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Not Retirement, Financial Independence

What it means to be financially independent.

An anonymous blogger named kaptain_lou had a couple of interesting posts about his plan to retire at 49 with $600,000. He's a CPA by training and if I understood correctly he has been a CFO for the last five years. His retirement date at age 49 is coming up soon. He bought some real estate (income property) early on that he sold because he did not enjoy being a landlord (that is not easy). If I understood correctly the bulk of his $600,000 is from the real estate sales but there is also a Roth IRA in the mix as well as a 457 (similar to a 401k).

In part two of the two part article he lays out the various things he plans to do in terms of volunteering, possible part time work, exercising and preparing mentally. He related the story of a former colleague who wished away his life to retire and regretted it afterward.

He also spells out in great deal the various bonds he owns and some very high yielding stocks including a bunch of REITs with yields in the 7s, 8s and 9s.

I'll offer two observations about his plan (read part 1 and part 2 for this to make sense). Unless he is more engaged in markets than he seems to convey, he is taking insane risk with his portfolio on a couple of different levels. One is that he appears to not have any equity exposure beyond the REITs which for someone who is 49, wants to retire now and only has $600,000 is insane, he's very unlikely to get anything approaching normal equity market growth. The other risk is that he owns a bunch of very high yielding securities in what appears to be a classic yield chasing example. If you're getting a 7% yield in a 1.5% world then you are taking risk and if you don't think you are then you probably don't understand the risk you're taking. There is nothing wrong with exposure to some very high yielding securities in a diversified portfolio but people doing themselves in with too much is something that repeats over and over.

The other thing is that it is not clear to me is I don't think he realizes how little he will get in Social Security. Your Social Security payment is based on your highest 35 years of earnings. Unless he started paying FICA when he was 14, he will have some zero earnings years in there, maybe a lot of them. But even if he did start working at 14, teenage years aren't usually high earnings years.

Having $600,000 to retire with is a fine amount, it is a workable number even if it s not an enormous sum. I say that based on the 4% rule which in simple terms says that taking out 4% annually from retirement assets should allow it to last for at least 30 years. So 4% of $600,000 is $24,000 which as part of a retirement plan can get the job done but not extravagantly so.

For many years I have written about all sorts of different ways to tackle retirement in the face of being under saved but also as an attempt to recognize and explore the idea that retirement is a different thing than it used to be even for people lucky enough to have a sufficient nest egg.

What I would describe this as is to think about being financially independent not retired. I did not coin the phrase but I think it eloquently sums up my approach. Many people will need to generate an income after they "retire" beyond Social Security and whatever they pull from retirement accounts. It can boil down to simple spreadsheet work to figure this out once you understand the 4% rule. There are also plenty of other benefits to working in retirement besides the money, related to well being and a continued sense of purpose (the problem that kaptain_lou's friend ran in to).

Financial independence in this context doesn't have to wait until "retirement." Back to kaptain_lou, at 49 with $600,000 and still working has a lot of financial flexibility (independence), all the more so if he lives below his means. He is at best borderline able to retire at 49 but well on his way, were he to keep working closer to a normal retirement age. The difference between 55 and 49 in terms of increasing his Social Security check could be huge, also it wouldn't be crazy to think that his $600,000 would be more like $700,000 at 55 assuming a somewhat normal asset allocation (which he doesn't have currently).

How old are you? How much have you accumulated? If you're reading this then you are more likely to at least be close to being on track to retire with a sufficient nest egg. If that is the case and you are living below your means then you are far more likely able to absorb some sort of financial shock which should mean you have far less stress over money than someone less fortunate. Be grateful if you're in that position and strive to get there if you're not, it starts with living below your means.

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