Financial Independence

What does financial independence mean? It can mean different things to different people.

For young adults, it can mean the ability to pay their own bills and cover financial responsibilities without asking for help from their parents, grandparents, or others.  For those near retirement age, it can mean having enough retirement income and savings to live a comfortable life without the need to work. For those in between, it might mean having the ability to cover an emergency without incurring more debt.  It could involve starting a new career. It could also mean having the funds to travel or not having any debt.  Your definition could include several of these items.

For most, financial independence focuses on retirement, to live the quality of life you want without having to work any longer. Let’s face it, our jobs are at least partially a means to an end.  No matter how much you love your job, at least part of the reason you do your job is to earn money to pay living expenses and to have cash to do the things you want to do.

Retirement planning is planning for life after employment ends.  In addition to financial considerations, it includes considering how you will spend your time in retirement, at what age you plan to retire,  and where you will live during your retirement years.  These decisions will factor into the financial aspects of retirement.

Let’s consider various stages of adulthood and approaches to achieve financial independence.

Early Adult Finances: Ages 21-35

During this phase of life, you have time on your side.  The earlier you start saving and investing, even with a small amount, the more time you have for the savings to compound and grow.  However, student loan debt, young children and mortgages are factors in planning at this age.

Planning tips:
·       Open a 401(k) plan and/or a Roth IRA.
·       Create a budget and monitor expenses.
·       Pay bills on time to avoid late fees or penalties and build your credit score.
·       If you have children, open and contribute to a 529 plan.

Early Midlife Finances: Ages 36-50

This is an ideal time to meet with a financial advisor to review where you are financially and where you are on the path to retirement. There is still time to make adjustments to achieve the goal of financial independence.  Often this age brings the challenge of paying for college for children combined with looking at retirement. Investing may have occurred somewhat haphazardly in retirement plans or investment accounts. There is uncertainty in the investment decisions made, and a fear of making a poor decision, so needed changes in investments or allocation are not made.

Planning tips:
·       If you are eligible for a health savings account, maximize contributions to this as well.  Contributions are tax-deductible and can be used to pay for medical expenses, now or during retirement, tax-free.
·       Continue contributing to your IRA or 401(k) plan, at a minimum, to the extent your employer matches.  As your income increases, maximize your contributions. Evaluate with your tax professional to determine if a Roth IRA/401k or Traditional IRA/401K makes the most sense for you.
• Review your short-term and long-term disability insurance coverage, life insurance, and long-term care insurance.  Having the proper insurance coverage (not over or under insured) will prevent the need to withdraw from retirement savings or incur debt should something happen to you.

Late Midlife Finances :  Ages 51-65

At this stage, review social security estimated benefits and any defined benefit pension plans to estimate the potential cash flow from income you may have during retirement years.  Marital status, age and health of each spouse are important factors to consider.

Planning tips:
• Utilize the catch-up contribution limits that are available to further maximize contributions to your 401(k) and/or IRA.
• While your risk tolerance is lower as you near retirement, due to the shorter time frame for investments to recover, you still need to factor in some risk, as you may live for another 30-40 years.
• If you do not have long-term care insurance, obtain a quote, and evaluate this coverage so that long-term care expenses will not deplete your retirement savings if something were to happen to you.
• If you plan to retire prior to age 65, obtain quotes for health insurance coverage, since Medicare will not be available until you reach age 65.
• Review Social Security estimated benefits to determine the optimum age to begin taking Social Security. If you plan to continue to work prior to Social Security full-retirement age, be sure to look at the income limits, the amount you can earn before benefits are reduced.

Whatever it means to you, financial independence is only going to happen if you set goals and make a plan to get there. Whatever your objectives are, write them down. Keep them in front of you as constant reminders of where you want to end up—living a life, as you define it, of financial independence.

The information contained in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional for your specific situation.

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Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.