Financial Independence and Retirement

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financial independence

By Jarred Brooks 

Ultimately financial independence is about having enough passive income, so you can have the choice of when you make time for experiences.

With a clear focus, careful planning, saving and maintaining a long term investment strategy, you too can achieve your ideal lifestyle and financial independence.

This episode we highlighted the three key drivers behind financial independence.

Podcast Highlights

When looking at financial independence our view is that this can be broken into three phases.

  1. Financial Stability

Financial Stability is achieved when you have the ability to afford the essential needs, of yourself and your family, without having to go into debt (credit cards and personal loans) to fund these expenses. This will include covering the basic costs of; putting food on the table, clothing your family, a roof over your head (shelter), access to healthcare as required, and security which may involve having an emergency fund for unforeseen events.

  1. Financial Independence

Financial Independence is the point in time when you have established a wealth base that can generate you a passive income to support your desired lifestyle. Passive Income being income you can generate from your wealth base (traditionally via property or shares) without your physical or mental input, instead of trading time for money (being paid to work).

Those in the phase between financial stability and independence are wealth accumulators as your focus is on the growth of your asset base to create passive income. The key drivers of wealth accumulation is your ability to maximise additional sources of income, focus on increasing your savings rate and investing for returns by making each dollar you save, work its hardest. Put simply, EARN + SAVE + INVEST. It is then a matter of utilising the impact of time, and the benefits of compounding on investments, to increase wealth.

  1. Financial Freedom

Financial Freedom will be perceived differently by each of us, as it is an individual’s state of mind that is realised at various points in life when reaching a certain level of wealth.

This can be realised before, at, or after hitting your financial independence number and you will most likely transition in and out of this phase as your personal circumstances change. For example the following situations may only eventuate once a particular level savings is reach;

  • travelling abroad for an extend period,
  • beginning a family,
  • shifting careers,
  • starting a business,
  • and of course ceasing work all together.

 

At the end of the day financial freedom is attained when you have sufficient passive income or savings to make the choice of when you take time for experiences.

The FIRE movement has been gaining traction in news articles with stories of individuals and couples on their financial independence journey. Through extreme levels of saving and investing FIRE members are significantly reducing the number of years they remain at work when compared to the traditional sense. FIRE members have a clear understanding of what they value most and this certainly does not include Friday long lunches or wining and dining during the week. Their frugal spending habits and minimalist mindset when it comes to personal belongings, results in excellent savings rates by forgoing current lifestyle. The lost lifestyle perceived by many does not carry the same value to members of the FIRE movement as the upside benefits of retiring from the workforce and living a life of greater purpose, passion and fulfilment from their prospective.

The only deviation from the definition to note is the concept of ‘Retire Early’ which is not a hard and fast rule. Many FIRE members do establish a form of income produced through pursuing a career or business venture they are truly passion about. Maybe it is more ‘Financial Freedom Retire Early’ but FFRE does not have the same ring to it.

The FIRE movement is certainly not for everyone but give credit where credit is due and those that are on the journey of wealth accumulation and financial independence can learn from the principals applied by those within the FIRE movement. Striking the balance between short term gratification and lifestyle, against longer term financial freedom will continue to remain a balancing act for each of us.

If you can understand and focus on a few foundational elements of wealth accumulation, you too can secure your path to financial independence. These include; money management, debt management, wealth protection and estate planning. Each of these feed into your ability to accumulate wealth, which in turn generates you the passive income required to reaching financial independence.

Each foundation is important but have different levels of impact on your financial independence at different stages of life.  It is about putting the most effort into the area that will have the biggest impact on getting you the best outcome.

Money Management – spend less than you earn. Manage your money (Income, Expenses & Savings) because if you don’t understand it, you will never be able to control it, and ultimately control your financial objectives.

Debt Management – Consider the three types of debt; horrible, tolerable and productive debt, examples of which may include personal loans (consumer debt), home loans and investment loans respectively.

Wealth Protection – protect your greatest asset being you and your ability to earn income.

Estate Planning – protecting your families future financial independence.

Superannuation will form a significant component of the wealth we can accumulate on the path to financial independence and retirement. Superannuation is a government enforced personal savings policy for every working Australian which has concessional taxation benefits. But we are limited as to when and how we can access these monies which can influence when you may achieve financial independence if these funds are to be relied upon. Saying that, it is still very important that you take a keen interest in the underlying investment decisions made within your superannuation. Doing so can have a material impact on your final retirement balance given the positive effects of; regular investment, compounding interest and a long term investment horizon on growth assets.

Your financial independence number is the level of wealth you may need to fully support your current and future lifestyle via the passive income those assets can generate. The purpose of understanding what your number is;

  1. Give yourself a clear target of what you are trying to achieve.
  2. Break down the target into smaller saving goals with shorter time frames.

The rule of 25

The approach is to take your cost of living and multiply this by twenty five to come up with your financial independence number.

Alternative Method

Take your cost of living and divide this by the percentage return achievable by your investable assets.

The results will vary depending on your required cost of living and the potential return achievable by your investable assets, thought the main controllable variables include;

  • the time frame of when you want to reach your financial goal,
  • your ability to increase income,
  • and your savings rate.

These variables, specially income and savings, need to be your focus, the rest should just happen, if you have in place good strategies, you can then set and forget, or work with someone who can do this for you.

Shift your mindset, your greatest concern should not be on the next hot crypto-currency or what the new headlines claim about property markets, your attention should be on controlling personal cash flow through money management, how you go about increasing your income and what you can put towards the bottom line of savings.

Additionally, sit down and calculate your number, and if you don’t know what your expenses are then you need to start there. Have a clearly defined target.

This focus can put so much simplicity back into our financial lives.

Listen to our Financial Independence & Retirement Podcast

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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