At what point do you achieve financial independence?
Is it when you don’t care whether the market goes up or down? Is it after your last child graduates from college? Is it when you simply don’t care about money anymore?
You have your own definition of financial independence for one very good reason: it means something different to everyone.
You can’t use one yardstick to measure financial independence. What’s required to attain that lofty goal depends on too many factors: your age, where you live, the size of your family, and a whole slew of other possible variables.
Don’t get burdened by someone else’s definition of financial independence. Rely on your own knowledge of yourself for the definition that has the greatest meaning to you.
Of course, there are plenty of distractions that could sidetrack you on your journey towards financial independence. Here are three factors that everyone talks about but are probably overemphasized.
“Believe it or not, return is over-emphasized by plan sponsors and advisors,” says Dr. Guy Baker, founder of Wealth Teams Alliance in Irvine, California.
This shouldn’t surprise you. Almost a decade ago a research paper out of Wharton showed that controlling spending (i.e., investing early) and delaying retirement had a greater impact on attaining a comfortable retirement than any particular asset allocation you select.
In fact, the paper suggested you needn’t worry about optimizing investment returns for two reasons. First, there’s little practical difference between the optimal return and the average return. Second, if that difference in return is important to you, you can make up for that difference simply by working a little longer.
“The idea that participants need funds that will outperform the market is certainly overemphasized in the retirement industry,” says Jeff Coons, Chief Risk Officer at High Probability Advisors in Pittsford, New York. “Staying on a plan of saving and letting the markets work for you over time is far more important than playing the lottery of trying to find outperformance from funds on the investment menu.”
Finally, the real measure of a comfortable retirement isn’t the annual return you earned during your savings career, it’s the ability to pay your annual expenses once you hang up your corporate cleats.
“I believe that too much weight is placed on historical returns and the plan’s focus on growth instead of income,” says Steve Gaito, President of Retirement Resource Management in Asheville, North Carolina. “The closer you get to retirement the more important income becomes. Given current interest rates this is a difficult challenge given current options in most plans.”
Time (But Not in the Way …….