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7/01/2013 @ 10:16AM | 21,049 views

Plan For Financial Independence, Not Retirement Richard Eisenberg, Contributor

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Here’s a holiday suggestion that only a personal �nance blogger would make: While you’re celebrating Independence Day, take some time to nail down the day you want to become �nancially independent.

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Declaring your Financial Independence Day is a better idea than trying to come up with “the number” you need to retire, especially if you’re in your 50s or 60s and don’t have much time to pump up your savings. What exactly is �nancial independence or, as some call it, �nancial freedom? That depends on your own de�nition.

In a new Capital One 360 survey, 44% of U.S. adults said �nancial freedom meant not having any debt, 26% said it meant having enough saved for emergencies and 10% de�ned it as being able to retire early. I go with Jonathan Chevreau, the Toronto-based author of the new U.S.

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edition of Findependence Day, a “�ctional Home New Posts �nance” book, and creator of the Findependenceday.com site. His novel is about a young debt-ridden couple, Jamie and Sheena Morelli, and their road to reaching you know what.

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Chevreau says that when you’re �nancially independent, you work because you want to, not because you have to. “Findependence is necessary for retirement,” he says. “You can be �ndependent and not retired, but you can’t be retired without being �ndependent.” Chevreau targeted April 6, 2013 – his 60th birthday – as his Findependence Day and reached that goal, but he still edits Canada’s MoneySense magazine. “I have a job I like, so why would I quit?” he asks.

(MORE: The Retirement Topic Nobody Wants to Talk About) 5 Rules to Declare Your Findependence Chevreau’s �ve rules for achieving �ndependence: 1. Pay o� your home in full. “That’s really the foundation,” he says. 2. Find multiple sources of income for retirement. These can include interest and dividends from your investment portfolio; rental real estate; freelance or consulting work; Social Security; an annuity; and perhaps a guaranteed pension.

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3. Develop “guerrilla frugality” Home New Posts habits. Chevreau calls this “becoming a Frooger.” Keeping expenses low while working full time will make it easy to live that way in retirement and reduce the amount of savings you’ll need for a comfortable retirement.

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“If you spend like a millionaire, you’ll end up a pauper,” says his book’s protagonist, Jamie. “Spend like a pauper and you have a shot of becoming a millionaire.” 4. Save 20% of your gross income. This will be impossible for many people, but not for others. If you can’t save 20%, try for 15 or 10%. 5. Invest with a “Lazy ETF” portfolio. That means selecting, say, three exchange traded funds– a U.S. stock fund, an international stock fund and a U.S. bond fund – and holding onto them. Review their performance once a year then rebalance your portfolio if the markets shift and you discover you have a higher percentage in one of these asset classes than you want. (Use index funds instead of ETFs, if you prefer.) Women, Men and Money At the risk of overgeneralizing, I think many women gravitate toward the concept of �nancial independence, while men often prefer focusing on “the number.” In the initial episode of the two-part Consuelo Mack WealthTrack public television series on Women, Investing and Retirement that premiered June 28, Jewelle Bickford, senior strategist for GenSpring Family

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O�ces, said the �rst question her male Home New Posts clients ask in their monthly or quarterly meeting is “how has their portfolio done, whereas the women tend to think: ‘Will I have enough?’”

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Two Types of Retirement Calculators If you’re trying to �gure out your Financial Independence day, should you bother using an online retirement calculator? I think it depends on the tool. Most retirement calculators are actually best for people in their 20s, 30s and early 40s who have years to save furiously once they see their “number.” The electronic number crunchers typically ask few questions, partly because younger people can’t possibly determine for sure their retirement income sources or expenses. “When you’re further away from retirement, these calculators are directional in nature,” says Kent Allison, a PwC partner and leader of the �rm’s �nancial education practice, based in Florham Park, N.J. “When you get closer to retirement, you really have to get into a nitty-gritty cash �ow analysis.” He’s right. If you’re three to 10 years away from retirement, that’s the time to �gure out where the money will come from to cover what Pat O’Connell, executive vice president for the Ameriprise Advisor Group, calls the three types of expenses: Essential expenses that’ll be covered by guaranteed income sources, like bonds, Social Security and a pension. SWIPE

Lifestyle expenses purchased with money from your investment portfolio.

Unexpected expenses, like health care New Posts and long-term careHome costs, paid for out of your emergency savings fund.

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Three Good Calculators for People 50+ There are, however, a few excellent calculators – not always free – that are speci�cally geared for people in their 50s and 60s. They can help you �rm up a retirement cash-�ow analysis. One is Retirement Works2 for You, created by retirement adviser Chuck Yanikoski primarily for what he calls “nona�uent people trying to play their cards as smartly as they can.” It costs $189 for the �rst year; annual renewals are $44.50. RW2, as it’s sometimes called, asks a lot of questions; Yanikoski says you should plan to spend one to three hours answering them. (“Retirement is an extremely complicated thing,” he says.) But the results can be valuable. As soon as you input your data and answer the questions, you’ll get an online report card with retirement planning advice and letter grades telling you how well you’re set under “normal” circumstances, if you live an extra long lifetime, if your investments don’t perform well, if in�ation shoots up and if you run into high medical expenses, including long-term care. You’ll also see how your cash �ow would be a�ected if you delayed retirement and lowered your standard of living. SWIPE

(MORE: How Much to Withdraw From Retirement Savings)

Two other calculators worth considering: Home

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The free Ballpark E$timate from the Employee Bene�t Research Institute’s Choosetosave.orgsite and the American Savings Education Council; Next Avenue has a link to the Ballpark E$timate calculator. E$Planner, created by Lawrence Kotliko�, an economics professor at Boston University. There’s a free version of E$Planner Basic as well as one that costs $40, with “what if” investment scenarios and Social Security options. The downloadable $149 product also o�ers “retirement spend-down” strategies, helping you determine how much to withdraw from your portfolio. Use an Adviser to Plot Your Findependence Whether or not you use a calculator to come up with your Financial Independence Day, I strongly suggest you work with a �nancial adviser to run the numbers. “The decisions are major,” Allison says. “A wrong one could cost you a lot. So even if you don’t normally want to spend money on a �nancial planner, this is the one time to do it.” Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue. Follow Richard on Twitter @richeis315. Like this article? Sign up for Next Avenue’s weekly newsletter to get more fascinating articles and blogs about work, �nance and lifestyle issues geared to a 50+ audience.

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