Independence Day

Answer: Financial independence means different things to different people. It could mean being out of debt; for others, financial independence is having an investment portfolio large enough to provide income to meet their needs for the remainder of their life. For some, financial independence is early retirement or the ability to leave a legacy for heirs and provide a cash flow for future generations. 

Financial independence, regardless of how it’s defined, may provide a sense of security and empowerment while providing the ability to do what you want, when you want and maintain your desired standard of living. Investopedia explains the acronym FIRE which stands for Financial Independence, Retire Early. This implies passive income derived from investments to cover needs, wants, and wishes. 

Hopefully, everyone enjoys their chosen avocation and “works” because they enjoy their profession. Some people work for the paycheck, while most work for  the blended satisfaction between the income and fulfillment. 

The various stages of life can illustrate the progression of financial independence. Here are three phases: 

Financial dependence: Reliance on others to provide for your expenses. This is true for children and in many families where a member may not work outside of the home, and they choose to share expenses. 

Stability: This is a state of solvency where costs and expenses are covered with earned income and passive income either on your own or as a couple. This includes having an emergency fund and a goal of paying off or paying down debt. People tend to feel financially secure once debt is reduced or eliminated with an emergency fund sufficient to cover unexpected situations, whether opportunities or emergencies. 

Financial Independence: This is the point where passive income meets or exceeds cash flow needs. Many don’t want to invade principal and withdraw only a percentage of their portfolio. Some people are comfortable spending down the balance over their investments over their life expectancy. Those achieving financial independence typically have a goal of retiring early and living off the funds they’ve amassed. Full retirement age with Social Security is currently age 67.

As you can see, discipline and prudent planning are a must for achieving one’s goals. To start the process, it’s important to document and know annual expenses. This is trickier than it may seem as there are unknowns such as inflation, taxes, and health care expenses that may not be easily or accurately predicted.

Financial independence encompasses a great deal from the planning process to implementation and ongoing monitoring. In some instances, it’s a simple math equation where either spending or income must be adjusted to match your definition of financial independence. 

According to financial services company Empower, when surveying 2,000 U.S. adults, financial independence means “making it” for the majority. “Making it” according to the poll, meant making at least $94,000, not having to rely on friends and family for money, reaching a certain level of net worth, and contributing to a 401(k) retirement account. The study by Empower further states that two out of five or 40% of parents with adult children aged twenty or older, contribute to their support in some way. More than half or 53% are using retirement savings for this purpose. Of those surveyed, 60% would have made financial literacy for children a priority, wanting adult children to pay their own way by the time they reach age 23. 

As we celebrate the Fourth of July and Independence Day for the United States it’s worth remembering the meaning behind the date. July 4, 1776, was the actual date the Continental Congress signed the Declaration of Independence in Philadelphia, announcing the separation of the U.S. colonies from Great Britain. The actual vote for independence took place on July 2nd, 1776. On July 4, 1778, in Massachusetts, George Washington was one of the first to celebrate July 4th by providing double rations of rum for his soldiers. 

Financial independence means many things to different people. The Merriam-Webster definition of independence is “the quality or state of being independent: freedom from outside control. Thinking about what this means for you is a great place to start. Whether it’s not relying on others, having a job you love, making a certain amount of money, not having to work at all, or being able to spend with no worries and retire comfortably, it is unlikely to happen without planning. Having the conversation with a CERTIFIED FINANCIAL PLANNER™ Professional is an effective way to start clarifying your goals. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of June 24, 2024, but not necessarily those of Raymond James & Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL Main™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing

certification requirements.” This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com. 

Website: www.raymondjames.com/Darcie.