Sarah is a 50-year-old business executive with a one in four chance of living until she’s 95. She’s considering retirement and suddenly realizes she needs enough assets stored away to be accessible for the remaining 48 years of her life and is wishing her 28-year-old self had contemplated this earlier.
Financial independence (FI) can be defined as the total savings and investments that cover the rest of your life’s expenses or having enough passive income to sustain your lifestyle. However, after retirement, the cost of living can increase too—not only do you have more time to explore the world, go for lunches, indulge in treatments, or tick those bucket list activities, but medical bills tend to increase as well. People aged 55 and over accounted for 56% of total health spending in 2019 (35% for 65+), despite making up only 30% of the population.
With people living longer and rising living costs, what can you do to prepare? Let’s take a look at some ideas on how to become financially independent and get you on your way to a safe and early retirement.
Clear the debt
Among being able to weather unexpected expenses, support themselves with independent financials, and the ability to make ends meet each month, women, more than men, believe being debt-free is the top hallmark of financial independence. 47% of women perceive eliminating debt as the most critical element in gaining financial stability, rising to 55% among the ages 65 and over.
For many, living debt-free is a dream that can feel far from a reality. According to 2021 Experian data, the biggest change in the total average debt balance was Generation Z (18-24), reflecting a whopping increase of 29.7% since 2020. While the older age groups are stacking up the highest debt, our youngest members might have some lessons to learn to cope with their increasingly expensive lifestyles.
Two strategies to clear debt include the debt snowball; paying off the smallest debts first by making minimum payments on the others and working your way up. Or the debt avalanche, which involves eliminating your highest interest debt first and working your way down.
Today, interest balance transfer cards with 0% introductory APR periods support those on their path to financial stability by buying time to pay balances without spending part of your salary on interest. The issue is ensuring you don’t get hit with extortionate fees after the preliminary waiver expires.
While debt might not be a worry when you have an income, what happens after you are ready to say goodbye to the day job?
Investments—Trinity’s 4% rule of thumb
Investment portfolios can include retirement accounts, pensions, stocks, bonds, real estate (not including your home), and business-ownership stakes. These types of ‘savings’ are not liquid like emergency funds and are often stashed away until you reach retirement. Due to their inaccessible nature, they build greater compound interest over time.
For example, if you contribute the yearly maximum of $6k to a Roth IRA for 20 years, at a fixed rate of 7% annual returns, your money will grow to $269,191. Compare this to an easy-access savings account that allows withdrawals, and you’re looking at a maximum 1.5% interest rate, leaving you with $146,823 for the same period.
The Trinity Study from 1998 still holds some truth: Imagine you spend $4k in living costs per month, taking into account bills, contributions to vacations, emergency funds, and car maintenance; that’s $40k annually. Divide it by 4%, and you get a financial independence number of $1 million. According to the updated study, if you only withdraw 3.5% of your initial investment portfolio yearly, you can sustain your lifestyle for 50 years.
So let’s say you manage to put away $12k a year in a Roth IRA with $269,191 and a savings account with $146,823. What can you do to save the remaining $583,986 and reach your early retirement goal of a million dollars?
Enter the BOND Account
Banking applications like our BOND Account allow banks and corporations to help people like you understand your financial capabilities, make savings plans, and set goals based on your unique behaviors.
With the BOND Network, made up of partners from banks to corporations and financial specialists, we are able to see the best practices in the network. Using our state-of-the-art Empathy Engine®, we can feed these learnings to you to support individual finance plans that suit your specific purchasing habits.
The bottom line is whether you're using a financial plan, digital budget tracker, or advanced company banking app to manage savings, anyone looking to gain financial freedom and retire for at least 30 years needs to invest. When you’ve worked out how much money you can live off a month, taking into account additional expenses as you age, and divide the annual total by 3.5%, this pre-retirement investment figure is an excellent place to start.