Independence Day comes like clockwork every July 4, but do you know when you can expect to celebrate your own financial Independence Day? Retirement planning is largely based on planning around future probabilities, so it’s nearly impossible to pinpoint your exact Independence Day – the specific day you become financially independent.
Financial independence is one of the most important concepts in retirement planning. It’s that target you’ve been aiming at for the last several years – the point at which you won’t need to work anymore.
As you can imagine, financial advisors think a lot about this, but you’d be hard pressed to find an advisor who would stake their reputation on the exact day or even month you’ll be able to retire.
As advisors, one of the ways we gauge your financial independence is by looking at your financial plan – assuming you were to retire today. You’re financially independent when this “retire now” plan starts to look solid.
At this point, most people decide they’re done. It’s time to retire. You’ve reached your objectives, and it’s time to start enjoying the life you’ve worked so hard for. Why work if you don’t have to, right?
But not everyone thinks this way. A lot of people choose to keep working. That’s the beauty of being financially independent: you can do what you want. (Sadly, many people have to work after retirement because they haven’t saved enough money to allow them to choose, but that’s a discussion for another day).
For a lot people, the annoying parts of their jobs become a lot less annoying when they know they can walk away any time they want.
People choose to keep working after their Independence Day for a lot of reasons, but they generally fall into two camps:
- They enjoy their work – If you enjoy your work, there’s (usually) no reason to stop. In fact, there’s evidence that continuing to work into “retirement” is good for your health. Whatever you enjoy about your work – the intellectual challenge, the social interaction, feeling productive –just because you don’t need the paycheck anymore doesn’t mean you have to stop.
- They want to be able to spend even more in retirement – Depending on when you achieve financial independence, you might want to continue to work so you can afford to take a trip every year or do whatever you want. This can be an incredibly powerful strategy because not only are you delaying the point when you start dipping into your portfolio (which means more time for your investments to compound), you’re also continuing to add money to your portfolio.
But whatever you do, don’t do it out of inertia. Take a moment on your Independence Day (or, preferably, before) to make a conscious decision about working in retirement. You’ve worked hard to become independent, and you want to take advantage of it.
But in order to know if you’ve reached financial independence, you need a financial plan. Otherwise you’re just guessing, and that could be disastrous.
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