What Should be Your Focus: Financial Freedom or Retirement?
This is a guest post written by Linda Richardson.
The term ‘financial freedom’ is often misunderstood by people. They often equate financial freedom with retirement. But, both are significantly different from each other. You have to understand this. Retirement is a big event in your life. However, this event usually comes almost 30 years after you have started working. It’s something that will happen when you’re old.
Financial freedom means having enough money to lead a comfortable life on your own terms.
A real-life scenario
You’re pissed off with your boss since he is hackling you every day at work. One fine day, you put down your papers and quit the job without worrying about what you’ll eat the next day. You have enough money to survive without this job. That is financial freedom.
What should be your focus? Financial freedom or retirement?
The definition of financial freedom varies from individual to individual. For some individuals, financial freedom implies getting out of credit card debt. They are looking for options to pay off their credit card debt fast. Once they pay back their creditors, they feel as if a heavy burden has been lifted from their shoulders. They feel good. Thereafter, they can fulfill their childhood dreams and aspirations. They can follow their passions.
For some people, financial freedom means having sufficient cash-flows to cover their basic needs. For others, it means winning a lottery and maintaining a luxurious lifestyle. The definition differs from person to person. But one thing is clear. Financial freedom essentially means having enough money to live comfortably. The power to lead a life on your own terms and in comfort without doing a job. You don’t need income from employment. That is financial freedom.
Now, you have to decide the amount of money you need to have in your bank account for attaining financial independence. How much do you need for that? Is it $70,000, $140,000, $200,000, or $400,000? This requires specific evaluation…
With the right financial planning and luck, you may attain financial independence by the time you turn 40. You can enjoy the rest of your life without doing a 9-5 job. It’s only you who can decide the amount of money and the time you need to get complete financial independence.
Given a choice, you should always focus on attaining financial independence instead of retirement. First of all, retirement is a long term plan. The average age is 59 ½. So, you have to wait until that time. Moreover, there is no guarantee that you’ll enjoy a comfortable life after retirement.
Yes. You may not need the full income from employment anymore. However, this doesn’t mean that the Social Security check that you’ll receive is enough to take care of all your financial needs. You can withdraw money from retirement savings accounts, But, you won’t get Social Security benefits before you turn 62. Other federal healthcare benefits, like Medicare, also kick in after you become 65 years old. So, do you get my point?
How can you calculate the amount of money you need for financial freedom?
The calculation is not that tough actually, Suppose, your annual income is $80,000. You’re happy with the amount you are earning annually as it helps you to lead a comfortable life. However, you have a few financial obligations at present. This includes mortgages, credit card debt, and student loans. You have to pay almost $20,000 on the mortgage, $10,000 on student loans, and $10,000 on credit cards. So, your total expense on debts is $40,000.
After you pay off the mortgage, credit card debts, and student loans, you don’t have to pay $40,000 every year to creditors. So, you’ll need $40,000 to retire early and achieve financial freedom. However, you shouldn’t stick to this figure only. You may need more money due to inflation, financial risks, and unforeseen expenses. So, $40,000 is just the basic figure. The actual figure for attaining financial freedom should be way more than $40,000. A great way to estimate how much money you’ll need is by using the 4% rule – a “safe withdrawal rate” approximation popular in the early retirement community.
Conclusion
Finally, you need to determine when you would like to get financial independence. If you’re a 20-year-old guy and want to attain financial freedom by 40, then you have only 20 years at your disposal. Suppose, you have already calculated the amount you need for attaining financial independence. Now, you have to decide how much to earn and save every year to touch that magical figure by 40.
Once you know how much you need to save every year, a lot of your stress is alleviated. There is no need to compare yourself with others. You know your destination. All you need to have is a clear strategy for achieving your goal. You can consult financial planners to chalk out a strategy. You can also use various financial tools to attain your goal.
Linda Richardson is a financial content writer based in New Jersey and a perennial student with an ongoing interest in learning new things. She uses her curiosity, connected with knowledge as a financial writer, to write valuable posts for small businesses.
You can find her on Twitter at @LindaRossie9 and Facebook at @LindaRich008. She is currently a financial writer for http://www.
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