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How do you define financial independence? Is it based on one’s personal assets or income or both? What is the path to becoming financially independent? And will achieving financial independence guarantee your happiness? Stay tuned because that’s what we’re going to be addressing in this video!

First let’s define "financial independence" as having enough sources of income other than earned income from a traditional job that can sustain someone financially over the course of their life.

In the real world, when I am working with retirees or people who are preparing for retirement, they all want to know, will they be able to generate enough income to sustain themselves for the rest of their life.

For retirees, we’re generally considering three primary sources of income which are:

1. Social Security Income
2. Defined-Benefit Pension Income
3. Income generated from personal assets which often include:
-Investment Portfolios such as taxable investment accounts and IRA accounts
-Other sources of income may include income producing real estate

For younger individuals who do not yet qualify for social security income because of their age and perhaps won’t receive pension income, then for them their personal assets in combination with other sources of passive income is what would be used to determine if they are financially independent.

Finally, let me point out that you can technically be financially independent, yet still choose to have a full-time career, which many successful people to do. Examples include leaders in the business world, A-list entertainers, athletes and successful entrepreneurs or even YouTube content creators.

Which leads us to an important point in that achieving financial independence doesn’t in and of itself lead to or guarantee happiness, but perhaps having a purpose driven life does. Something to think about...

Let’s have some fun and discuss the path to financial independence which I have divided into five primary categories.

Category 1. FINANCIAL DEPENDENCY. No savings or emergency fund.

Category 2. FINANCIALLY STABLE. 6-12 months’ worth of living expenses set aside/emergency fund created and funded.

Category 3. FINANCIAL FLEXIBILITY. 1-5 years of living expenses.

Category 4. FINANCIAL FREEDOM. 5-10 years+ worth of living expenses.

Category 5. FINANCIAL INDEPENDENCE. Enough sources of income to fund one's living expenses for the remainder of their life.

When should you have achieved true financial independence?

By the time you are truly ready to retire which will give many people watching this video decades to work towards this goal.

At some point you may psychologically ready to retire.

You could have a physical or health related issue that forces you into retirement.

You may continue to enjoy working and being productive well into your 80s and beyond.

So how do you know if the monies you have accumulated put you into the category of being financially independent?

In my advisory practice I use financial planning software which allows me to enter a client’s assets, sources of income, estimated annual expenses and make assumptions regarding their federal and state income taxes, inflation, rates of return, longevity as well as the cost of living adjustment for social security income and make projections about the likelihood that they will be able to sustain themselves throughout the remainder of their life.

While there are rules of thumb that help people determine if they are financially independent, such as the 4% rule, I personally consider them as a way of demonstrating a concept rather than being the definitive tool for determining whether someone is prepared to retire. And even with sophisticated financial planning software, it’s important to run “what-if” scenarios and make updates to the projection annually as well as whenever there any changes in a client’s financial life or when tax laws or assumptions change.

If you are preparing for retirement and would like help determining whether you are financially prepared to make that life transition, then I suggest working with a CFP professional who can help you.

You may also contact me through my web site https://www.maywealthstrategies.com

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