Rethinking retirement: A focus on financial independence
By Linda Lamarche, CFP® 13 July 2022 4 min read
The concept of retirement is changing. Previously, retirement was like a light switch — you spent decades working then one day you flipped the switch and were retired. Often, it was a cookie-cutter retirement: your working years were spent with the same employer or at least in the same industry; retirement was at age 65 when government benefits began; you might've had a defined benefit employer pension plan; and, with any luck, you had enough invested for a rewarding retirement and didn’t outlive your money.
This traditional view of retirement has gradually advanced into a more fluid, flexible evolution into financial independence.
What does financial independence mean?
Financial independence is about being in control of your finances and being able to have flexibility throughout your life, not just after you’ve stopped working. Although it does provide the opportunity to retire sooner, it’s also about having enough invested prior to retirement years to be confident to do the things you want both earlier and later in life.
There are various degrees of financial independence. Perhaps you’ve even heard of the FIRE movement, which stands for “Financial Independence, Retire Early.” The FIRE movement was initially inspired by the 1992 book entitled Your Money or Your Life by Vicki Robin and Joe Dominguez, and more recently Jacob Lund Fisker’s 2010 book Early Retirement Extreme.
FIRE investors are focused on extreme savings and investing, and often dedicate up to 70% of their income to their investing goals with the objective of being able to live off their wealth much sooner than the typical retirement age. This is generally accomplished through living a very frugal lifestyle both before and after withdrawals from investments begin. It’s not unheard of for extreme FIRE investors to live in tiny homes or even RVs, sacrificing life’s luxuries and maintaining a very minimalistic lifestyle to be able to save aggressively for future financial freedom.
In reality, financial independence for most of us will fall in the spectrum between the extreme FIRE movement and traditional retirement. Having more freedom and flexibility with your finances may not require you to live in an RV, but will likely require more than just giving up your daily lattes. It’s about defining your goals, creating a plan and being very intentional about your spending, savings and investing.
Although this transition towards financial independence was occurring before the pandemic, the economic impact of COVID-19 has shifted the priorities of younger generations and highlighted the importance of financial well-being. Generally, the focus on saving for the future was more common in older generations. However, a January 2021 Ipsos survey conducted on behalf of Sun Life indicates that as a direct result of COVID-19, 80% of millennials (ages 24-39) and 89% of gen Z (ages 18-23) want to ensure their financial future is protected, as compared to only 71% of gen X (ages 40-55) and 65% of baby boomers (ages 56 and older). As a whole 73% of participants want to ensure their financial future is protected. Additionally, of all Canadians surveyed 65% indicated the pandemic has made them focus more on their financial security.
Regardless of your age, the pandemic has highlighted the need for maximizing your finances, being intentional about your spending and savings, and the importance of having a comprehensive plan for your financial future.
What does financial independence mean to you?
Financial independence means different things to different people and it's important to define what it means to you.
Are you willing to sacrifice and save now to build your investments to sustain a modest lifestyle? Would you prefer continuing with full-time work with disciplined savings and investing and a move to part-time or flexible work at some stage in your career? Even if you love your job and have no intention of retiring early, financial independence means having the ability to have flexibility with your future and the freedom to change course if your plans change.
Where do I start?
Achieving financial independence, whatever that may mean to you, starts with defining your goals, creating a plan and taking the steps necessary to achieve your objectives.
A comprehensive financial plan not only provides the foundation for reaching your financial and lifestyle goals, but also provides peace of mind. In fact, according to a three-year study commissioned by FP Canada, those participants that engaged in comprehensive financial planning reported significantly higher levels of financial and emotional well-being and indicated they were more confident dealing with financial challenges in life. In addition, 81% of survey participants with a comprehensive financial plan said they are on track with their financial affairs, compared to only 44% of those with no financial plan.
As there are many moving parts in the creation of a financial plan, working with a financial advisor can ensure nothing falls through the cracks. Financial plans are never a one-size-fits-all template. Your plan should be customized to reflect your unique circumstances. An in-depth financial plan may encompass some or all of the following areas:
- Financial management
- Retirement planning
- Major purchase strategy
- Education planning
- Risk management
- Tax planning
- Estate planning
An ATB Wealth advisor can work with you to create your plan and determine what steps are required to achieve your goals, whether that’s becoming financially independent, retiring early or being financially secure to do the things that are important to you at any stage in your life.
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