What is Financial Freedom?

One of the most common questions I ask my clients is, "When do you plan on retiring?"

The answer isn't so straightforward. There are a lot of complicating factors to consider when thinking about that question.

Retiring often does not follow the traditional clean trajectory of working until age 65 and then leaving the workforce altogether. That's because work itself isn't necessarily so neat and tidy. If you work in a salaried position, then choosing a retirement date might be quite straightforward. But a lot of people have other work structures: they could be running their own business, freelancing or doing consulting work, or they could be working several part-time jobs. These structures don't always lend themselves to a super clean and firm retirement date.

Some people don't want to stop working. They find a lot of satisfaction, purpose and enjoyment in it, so they don't actually want to fully retire.

For many people “When do you want to retire?” isn’t the right question. It should be “What do you want your work life to look like?” Choosing how much you want to work and for how long is called Financial Freedom, and it’s a different way of thinking about retirement planning.

If you want to put together a financial plan that gives you true peace of mind, you'll need to answer this question for yourself. And I'll be honest, the answer isn't clear for me personally. I love my work, and I want to keep doing it for a long time, but how long do I want to work full-time hours? When do I want to reduce my workload and have more downtime? What will my partner do for work? How much does he want to work? And are we okay with having different levels of work?

This is where the concept of Financial Freedom comes in handy. Financial Freedom is knowing that you have enough money to make your own decisions about how much you're going to work. Striving for Financial Freedom doesn't mean that as soon as you hit your savings target, you're going to necessarily quit your job. All it means is that when you go to work on Monday morning, you do it knowing that it's a choice. Many clients I work with think they want a retirement plan, but what they actually want is Financial Freedom.

You can look at Financial Freedom in a few different ways. The most common way, as described by the FIRE (Financial Independence Retire Early) movement, is to figure out how much you need to save to fully retire at a young age. For most people, this isn't a realistic goal, so it's a good idea to look at it differently.

If you are in a high-stress job and are dreaming about doing something less intense, you could figure out how much you need to save for your big goals. Goals like retirement (or we can call “later in life” money), and paying for your children's education. Once you've hit these savings numbers, then you can afford to work less or take a less stressful, lower-paying job that pays your bills without having to add to savings.

You could also ask yourself, "What is the most basic lifestyle I'm willing to accept in order to retire early?" If you pare down your expenses to bare-bones levels, you may be able to retire quite young. That means if you're very unhappy or stressed out in your job, or if your health isn’t great, you know when you can leave. But if you're doing fine when you hit that age, then you can continue on and pad your retirement savings in order to have a more comfortable life.

Financial Freedom can also mean taking time off work and then returning to it later. You might take time off when your children are young to spend time with them, or to look after an aging parent. It could be taking time off to travel for a few years. Or you might want to return to school and retrain for a new career. In these cases, you need to understand the impact of not having an income for those years. This not only means having enough money to pay your expenses, but it also means you're not going to be adding to your savings for a while. What does this mean for your financial outlook?

There are a lot of factors you need to take into account when figuring out these numbers. For example, if you're in a pension plan, the sooner you leave the plan, the lower your payment is going to be. And the sooner you decide to start taking that pension, the more the payment will be reduced.

If you own your home, you may need to sell it sooner than you would like to in order to have enough cash to pay your expenses. If you stop working at a young age and draw heavily on your savings, they might run out, so you’ll need to access the equity in your home.

You also need to consider whether you want a plan for high expenses later in life related to long-term care. This can make an impactful difference to your Financial Freedom plan. Since it can be so hard to look that far ahead, it's really difficult to know how much money you should allocate for this.

Determining what you need to save to reach Financial Freedom can definitely be complicated, but it's really worth taking the time to think about it if it's important to you. You might discover that, actually, you're in a better financial position than you thought. The last thing you want is to look back on your life and realize that you could have reduced your work hours or taken a break from work, but you didn't know it at the time.

I've seen this firsthand with people I've worked with. In one instance, I worked with a couple who had no idea how much they should be saving for their retirement. They just kept ploughing ahead, assuming they'd have to work for many years yet. As we talked about their future, they solidified what they wanted their life to look like, and discovered that their dream was achievable sooner than they thought.

In another instance, I had a client who really wanted to have time to spend with her partner and on her hobbies. She assumed that she just needed to continue working and keep adding to her savings. What we discovered is that she could actually reduce her workweek to just three days, and she did so immediately after finishing the plan.

And I took this route myself. After working at a bank for 25 years, I wanted more flexibility, more time at home to be with my teenage boys, and I wanted to help people with their money through financial planning. I knew that leaving a salaried position to work for myself was a financial risk, so I made sure that I had enough savings for my big goals, while knowing exactly what my expenses were going to be. If I hadn't taken the time to figure this out, I know I would have regretted it later.

Life is busy. It can be hard to take the time out to work on your financial plan. It will require time, since you will need to do things like itemizing your expenses to understand how much your life costs, and doing projections about how your life and expenses might change. You'll need to dig out statements and face some tasks you've been putting off. But the longer you delay, the greater the chances that you're going to miss out on an opportunity to have the life you want.