Achieving Independence, Financial and Otherwise: Because There’s More that Matters


Posted: October 03, 2019 | Word Count: 771

By George Karris and Matt Logan

It’s a common dream: retire early and enjoy the best of what life has to offer. It’s a dream within grasp, but not one that comes to fruition without a mindset akin to that of a professional athlete. Becoming financially independent requires focus, drive, patience and commitment because there are not only challenges on the way to getting there, but also in being there.

What exactly is financial independence?

Financial independence is when the sum of your passive income is enough to cover your annual financial needs. Such needs would include the daily needs of food, housing and transportation, but also regular expenses like insurance and taxes and even unanticipated costs like a major home repair. Track monthly expenses to determine your income needs, and pad the total to provide a cushion for the unexpected.

How early can financial independence be achieved?

Many consider financial independence as the ability to stop working and generating earned income; in other words, retirement. Traditional retirement may be considered at about age 65, when most can begin taking advantage of Medicare for their health care needs. Retiring at age 59.5 is another common milestone, as this is the age when most individuals can begin accessing retirement assets without incurring penalties. Even earlier retirement, before 59.5, is the version most often associated with achieving financial independence, but it takes considerable effort.

How can it be achieved early?

Achieving an early retirement requires discipline, and there are a few key steps:

1. Start early. If retiring early is a goal, start taking advantages of opportunities to save and invest as early as possible. Time allows for compounded earnings, helping investments grow.

2. Maximize retirement accounts. Use all tax-favored retirement savings vehicles at your disposal. If you have a 401(k) plan available, contribute the maximum each year — not only are you sure to reap the benefits from any employer match, but you’ll be reducing your current tax bill with the pre-tax contributions. Consider opening individual retirement accounts to supplement any employer-sponsored savings vehicle.

3. Eliminate debt. If you have student loans, auto loans, credit card debt, a mortgage or any other loans, make paying down debt a priority. A financial advisor may be able to help you identify loans that can be refinanced at lower rates and develop a plan to get out of debt early so that your money can start working for you instead.

4. Save. After setting up an emergency savings account, direct all your extra income into investments that have potential to support your financial goals. Keep in mind that the higher your savings rate, the quicker you can retire. Setting aside 60% of your post tax income may sound drastic, but if you can manage it (and stay disciplined), retirement could be as few as 12 years away.

5. Invest. Investments that meet your risk and return objectives have potential to generate more growth than cash vehicles, like money market or savings accounts. Look for income-generating vehicles that offer a significant yield, such as bonds, annuities and dividend-paying stocks.

6. Diversify. Work with an advisor to create a diversified portfolio that incorporates a variety of income sources — stocks, bonds, mutual funds and even rental property or passive business interests. Diversification can help protect your overall portfolio from excessive volatility.

What challenges could be present?

While retiring early sounds like a dream, for some, the endless hours with no clear purpose can become a source of stress or anxiety. Think about which pursuits would fill the void, whether it’s community service, travel, family obligations, hobbies or other activities. Many who achieve financial freedom choose to continue working, albeit in an occupation that aligns with their personal hobbies and interests.

Despite careful planning, you may find that some expenses have been underestimated and may require tightening your belt on occasion. Health care coverage, for instance, can be a big strain on the budget and may vary as you age or your health conditions change. Or, property taxes in your area could increase faster than anticipated.

Keep track of your portfolio

While tempting to leave a portfolio in cruise control and enjoy newfound freedom, it’s a good idea to review investments on a regular basis. Consider establishing a relationship with an investment advisor, who can send reminders and help rebalance a portfolio as necessary so you can focus on living the life you desire.

George Karris is Head of Strategy at Cetera Financial Group, based in San Diego, California.

Matt Logan is an Independent Financial Planner affiliated with Cetera, based in Greensboro, North Carolina.

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