The month of July starts off with a literal bang on the 4th when we celebrate Independence Day as a nation. Being independent is defined as “being free from the control, influence, support or aid of others.”
The definition of financial independence generally describes “the state of having sufficient wealth and income to pay for necessities, without actually having to work.” But different people have different ideas about what is sufficient in terms of wealth, and what are necessary expenses versus lifestyle choices.
To help your clients create financial independence, one of the first things you may do is find their “number.” Once you have an idea of what a client needs and wants in terms of monthly expenses when they stop working, you work backward to develop an overall total nest-egg they need to amass.
In general, in order to be considered financially independent, a person’s assets need to generate an income that is higher than their expenses and liabilities. As an example, if a person has $500,000 in an investment that pays 4%, that asset would generate $20,000 per year in income. If they were debt-free and their monthly expenses only totaled $18,000 per year, they could be considered financially independent.
As a person gets older, their “number” changes, and they can begin spending down some of their nest-egg or principal. As a seasoned financial advisor, you take this into account when you develop financial independence/retirement plans. You also take into account future inflation and unexpected expenses, such as health care and long-term care.
One size does not fit all when it comes to the meaning of “financial independence.” Use this opportunity to discuss true independence with your clients today!