Financial Independence

by Paul R. Ruedi, CFP®

As I was celebrating Independence Day this year, I couldn’t help but think of one of the pieces of financial jargon you may hear in the retirement and financial planning industry: financial independence. As the name implies, a person reaches “financial independence” when they have saved up enough that they no longer need to work their full-time job to support their lifestyle. The big question, of course, is how much do they need in savings and investments to be able to do that? The answer is different for everyone.

The first step to understanding how much you will need is by gaining an understanding of what it takes to fund your lifestyle now. If after all your taxes and savings you are spending $100,000 per year, you will need to figure out a way to replace that spending in some way when you are no longer working.

That can be done many ways, but almost all involve some form of saving and investing. A person could invest in rental properties with a goal of buying enough properties over time to produce the same income they make working. Others may invest in a diversified stock and bond portfolio and take withdrawals from that once their account balance is high enough that it can support their spending indefinitely.

If a person used the 4% rule as a guideline for how much they can withdraw from their portfolio, it would mean they must save 25 times their annual spending to achieve financial independence. Many people pursuing early financial independence will target saving 30 times their annual spending just to be extra safe.

It is very helpful to save as much as possible, as early as possible, if you aim to achieve financial independence as soon as possible. I think it is also important to emphasize how big of an impact lower spending has on the math of financial independence.

Lower annual spending requirements considerably lowers the bar for how much needs to be saved to achieve financial independence, which generally means it can be achieved much sooner. The tradeoffs between spending more and working longer to be able do so are important to consider when diving into the math of financial independence.

There is no single best route to financial independence, but I think it is important that whatever route you choose, you make a plan and stick to it. If you are not sure if you are on the path to achieve financial independence at some point, I’d highly recommend you seek the help of a financial planner.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.