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Change the Conversation: Financial Independence is the Goal

Change the Conversation: Financial Independence is the Goal

| May 10, 2022

Webster defines the word retirement as “To Fade Away “. That may have been true a few decades ago, but with today’s longevity and healthy active seniors, I propose that we consider a different objective-the goal being achieving Financial Independence. What does it mean to be “financially independent?” It is the point in time where your savings, investments, and income sources such as pensions and Social Security can meet your living expense objectives. When a person is financially independent, they can then decide whether they want to continue to work, leave their present situation to seek a more fulfilling position, or stop working altogether.

Let’s talk instead about the day that you achieve financial independence. Clients must ask themselves What do you see yourself doing?
Will you continue to work?
Will you do something new?
Will you choose to work longer/ purpose vs. necessity.?

One of the biggest hurdles to achieving financial independence and leaving the workforce is the unknown cost of health insurance prior to age 65 Medicare qualification. Clients can compare the cost of COBRA coverage through their employer (up to 18 months), the cost of insurance under the Affordable Health Care Act, or individual health insurance options. Married couples can explore coverage through a still employed spouse if that is an option. During the pandemic, many baby boomers chose to leave the workforce. In fact, departures rose from 3.2 million in 2019 to 30 million in 2020 according to Forbes magazine.

Another hurdle to address is leaving the workforce before your Social Security full retirement age (the point between age 66 and 67 depending on your year of birth). Electing benefits early can lead to a permanent reduction in your lifetime benefits. If you elect to wait until age 70, you can lock in a higher benefit for life, one which increases by 8% per year from FRA to age 70. Through good planning, the best timing can be determined.

Pension benefits are no longer the norm for the average retiree. With the movement toward self-funding (using 401k plans, etc.), most companies no longer offer pension benefits. Where there is a pension benefit, it is important to choose the best payment option, which can be a lump sum benefit (where the individual is responsible to manage the funds and distribute income) or through various payout options such as single life or joint life (providing benefits to the surviving spouse.) We have seen many cases where a spouse made a single life election, and the income came to an abrupt halt at their death, leaving the survivor short. A careful review of all options should be done to make the best decision for the family.

Once you have determined what all of your retirement income sources are, you can begin to develop a plan to use the assets you have saved over a lifetime of work. Here you must consider taxable versus non-taxable, required minimum distributions from retirement plans, and the best method to structure your income. At our firm, we take a bucket approach wherein we purposely set aside 36-48 months of planned distributions in low-risk short duration fixed income and cash instruments. The funds not required for generating income are allocated for growth and future income. In this way, market cycles become less of a factor in taking income from a portfolio as the funds allocated for future growth will not be accessed for at least 36-48 months.
Thus, you can see, that there are many issues to consider as you plan to leave the workforce at the age when you become financially independent. All of these should be part of a comprehensive “retirement” income plan for now and long into the future.

Securities and investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC, Additional investment advisory services offered through Cathy A. Wagner, CFP®. 727-789-3691 2662 West Lake Road Palm Harbor, FL.