The traditional approach to retirement has been to put your head down and work hard until your mid-60’s, at which point you stop working altogether and enjoy the “golden years.” The idea is that you put in your time over the years and retirement is the reward for your effort; the point when you can kick back and relax (stereotypically on a beach somewhere).
That traditional approach is now changing. With physician burnout becoming increasingly prevalent and more people questioning why they should wait several decades before enjoying the benefits of retirement, focus is shifting toward the idea of financial independence. But what is financial independence?
What It Is
Financial independence is when you can sustain the lifestyle you want based on the wealth you have accumulated. While you must be financially independent to retire, you don’t have to retire to be financially independent. Stated another way, financial independence is the point when work becomes optional. That’s not to say that you must stop working, it simply means you no longer HAVE to work. Financial independence is about freedom and flexibility.
The Benefits of Financial Independence
One of the biggest benefits of reaching financial independence is that it opens options. When you are no longer reliant on a paycheck to support your lifestyle, you have much more flexibility when deciding how to balance your life. Such balance could mean spending more time with your kids, traveling, volunteering more, working part-time, pursuing a new career, or anything else that your prior work schedule prevented you from doing.
The Reality of Financial Independence
While financial independence is great once you achieve it, getting there takes time, discipline, and often involves some sacrifices in current lifestyle. This helps explain why the timing of financial independence typically lines up with a traditional retirement age of around 65. However, those who want to reach financial independence earlier must accelerate the wealth-building process.
In the most basic sense, you build wealth by saving money. And to save more dollars than you currently are, you can either increase your income or reduce your spending. For some people, this means pursuing a higher paying job (one that could carry more stress or longer hours), while for others, it means spending less. Regardless of where you fall on the spectrum, to build the wealth required to reach financial independence at a relatively young age, you must save much more aggressively than the average American.
What’s Best for You?
The timing of financial independence is different for everyone. For many people, the delayed gratification required to reach financial independence earlier in life simply isn’t worth the sacrifice in current lifestyle. Other people love their jobs and plan to continue working until they are “dragged out of the building,” which puts less pressure on their timeline for reaching financial independence.
However, for people who have the willingness and ability to save a large enough percentage of their income, have jobs that would be difficult to continue to the traditional retirement age, or have a vision of life that involves spending less time working in formal employment and more time pursuing other interests, early financial independence may be a worthwhile goal.
Financial independence provides freedom and flexibility, but it’s important to understand there are trade-offs and sacrifices involved in pursuing it. Adopting the goal of financial independence earlier than “normal” retirement age means embracing a lifestyle shift and taking a different path than many of your peers. Regardless of what you decide, keep in mind that just because you reach financial independence doesn’t mean you must change anything about your life or stop working, it simply means you have that option. And on the flip side, once you reach financial independence, you may still end up on that proverbial beach, but perhaps you’ll make it there young enough to still have your beach body intact.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.