Financial independence is used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses. This is something that many of us yearn for and strive to have, especially when it comes to our retirement. This is something that for most of us is quite hard to achieve, not impossible, but hard to achieve. It is something that we have to work at and strive for. Financial independence takes an all out effort. It takes us truly analyzing our situation and figuring out where we are at and how we get to where we need to be in order to be financially independent.
Why Financial Independence?
One huge benefit to financial independence is security. The security that if your current job goes south it doesn't mean disaster or when in retirement if an unexpected health bill arises that you can cover the expenses. Retirement is one of the biggest things financial independence will benefit. Many times in retirement there will come a time when you can no longer work. During this time the best situation you can put yourself in is to be financially independent.
How To Get Financially Independent?
Two major things should happen to have the best chances of becoming financially independent. The first thing you need to do is save and save until it hurts. This is something that you are going to need to do all the time in order to achieve your goal of financial independence. It comes down to two major things. The first thing you need to do is to start saving and saving hard. Save until it hurts.
How much should I be saving?
This can be a huge debate and I have written extensively about this. You have to decide which way to calculate how much you should be saving is right for you. One way I like to figure it out is by first planning out my retirement with this retirement guide. Once I know where I am at with my current retirement savings and where my retirement nest egg needs to be then I will have a much better idea of what that means I should be saving.
One easy way to break down what you should be saving is to look at how much you spend a year. Again, the retirement guide can help you figure this out. Once you know what you spend a year then the idea is to save roughly 15 times your yearly spend (expense coverage ratio). If you spend $50,000.00 a year your goal for retirement should be to save roughly $750,000.00. Seem way to hard to save that much? That is why you need to start saving and planning today for your retirement.
One thing to note is that while you may currently be spending a certain amount that typically changes over time. Because of this you should continually be checking your spending and savings to make sure it is in line to help you save roughy 15 times your spending by retirement. This should be done on a yearly basis or at least every other year. The closer you get to retirement the more often you will want to make sure your expense coverage ratio is still on par to be where you need it for retirement.
Expense coverage ratio by age (how much money you have saved to cover yearly expenses)
Age | ECR
25 | .5 times
35 | 4 times
45 | 7.5 times
55 | 11 times
65 | 15 times
This is a rough guideline that will change over time for most of us. We may notice there are times that are easier to save than others throughout our lives. Typically though the earlier we start saving towards this goal of 15 times our yearly expenses the ore likely we are to obtain that goal.
Investing to reach your retirement goals
One way to help achieve that retirement goal of an expense coverage ratio of 15 times is by investing. There are plenty of ways to invest for retirement. The two best vehicles to invest with for retiremen is through an IRA and 401K. These two types of accounts are specifically retirement accounts that give you specific benefits for retirement.
Once you know the type of account you want to use for retirement investing the next step is to start investing. There are way too many different investment accounts to go through what types of investments are best for you. One thing to know though is that a diversified retirement nest egg that is invested in a wide range of investments is a smart decision. One way to invest in a wider range of investments through an IRA or 401k is through a self-directed IRA or self-directed 401k. We specialize in self-directed IRAs and 401ks and are here to answer your questions about how you can go about investing in real estate, gold or private placements with your IRA or 401k.
Hopefully we have begun to show you how important saving and investing for retirement is. If you don't start early enough it can be very overwhelming to save enough for what you will need during retirement. Even if you are too close to retirement and you won't be able to save up enough it still make sense to start now to save. Every little bit really does help.
Retirement is a big time in our lives and it should be great. The more you plan, save and invest for retirement the better chance you have to enjoy that retirement you have always wanted.
Author: Nick Barker