You Hit Financial Independence? Perfect! Now What?

No matter what you call it, it’s one of the top financial goals for almost all of us.

• Retirement.
• Financial independence.
• Financial freedom.
• Or, my personal favorite, work-optional

If you’re already there, kudos! 

All too many of us are far behind where we need to be to retire, even in our late 60s, let alone much earlier.

How Many Americans Can Afford to Retire Early (or Even at All)?

According to DQYDJ.com, the median income at age 50 is $60k. The Social Security Administration (SSA) actuarial life table shows the average remaining lifetime once you reach 50 is about 30 years (28 for men, 32 for women). 

Using the 4-percent rule, if you want to replace 80 percent of that median income through your portfolio, you’ll need about $1.2 million.

According to DQYDJ.com, only 18 percent of Americans aged 50-54 have that $1.2 million (excluding home equity which doesn’t help with cash flow).

If we delay to age 55, your retirement would be (on average) about 26 years long (24 for men and 28 for women). 

Here, the median income is $56k. Using the 4-percent rule again to replace 80 percent of that median income, you’d need $1.12 million to retire. Here, 18 percent of Americans aged 55-59 have that much.

How about at age 60?

The average remaining lifetime is 22 years (20 for men, 24 for women). The median income is $55k, so you’d need $1.1 million, which about 21 percent of Americans aged 60-64 have.

Finally, how many can retire at the SSA’s full retirement age of 67 (assuming you were born after 1959)?

The average retirement here is about 17 years (16 for men and 18 for women). The median income is down to $50k, of which 80 percent is $40k. 

Since you can collect full retirement benefits from Social Security, let’s reduce this by the average benefits for couples, $32.8k. This reduces the income you’d need from your portfolio to $7.2k, which translates to a portfolio of $180k.

For Americans aged 65-69, 46 percent have at least that much. That means most Americans who reach the SSA’s full retirement age can’t retire on 80 percent of the median income for that age.

All the above makes assumptions that may or may not hold for you.

• We looked at the median income for each age. Your income could be lower or higher. The higher it is, the more you need to accumulate to retire on your terms.
• We assumed an 80-percent replacement of pre-retirement income. This isn’t always the case. For example, if you plan to travel extensively, you may need more, potentially even more than you made pre-retirement. This could again increase the amount you’ll need to save.
• We looked at the remaining life expectancy, which, by definition, means that half of the people at that age will survive longer. How much longer depends on many factors. For example, on average, the wealthy live much longer than those less well-off. There are also significant racial disparities, with African Americans having shorter life expectancies than Caucasian Americans and Asian Americans. If you want to ensure you don’t run out of money while you’re still alive, your plan has to assume a longer-than-average retirement. However, you may need much less if your family typically has shorter lifespans.
• We used the 4 percent rule, which may not be right for you. For example, if you plan to use a dynamic withdrawal strategy, you could probably safely draw 5 percent of your portfolio or more.

However, these assumptions are a plausible starting point and paint a useful picture.

Two Opposite Risks Once You Reach Financial Independence

Whatever your personal Financial Independence (FI) number is and however you calculated it, let’s say you’re there.

You’ve officially ‘won’ the financial game of your life.

Now what?

Does this mean you’re home-free?

Not completely. There are still a couple of risks to contend with.

Risk 1: Life happens differently than you planned…

Your FI number is based on assumptions such as:

• I can safely draw 4 percent of my nest egg this year and adjust by inflation each year (a.k.a., the 4 percent rule).
• My retirement won’t be longer than 30 years (as the 4 percent rule assumes)
• My investment won’t crater just before or soon after I retire (a.k.a., sequence-of-returns risk).
• My inflation-adjusted retirement budget will stay constant.
• My taxes won’t change much.

But what happens if one or more of these doesn’t come true?

Just ask Sam Dogen, better known by his pseudonym “The Financial Samurai.”

In 2012, at age 34 he had $80k coming in from his portfolio and real estate investments, so he retired. Three years later his wife retired too. For a long time, everything worked great. 

Then, as he writes, “In 2023, my passive income was tracking to generate about $380,000. However, by buying a real forever home this time, my passive income is estimated to decline to about $230,000 in 2024. Sadly, $230,000 is not enough to cover my family’s living expenses.” 

He also writes, “After doing a deep dive on the different ways to pay for college and how to get good financial aid, I realized the best thing for my family is for me to go back to work. Coming up with $1,500,000 for two kids’ college experience in 12-15 years is daunting… After trying for so long, we thought kids would not be in our destiny. But our son was finally born in 2017 and then our daughter in 2019. Suddenly, our whole world had changed and so had our expenses.”

After being retired for about 13 years, Dogen returned to work because his expenses increased significantly because he needed to save for his unexpected kids’ schooling. Also, by buying his dream home with all cash, a good chunk of his portfolio transformed into home equity, which brings him zero cash flow.

Remember the old joke, “If you want to make God laugh, tell him your plans!”

Brian Lawrence, CFA, North Ridge Wealth Advisors says, “One of the most important things to do, as you switch from accumulation to spending (retirement), is creating and funding a ‘big bills’ account. This account covers, e.g., property tax, a new water heater, and other major expenses whether planned or not. The big bills account should be replenished monthly by a portion of a monthly portfolio withdrawal. Otherwise, you may find yourself tapping your investments ad hoc to pay for these; and what was once a sustainable withdrawal plan becomes a death spiral for the investments.”

