Financial independence, the new retirement

Clients often come to me and say they 'should probably do some retirement planning'. They usually mean they want me to look at their various employer plans, rollover, Roths, and other assets, and figure out if they're on the right track to retire at some point.

But in order to do that, we need to discuss what they envision their retirement years will look like. Where will they live? Will they stop working completely at a particular age (and what age is that?) or will they gradually scale down? Do both spouses share the same ideals for later in life? Talks tend to break down when we get into those details, because 1) often, people feel like they can't think that far ahead; 2) indeed, people may be afraid to think that far ahead, not knowing if their assets will support them, and 3) who really knows anyway? If you're in your 20s, 30s, or 40s now, the only certainty is that your retirement will probably look nothing like your parents'. That presents both complications (it can become a lot more difficult to determine how much money you need to fund a future you can't really predict) and opportunity (you can shape that future far more than our predecessors could).

In his new book, The New Parents' Guide To Financial Independence, Mom and Dad Money's Matt Becker encourages us all to change our focus from planning for a clear-cut event (you cease all work at some point far in the future and begin to draw down the assets you've accumulated) to attaining financial independence – the state of having enough money that you no longer need to work. It's a subtle but important difference: the goal of reaching financial independence doesn't assume you will necessarily stop working at all; rather it allows you to continue to pursue the work you want to, if you choose to.

In his view, there's no reason why we shouldn't take the concepts of retirement planning – identify your goals and determine what it will take to achieve that goal – and apply them to our whole lives. He uses himself as an example: by achieving financial independence, he and his wife were able to allow him to pursue his goal of launching his own financial planning practice, which is work he finds personally fulfilling and in his words, “would still be doing it even if (he) won the lottery tomorrow”. They were able to take some time off from higher earnings and live on savings while Matt builds his business into something that sustains them for a long time. Maybe running your own business isn't a goal of yours. But what would you do with financial independence?

Matt's book is a step-by-step guide to answering that question, complete with clear illustrations of the power of savings vs the power of returns and the impact each can have on your progress; easy to use worksheets to assess your current position and how much you need to save (note that this step comes after you determine what your goals are); advice on what to do with the savings; and encouragement to stick with your plan when you miss your savings targets some months or if the market looks like it's working against you sometimes (both are all but guaranteed to happen).

And even if you do want a traditional retirement (work until 65 or 70, retire completely, activate hammock mode), that will work with Matt's model. Your goals are your own, and what's important is to identify what will make you the most happy and to actively plan to achieve that happiness.