Rethinking Retirement: Why Traditional Financial Planning May Not Work for Early Retirees
When I first started in the Financial Industry, I remember setting some goals for myself. One of my most important goals was to be financially free by the time I reached 55. While my goal was to be financially free, I didn’t think I would retire.
Unfortunately, after working for 20 years in the industry and working with thousands of clients, I realized that the old-school way of looking at retirement just did not work for people who had a goal to be financially free early. I also had to start thinking differently if I could help myself and my clients. After years, I created the Freedom Day and the Freedom Day Method (™) concept.
In our current financial climate, the traditional approach to retirement planning — saving 10% of your income, investing in financial assets like stocks, bonds, and mutual funds, and then drawing down 4% per year during retirement — may not suffice for those aspiring to retire early. This strategy, though time-tested, may not allow many individuals to maintain a lifestyle similar to what they're accustomed to while working. For those seeking financial independence and the ability to retire on their terms, a shift in perspective is required. This article will explore why the traditional financial planning method may fall short for early retirees and propose an alternative — developing multiple sources of cash flow through passive income, which we refer to as Freedom Engines, to secure your Freedom Day.
The Shortcomings of Traditional Financial Planning
The traditional approach to retirement planning, which we'll call the 10-4 Rule (saving 10% and withdrawing 4%), has several key shortcomings when applied to the goal of early retirement:
- Insufficient Savings: A 10% savings rate may not provide a substantial enough nest egg for those who want to retire early. The length of retirement increases for early retirees, which means the savings need to last longer.
- Market Dependence: This approach heavily relies on financial market performance. Market downturns can significantly impact the value of investments, making the 4% withdrawal rate risky during volatile periods.
- Inflation Risk: Over time, inflation can erode the purchasing power of your retirement savings. If your investments don't outpace inflation, your 4% withdrawal could become insufficient to cover living expenses.
- Lifestyle Adjustment: The 4% withdrawal rate assumes you're willing to live on a fixed or reduced income during retirement. This may not align with the lifestyle expectations of many, particularly those seeking early retirement.
Building Freedom Engines for Early Retirement
Suppose the traditional retirement planning approach aligns differently from your early retirement goals. In that case, it's time to consider an alternative — building Freedom Engines. These are multiple sources of passive income that work independently of your time, providing a steady cash flow.
Freedom Engines aim to generate enough passive income to cover your Minimum Required Income (MRI) — the base amount you need to cover your living expenses. Once your Freedom Engines can generate 125% of your MRI, you've reached your Freedom Day — the day you become financially independent and can retire if you choose to.
Freedom Engines can come in many forms, such as real estate rentals, dividend-paying stocks, peer-to-peer lending, or even a side business. The key is building a diverse portfolio of income-generating assets that weather different economic conditions.
The Power of Passive Income
Passive income has several advantages over the traditional retirement planning approach:
- Cash Flow: Passive income provides a steady cash flow independent of market conditions. This can offer more stability and predictability than relying solely on withdrawals from a retirement account.
- Inflation Protection: Many passive income sources, like real estate or certain dividend stocks, can provide a hedge against inflation.
- Lifestyle Maintenance: If your Freedom Engines can generate 125% of your MRI, you can maintain or even enhance your current lifestyle without worrying about outliving your savings.
- Financial Independence: By focusing on cash flow instead of a fixed savings amount, you can achieve financial independence and retire on your own terms.
Steps to Build Your Freedom Engines
Here are some steps to help you build your Freedom Engines:
- Assess Your Financial Situation: Understand your current financial standing. Determine your MRI by calculating your monthly expenses, including housing, utilities, groceries, health care, transportation, and other necessities.
- Set Financial Goals: Determine how much passive income you need to generate to reach your Freedom Day. Aim to create Freedom Engines that can generate 125% of your MRI.
- Identify Potential Passive Income Sources: Research and identify potential sources of passive income that align with your skills, interests, and financial goals. These could range from real estate investments to dividend-paying stocks or starting a side business.
- Diversify Your Income Streams: Don’t rely on a single source of income. Diversify your passive income sources to ensure financial stability even if one income stream takes a hit.
- Reinvest Your Earnings: Use the income from your Freedom Engines to pay down debt, purchase more income-generating assets, or invest in other opportunities. This will help accelerate your journey towards your Freedom Day.
- Monitor Your Progress: Regularly assess your financial situation and adjust your strategy.
The Impact of Freedom Engines on Your Financial Future
By shifting from a traditional savings-focused mindset to one that values diverse income streams, you can create a robust financial plan that enables early retirement. Freedom Engines provide a roadmap to financial independence that isn't tied to the volatility of the market or a fixed withdrawal rate.
Instead of waiting for the right age to retire, your Freedom Day is dictated by when your passive income surpasses your living expenses. This financial approach creates the possibility for early retirement. It contributes to a more secure and fulfilling financial future, giving you the freedom to live on your terms.
Building Freedom Engines takes time, patience, and strategic planning. But the reward is worth the effort: the ability to achieve financial independence and retire early, secure in the knowledge that your lifestyle is sustainable and your financial future is secure.
If your goal is to retire early and maintain your lifestyle, it may be time to rethink traditional financial planning. By focusing on multiple passive income streams, you can achieve your Freedom Day. Remember, the journey to financial independence is not a sprint but a marathon. With strategic planning, patience, and perseverance, you can build a financial future that aligns with your retirement goals and lifestyle aspirations.
Conclusion: Achieving Your Freedom Day
Retiring early requires a different strategy than traditional retirement planning. While saving and investing are crucial, they may not provide the lifestyle or security that early retirees seek. By building Freedom Engines, you can create a steady stream of passive income that allows you to retire on your own terms and timeline.
