The traditional road to a well-funded retirement is a linear process that follows the predictable trajectory of school, university, job, marriage, children, travel and then retirement – a process which is supported by approximately 480 pay cheques and interspersed with climbing ladders, moving jobs, buying bigger homes, faster cars and more stuff. Over the past decade or so, however, a number of significant factors have worked together to create (as it were) the perfect storm within the retirement landscape. Increased longevity, the rise of the ‘experience economy’ and the dearth of the silent generation, coupled with the desire by a generation of brave new Millennials to retire differently, has necessitated a global rethink as to the ‘magic’ number 65 and what retirement is really all about.
The concept of retirement has always been synonymous with financial freedom, and it has widely been accepted that us humans have approximately forty years to achieve this status. Perhaps this generation’s preoccupation with choice has contributed to us questioning why the traditional retirement model provides very little in terms of options for those averse to the thought of making a clean-break at age 65.
Re-imagining retirement begins with unpacking exactly what is means to retire. The point at which a person is able to financially ‘retire’ marks the point at which he has accumulated sufficient assets to generate enough income for the remainder of his life. Put differently, it is the point at which a person attains financial freedom and everlasting choice. Our challenge in the re-imagining process is to accept that we are not restricted to a forty-year period in which to achieve financial freedom. If we are prepared to devote our time, money and energy towards this end-goal, the timeline is ours to determine.
Replacing the term ‘retirement’ with the term ‘financial freedom’ is an empowering substitution which removes age-based limitations and reinforces the personal desire to save towards absolute financial freedom, whenever that may be. While the term ‘retirement’ connotes being in the last stage of life, ‘financial freedom’ is a timeless phrase achievable by absolutely anyone with the right mindset and a financial plan to support it. ‘Saving towards absolute financial freedom’ is a much more desirable objective than ‘saving for retirement’, and is something that even a 22 year old graduate can relate and aspire to. This rephrasing is less about semantics and more about framing a mindset from the get-go that we are not working so that we can reach age 65 and ask ‘What am I going to do for the rest of my life?’. We are working towards reaching a point in our lives where we can sit back and say, ‘I can do whatever I like for the rest of my life’. You might not know now, or even at the point of reaching financial freedom, what it is you plan to do with the rest of your life, but you have bought yourself freedom to spend your time as you choose, and that is priceless.
Working towards financial freedom at an earlier age has a significant impact on the way we make every-day financial decisions. On the journey to financial freedom, we will be greatly challenged to find a balance that allows us fulfillment in the present while simultaneously staying focused on the end-goal. Your vision of financial freedom, which you will need to define in your own financial terms, needs to be clear enough to hold up as a touchstone for all financial decisions. Every vehicle upgrade, every overseas trip, every capital outlay delays our goal and extends the period during which our choices are limited and our time is not fully our own.
There are a number of key milestones on the progression towards absolute financial freedom, and our advice is to celebrate each victory along the way. The journey to financial freedom is essentially a continuum of incremental advances toward a stated end-goal. Each milestone provides one with greater autonomy and freedom of choice, which in turn contributes to one’s overall feeling of fulfillment. Traditionally, retirement means stopping work for pay, whether in the form of formal retirement, early retirement or semi-retirement. On the other hand, financial freedom means being permitted to work for passion and purpose alone.
Although generally defined as the state of having sufficient personal wealth to cover one’s living expenses without accessing one’s assets, all-encompassing financial freedom means different things to different people. ‘How much is enough’ is a thoroughly personal question that every person will need to answer for themselves. Every person has their own measure of what constitutes peace-of-mind and personal freedom, and the extent of the legacy (if any) they wish to leave behind.
The key milestones on the path towards financial freedom include the following:
Unless you’re a trust fund baby, everyone starts off life being financially dependent on a parent or guardian. At some point during the early stages of adulthood, we become more financially independent as we begin generating an income and paying our own way. Until you reach a point where you earn more than you spend on a monthly basis, you are considered financially bound to someone else. This is the beginning of the journey and is defined by lack of autonomy and little personal choice, with self-esteem being adversely affected the longer this state continues. Your first pay cheque marks the first step of the journey, and this is the best time to draft a financial plan and start saving.
- In the black
The move from dependency to this first stage of independence means that from a budgetary perspective you are making a profit each month. With earnings exceeding your expenditure, you are considered to be ‘in the black’ and can meet all your financial obligations. In this stage, you are able to service your good debt (vehicle and home) and cover your basic living expenses without incurring further debt. Very little autonomy is experienced and financial decisions are somewhat reactionary. Your standard of living can easily be compromised by interest rate increases and inflationary hikes, and your finances need to be carefully managed.
Although this stage may include some secured debt, it is notable in that a portion of your net monthly income is now being channelled towards saving for the future. At this stage, short-term and high-interest debt would have been eliminated and an emergency account set up to protect against unforeseeable expenses. All debt should be secured, low interest debt on appreciating assets such as property. Consumer debt should be a thing of the past, and surplus income should be channelled towards wealth-building. At this stage, you would have created effective financial buffers through emergency funding, an access bond and regular debit-order investing, although your financial decisions may still be somewhat reactionary.
At this point, you have settled all debt including home and vehicle debt which marks the end of the survival period and the beginning of hard-won prosperity. All income is directed towards wealth-building and you now have the freedom to take more proactive financial decisions that are specific to your personal goals and dreams. In general, you would still need to generate an income to cover your living expenses, although these would be dramatically reduced as you are no longer servicing debt. This stage may come with added flexibility in terms of work commitments and possibly reduced working hours providing you with new levels of autonomy and choice.
Once you have amassed sufficient wealth, you will reach a point where your lifestyle expenses can be covered by your passive income, and will be able to do so for the remainder of your life. Freedom of choice and autonomy over your time are hallmarks of this phase in the journey, and you are now free to work (or to not work) for pleasure, passion and purpose, or a combination of all three. Your living expenses are no longer regulated by your pay cheque, and there is freedom in your budget for travel, luxury and impulsiveness. Your finances are such that they are able to support your philanthropic and charitable goals. Regular reviews of your investment portfolio are essential and the skill of a qualified financial planner will be required to ensure that the cashflow from your investments is optimally constructed and that your investments are tax-efficient.
In this final stage of the journey, your passive income is considered more than enough to support any lifestyle you choose whilst also ensuring that you will have a sizeable financial legacy to bequeath to your loved ones. With this level of net worth, you are able to take risks and indulge in whatever interests you desire, secure in the knowledge that even a failed business venture will not erode your underlying wealth or the legacy you wish to leave behind. This age of abundance is void of financial worry and allows you to be the master of your most precious asset: time.
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