When you can tell your boss to drop dead
Financial independence vs. retirement
Jonathan Chevreau, Financial Post Published: Saturday, August 09, 2008
Much has been written about the tidal wave of Baby Boomers approaching retirement. But the underlying story is their quest for financial independence.
Retirement and financial independence are two terms that are often interchanged, but there's a huge difference, says Jason Heath, a fee-only financial planner with Markham, Ont.-based EES Financial Services Ltd.
He defines retirement simply as "when you stop working." Financial independence, he says, "is the point at which you no longer need to rely on a paycheque."
Preet Banerjee, a Scotia McLeod advisor and author of RRSPs, says the word "retirement" should itself be retired and be replaced with "achieving financial independence." His clients find a long, multi-phase transition into retirement is more palatable than picking one target date to make dramatic changes.
Advisor Robert Smith defines retirement as the end of one's working career, whether financially ready or not. "The resulting lifestyle may not be pretty or glamorous, but you can be retired regardless of your financial situation." Financial independence means you don't need to work now -- or in the future -- to maintain a desired lifestyle.
David Chalmers, an advisor with Vancouver's Roger Group Financial, uses the term "independently wealthy" for financial independence. He says the magic sustainable annual withdrawal rate is 4% if you want your capital to last the rest of your life. So, if you wanted $40,000 a year, you'd need a $1-million nest egg with some inflation adjustments after the first year.
Robert Cable, a veteran advisor at ScotiaMcLeod and author of Investing on Autopilot, says financial freedom is not about specific dollar amounts. "There are millionaires who constantly worry about their money and waste time watching every little zig and zag of the market. They are not financially free by any means." He says there are two components to financial independence: You need sufficient reliable income to do whatever you want, and you should not be unduly worried about investments. A properly balanced portfolio should be worry-free from day to day.
Warren Baldwin, regional vice-president with Torontobased T. E. Wealth, says funding retirement is about having assets, pension, investment income and lifestyle costs all "meet in the middle." Baldwin often sees clients years away from retirement who have a degree of financial independence. "They have achieved an asset/lifestyle position that would permit them to just quit the rat race now."
Fred Kirby, a financial planner in Armstrong, B. C., says the difference between retirement and financial independence is the degree of personal choice in determining the event's timing. "Financial independence occurs on the date when one's income from sources other than employment exceeds, and will continue to exceed, one's expenses. At that point, the choice between work or retirement becomes a lifestyle choice and not one of necessity. If one chooses to continue working, it is because he or she wants to--not has to."
Retirement is not always a matter of choice. It can be imposed by pension service requirements, even failing health. "Retirement is a period in one's later stage of life that most of us stumble into by simply living long enough," Kirby says.
"Financial independence does not just happen with the passing of time, it requires an unflagging commitment to one's financial goals through controlled spending, disciplined saving and prudent investing." -
