Courtney C. Lipsey Financial Autonomy is the goal of my podcast, as you know. Financial Independence is a close cousin to the concept of financial autonomy. Financial independence is the idea of having assets that generate income so that you do not need to work to provide for your family.
Most listeners will be familiar with the acronym FIRE. We’ve discussed in previous episodes that while this acronym is cool and catchy, many advocates of the philosophy are realising that the RE part, or the early retirement portion, is likely misguided. Financial independence, or the first half, is an important pursuit. This is something we at Financial Autonomy are passionate about.
We work with a lot of people in their 40s and fifties, so I wanted to share the strategies we use with you this week. I hope it’s useful.
Why?
Clarity is the first step to achieving anything. And perhaps more importantly, it’s important to know why. Most people tell me that they want to achieve financial independence in order to escape from a stressful job. The person has reached a point in their career when their skills are highly sought after, and they are therefore well compensated. The employer wants to get their money’s worth. While it may be exciting and rewarding at first, those who can reflect and project ahead will realize that the demands of the job are not sustainable in the long run.
One “why” that we have seen quite a few times in recent years is clients who want to be able to step back from their work commitments to care for their aging parents.
Consider why you want to achieve financial independence. Discuss it with your partner if you have one. Share your vision of the future with them.
A person who is looking to become financially independent and leave their corporate job to live on a farm in Tasmania will have a very different strategy than someone who is hoping to quit their stressful teaching position and start a furniture restoration company. It might also be different for someone who wants to live in Nepal for four months a year.
Clarity about your goals is the first step to achieving financial freedom, as it will determine what strategy you use.
Long-term lock-in
Australia has a strong retirement income system and superannuation. If you want to achieve financial independence by your 50s or 40s, you will likely earn less income when you get there. Your superannuation growth will slow down if you earn less income or even none at all. Your super’s value will be lower once you reach the preservation age of 60 compared to if you had followed the traditional route.
To achieve financial independence, you must first ensure that your superannuation will cover your future needs after 60. This can be checked using financial modeling.
You can boost your superannuation now by sacrificing your salary.
If you can solve the gap between your financial independence goal at age 60 and the time it takes to reach that goal, then financial independence becomes much easier to achieve. Economic freedom is more achievable if we say that your superannuation from 60 will cover all your expenses.
Clear debt
Clearing debt is just as important to achieve financial independence as ensuring that your superannuation is adequately funded. A roof above your head with minimal monthly costs is a great help. Rent or mortgage payments are often the biggest expense for many people. If you remove this expense, the income required to live is significantly lower. This gives you a lot of options.
When you are aiming for financial independence, it makes sense to focus on paying off debt. Paying off debt is not the only factor. By moving to a cheaper home, you could reduce your debt. You could downsize your home from a large house to a smaller unit or apartment once the children have left. You might move from an inner-city area to a rural or outer-suburban area.
We also see clients sell investments after reaching their financial independence goals and retiring or semi-retiring, then use the proceeds of those sales to pay off any remaining debts. This is done after the peak earning period to minimize capital gains taxes.
Pre-60 phase investment
We tend to think of financial independence in two phases, as we mentioned in point 2. The first phase is the phase before 60, and the second phase is the phase after 60. You can find a detailed explanation of this on our website. This was created a few years ago. It has our old logo, and its presentation may be a bit basic, but the content is still spot-on. You can find the Early Retirement for Aussie’s document on the Resources and Tools page of the Financial Autonomy site. Scroll down. This is a free document. There, we look at the different phases. You might find it helpful.
The majority of the money you will need to live after you are 60 years old comes from your superannuation. To achieve financial independence by your 50s or 40s, we must solve the problem of how to generate enough income to cover your expenses up until 60. This pre-60 phase is likely to be funded at least partially by your investment wealth.
When it comes to investing for income, dividend income from your portfolio of shares and rental income generated by an investment property comes to mind. Income from investments is not the only way to meet your income needs. Superannuation funding is crucial to achieve financial independence. You can sell your investments to cover your living expenses in your 40s or 50s, knowing that your savings will last you until you are 60. It would be best if you did the maths to make sure you reach 60. Even if you think you’re on track, it is important to check your numbers every year.
If your plan is well-constructed and carefully thought out, then drawing on your savings to achieve financial freedom is a valid option. If you want to achieve economic independence at 50 and have no income from employment, you will need to cover all your expenses for ten years. The assumption is that you will have enough income to last the rest of your life if your superannuation kicks in at 60.
We have a 10-year window to cover. If you had $1 million in investment assets, at 50, you could declare financial independence, knowing that you could withdraw $100,000 each year from that $1 million portfolio and cover the ten years. Tax, inflation, and other factors are all important to consider. Still, it’s reasonable to withdraw capital in order to reach financial independence as long as you have adequately funded your post-60 phase of life.
It is important to understand this because the assets required to earn $100,000 in investment income without using your capital are enormous. To generate $100,000 of investment income, assuming a 4% rate of return on your capital, you would require $2.5 million of wealth. This requires a great deal of saving and investment to achieve. It might not be possible.
If you think about it another way, you can achieve financial independence much earlier if you engineer your life so that you are able to access your investment wealth. This will allow you to make the lifestyle choices you desire sooner instead of waiting until you have accumulated enough wealth to meet your entire needs.
Other Income Solutions
The strict definitions of financial freedom and financial autonomy diverge here. To be financially independent technically, you wouldn’t need to leave your bed to pay for all of your daily expenses. You can achieve financial independence by holding investments such as shares or property that provide you with income without having to do anything.
Financial Autonomy is different in that you gain choice. As long as you are doing what you want to do, it doesn’t matter how you earn money. If you decide that $80,000 is what you need to live on, but you also work three days per week in a role you enjoy, that’s perfectly acceptable as a way to achieve financial autonomy.
Financial autonomy is a much more rational approach for most people with whom we work. This is where the FIRE acronym’s “retire early” portion went wrong. We don’t build wealth and independence to then sit on the couch doing nothing. It is important to achieve this goal because it will allow us to do what we enjoy, which can often lead to an income.
I often get clients who are happy with their job but have been promoted to a position that comes with many responsibilities. This can cause a lot of stress. They want to be in a financial position to turn down a promotion and do what they are good at. Work less than five full days per week. But do you want to quit your job? Most people I know don’t want to leave their jobs.
If you accept my concept of financial independence, you don’t need to be rich to achieve it. As I mentioned earlier, you may be able to achieve economic independence by reducing your work commitments, simplifying your lifestyle, and lowering your income.
As we have already mentioned, clearing debts can help you achieve this. As you enter your 50s, your children will likely be moving out. If you own a home with no debt, your annual expenses won’t need to be huge. You may be able to achieve independence and autonomy in your post-60 phase by simply changing jobs. You could also generate a part of your income from investments and use the remainder to pay for employment. I have clients who work on contracts that last from three to six months. They also take breaks between the times. It seems that this gives them a lot of flexibility and independence.
This 5th and last item is just an invitation to think more broadly about the ways you can achieve financial freedom. This does not have to be the strict technical definition that requires sacrifices in order for you to accumulate a large amount of investment wealth. You may reach a stage in your life when you have lower living expenses and only work enough to cover them.
This is the end of this week’s episode: 5 Strategies for Financial Independence in Your 40s and 50s. Hope you found it helpful. Check out the free download on our website. It’s called Early Retirement for Australians and can be found under the Tools and Resources page.
Book an appointment to have a conversation.