The only problem is that even such an account wouldn’t have solved Dogen’s problem. He just changed his finances by too much.

Risk 2: It’s hard to teach an old dog new tricks…

Ramit Sethi of “I Will Teach You to Be Rich” fame has a podcast where he works with couples in all sorts of financial circumstances. What surprised me most were those who ‘won’ the money game but kept playing.

These couples succeeded in building a net worth of $5 million, $10 million, or even more, but continued being uber-frugal. They simply couldn’t bring themselves to spend in line with what they could afford.

Terry Parham Jr, Wealth Advisor & Owner, Innovative Wealth Building often sees the same sort of behavior, “Once you’ve climbed to the summit of financial independence, it’s time to consider your options for safely traversing the next stage of your journey. Not surprisingly, this inflection point is the perfect time to reevaluate your financial goals, risk appetite, and aspirations for leaving a legacy.

“I’ve observed that transitioning from saving diligently to spending from their nest egg poses a challenge for many. Often, individuals struggle to permit themselves to spend their own money, due to fears of the unknown or simply because spending freely isn’t a muscle that they’ve ‘exercised’ much in the past.”

What You Need to Do to Avoid Both Risks

Avoiding the first risk is tricky.

You need to create a clear vision of what you want your life to look like decades into the future.

Unfortunately, as physics Nobel laureate Nils Bohr once quipped, “It’s hard to make accurate predictions, especially about the future.”

And the further into the future you look, the harder it gets.

So, once you do what you can to create your vision and implement your plan, you must adapt to what life throws at you.

Ross Dugas, PhD, Founder and Financial Advisor at Scientific Financial, says, “It’s important to monitor your portfolio to ensure you stay on a good financial path. A small adjustment early on can avoid a dramatic adjustment down the line. 

“We use risk-based ‘guardrails’ to provide clients with specific portfolio values that merit action (cutting or increasing spending). This avoids short-term overcorrections and reduces stress over whether you’re still OK in a declining market. Clients are OK until their portfolio value hits the guardrail value. Then we make small adjustments. It’s important to keep an eye on risk and liability. 

“Once you’ve reached financial independence, it’s typical for clients to shift from an accumulation mindset to a preservation mindset. Risk is asymmetrical in retirement. A 20 percent loss hurts much more than a 20 percent gain helps. We can shift investment strategy and reconsider liability insurance to protect clients from those worst-case scenarios that can seriously disrupt their financial plans. 

“With a dramatic lifestyle change, spending habits can also change dramatically. We encourage clients to envision and describe their financial independence lifestyle. Incorporating this into the plan reduces financial surprises. Setting up automatic bank transfers can simulate paychecks once you start retirement, and help ensure your spending doesn’t stray too far from your plan.”

Avoiding the second risk may be even more important. Here’s how you can do it.

Parham again, “Building a substantial nest egg is commendable, but the key to a fulfilling retirement is converting those savings into sustainable income. There are several strategies for distributing retirement funds, such as the total portfolio approach, the bucketing strategy, or an annuity-driven flooring method. People tend to gravitate to one of these strategies naturally, so learning about the various options is an important part of this new stage of your life. 

“For retirement planning, I advise establishing a spending glide path and periodically reassessing it to determine if you’re on track, ahead, or behind schedule. This perspective allows for adjustments in spending, increasing or decreasing annually as your confidence in financial stability grows. This should make it easier to justify discretionary spending and fully enjoy life while in good health. 

“This lets you avoid the most significant risk, letting fear or restrictive beliefs prevent you from living your ideal retirement. By adopting a comprehensive and detailed approach to retirement planning, you can manage your finances wisely and enjoy the fruits of your labor more fully.” 

The Bottom Line

The first step in translating your having ‘won’ the finance game into ‘winning’ the retirement game is to envision what you want your retired life to look like.

Then, you need to create a financial plan that enables that vision to become your reality. However, your plan must be adaptable, allowing you to make timely course corrections as life unfolds. 

• Like Dogen, you may have kids you hadn’t planned on.
• You may choose to buy an expensive dream home, again like Dogen.
• Your portfolio and other retirement income sources may perform better or worse than expected.

A dynamic, flexible plan lets you make small course corrections early on, so you can avoid the massive corrections you’ll be forced into if you don’t adapt to your new circumstances. 

Finally, remember that it isn’t all about money.

Sometimes, the change you’ll need to make will be one of finding a new purpose, even if you don’t need the income that could bring in.

As Daniel Masuda Lehrman, Owner and Lead Financial Planner, Masuda Lehrman Wealth says, “In my experience, those who achieve financial independence before the traditional retirement age of 65 are disciplined savers and frugal spenders. They tend to have a hard time adjusting their lifestyle to early retirement. Specifically, they struggle to find happiness and fulfillment without the structure, routine, and purpose that their previous career brought them. Consequently, they end up finding some form of work that fills this void, whether it’s volunteering, consulting, or even working as a barista at Starbucks (true story)!”

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

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