $15,000 per year. Another person could be trapped, even with millions of dollars.

Last week, I touched on the topic of financial freedom. I wrote about my goal to build an emergency fund with a year’s worth of living expenses in savings. This would give me the freedom to make drastic career or business moves without feeling the effect on my bank account for an entire year. But this is just a first step towards financial freedom.

What is Financial Freedom?

I define financial freedom as not needing to worry about money. Money shouldn’t be a dominating force in making decisions in your personal or professional life.

A good way to view financial freedom is another type of freedom most people in the Western world enjoy: freedom from hunger. As a human being, I need to eat to survive. But the relative abundance of food in my life has meant hunger is never a driving force in my decisions. If food were scarce, getting enough to eat would probably occupy all of my thoughts.

Being financially free, is the same as being free from hunger. Money will always play a role in your life. But you are free when it no longer becomes the dominating influence on your goals.

Financial Freedom is More Important than Wealth

With food, there is an upper limit to the amount you can consume. Once you reach a minimum threshold, freedom from hunger is basically guaranteed. But there is no upper limit for spending money. That’s probably why there are far more people free from hunger, than those free from money.

Wealth is only part of the picture. If your spending outpaces your income, it doesn’t matter whether you are rich or poor: you aren’t financially free. Pursuing wealth is a noble goal, providing you do it by contributing value. But it doesn’t guarantee the peace of mind and satisfaction associated with financial freedom.