Retirement: the act of leaving one’s job and ceasing to work.
Financial Independence: having sufficient wealth to live on without having to work
There’s a very subtle, but very important difference. Most people achieve financial independence and retirement at the same time. As soon as they can afford to retire (i.e. – achieving financial independence), they do it. But there seems to be a shift in the mindset of young professionals, especially in creative fields.
For many of these creative millennials, financial independence seems to be a goal they hope to achieve long before retirement. Why? Because achieving financial independence means they can focus their energy on creating products, companies, software, apps, etc. without the same financial stress as doing it for a career. Their work becomes 100% passion driven. If they like a project, they work on it. If they don’t, they refuse it. No more working because they have to.
When you don’t need to work, you free yourself to pursue your passions at full speed (or half speed, or quarter speed). That’s the point. You get to make the rules. You get to work on what you what, when you want, and with whomever you want.
So I’ll ask you… what would you do if you no longer needed a current income, but still had the passion and drive to work? Is it what you’re currently doing? If so, consider yourself lucky. That’s an amazing accomplishment. If not, are you willing to put the pedal to the metal on your savings and investment plan to become financially independent as quickly as possible so you can pursue these passions, or will you accept the status quo and “…hope to retire at 65”?
I’ve made up my mind. I’m committed to saving and investing as much money as I can each year, because that’s what it takes. Contributing 3% to your 401k so you can get the company match won’t cut it. It takes a lot more than that to achieve financial independence.
Think about this. Each year you retire early will mean one less year to save money, one less year for your investments to appreciate before tapping into them, and one more year you’ll be relying on the income from your investments. It’s a triple whammy. Saving enough money to account for this doesn’t happen by increasing your savings rate from 3% – 10%. It happens by making dramatic decisions about your spending habits and your lifestyle choices. It means living a lifestyle that’s above your needs, yet significantly below your means. It means saving 30%, 40%, maybe even 50% of your income each year while you’re young.
This level of aggressive saving isn’t for everyone, and that’s fine. It’s a huge sacrifice to only live on a modest portion of your income. But if achieving financial independence in your 40’s or early 50’s is for you, and it’s a goal you hope to achieve someday, the time to take it seriously is now. You’ll need every ounce of savings to make it happen.
Tim Plachta, CFP® is the founder of Reliant Wealth Management, LLC, co-founder of Ruby’s Rainbow, Inc., and a CERTIFIED FINANCIAL PLANNER™ practitioner. He works with clients all over the country to help guide them toward financial independence.