Financial Independence vs. Retirement: What’s the Difference?

There’s a common misconception that “financial independence” and “retirement” can be used interchangeably. Though the terms may seem synonymous, they signify two distinct phases of financial freedom.

In my experience as a financial advisor for families and individuals, as they exit the workforce, I’ll explain the differences between mindsets to help you understand your financial journey objectives so you’ll feel empowered to make informed decisions for a secure and fulfilling financial future.

What is Financial Independence?

People work for two primary reasons: to earn money and establish financial stability. Although many turn to financial advisors to help allocate their earnings toward retirement planning, they can sometimes underestimate the full extent of our impact. Our primary objective as financial advisors is to guide clients through diverse financial milestones, working towards financial independence, so ultimately our clients are well-prepared to exit the workforce.

Grant Sabatier’s Seven Levels of Financial Freedom outlines the stages individuals progress through to attain financial security.

Depicts varying levels of financial freedom.
Source: CNBC

Though reaching financial independence is challenging, it is a crucial step toward a stress-free retirement. Once you’ve reached this milestone, you can depend on your personal wealth and passive income sources to sustain your expenses and lifestyle preferences– freeing you from dependence on traditional employment.

How Does Financial Independence Contribute to Success in Retirement?

Once financially independent, retirement becomes feasible as you envision life without a steady income. However, this takes strategic planning built on predetermined objectives and goals. The timing in which you retire and when to best pull from sources like your savings, pensions, and other investments is a strategic process that should be all predetermined and carefully accounted for before you transition into retirement.

Can You Be Retired and Not Financially Independent?

While possible, you still need to get close and figure out how to bridge expenses– which can be stressful. However, reaching financial independence before retirement fosters a positive outlook on the future. It instills confidence as your lifestyle choices are rooted, minimizing unexpected developments. Anticipating what lies ahead provides an opportunity to ease into retirement, fostering peace of mind.

Take Steps Toward Financial Independence

The best way to achieve financial independence is by preparing your finances and adjusting your lifestyle.

1. Start conversations

Be open and honest about the life you envision for you and your spouse.

The discussion surrounding retirement is highly individualized since each individual’s circumstances influence when and how they plan for it. Factors like savings, pensions, Social Security benefits, healthcare, and legal considerations contribute to the complexity.

Clear goal-setting is essential. By establishing concrete objectives, individuals can better understand their financial needs for sustaining and thriving in retirement. For instance, setting a goal of retiring at a certain age with a specific retirement income target can guide financial planning decisions like, what’s the best age to retire?

Engaging in discussions allows individuals to assess their current financial situation, prioritize goals such as travel or family support, identify unique opportunities like tax-saving strategies, and work collaboratively towards shared retirement objectives with their spouse or partner.

2. Find your long-term lifestyle

Discover a lifestyle that brings you happiness and guarantees a stress-free retirement.

Retirement planning brings its challenges. For example, despite the benefits of stability, peak earnings, and reduced financial burdens in your 50s, it’s easy to fall into a false sense of security. Many make the mistake of adjusting to a lifestyle that doesn’t align with long-term retirement goals. Instead, prioritize living the retirement you envision now.

Your spending habits now shape your future lifestyle. To gain clarity, track your expenses using tools like Mint or YNAB. Define your retirement goals, considering when you’ll retire, where you’ll live, and what you want to do for fun. Utilize our retirement calculator to plan for a comfortable and worry-free future.

3. Move towards a choice-driven career

Start cultivating a balance between your professional and personal life.

Life is finite. You won’t be working forever, and it’s crucial to acknowledge this reality as you approach the end of your career. While it might seem like you must push yourself relentlessly until the end, that’s not necessarily the case.

Transitioning into a more balanced life as retirement nears can provide peace of mind and demonstrate that the future holds exciting possibilities beyond work. Those who continue to work the same or even more hours as they near retirement often have a significantly harder time exiting the workforce compared to those who throttle back as retirement nears. Embracing this transition can help alleviate fears of the unknown and empower you to embrace the next chapter of your life.

4. Engage with a firm

Find a financial partner for your evolving goals.

The fear of the unknown, especially with finances, can be scary and intimidating. Partnering with a knowledgeable financial advisor who understands your needs, asks the right retirement preparation questions, and crafts a clear roadmap can significantly enhance your retirement journey and success.

At Toberman Becker Wealth:

• We learn about our clients’ personalities, priorities, current situations, and future goals. Based on those factors, we establish a risk tolerance and a plan that best fits their short and long-term objectives.
• We develop strategic methods and framing that go beyond data and numbers and are personalized to the client.
• We’re accessible and committed to being a trusted companion throughout our clients’ financial journey, supporting them through any challenges.

What Does Financial Independence in Retirement Look Like to You?

How and when you want to retire is different for everyone. Determining your retirement plan is the first step toward financial independence and a stress-free future. While it’s possible to travel this path alone, the expertise of a fee-only fiduciary ensures optimal savings and peace of mind.

Toberman Becker Wealth is a fee-only, independent fiduciary firm based out of St. Louis. Whether starting to invest for retirement in your 50s or actively planning for retirement in your 60s, we help people nearing a transition build a resilient retirement plan. We operate in the best interests of our clients, always, and our top priority is to help you live comfortably now, without sacrificing your financial future later.

If you’re looking for an investment advisor to help you build a diversified strategy that hedges against risk, feel free to book a meeting or give us a call.