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Why Millennials should plan for Financial Independence, NOT retirement!

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Alan Moore, XY Planning Network

 By Alan Moore

Special to the Financial Independence Hub

Two major issues make the concept of retirement planning difficult to grasp for many members of Generation Y. This group, also known as the millennials, ranges in age from the young twenties to the mid thirties. At this age, they have anywhere from 30 to 40 years (or more) of a working career ahead of them.

That makes the concept of retirement pretty abstract. It’s difficult to envision something more years into the future than years you’ve been alive!

The other issue that complicates matters is the fact the average American is living longer than ever before. Gen Y isn’t likely to retire at 63 and expire a decade later. Their retirement savings will likely need to last more than 20 or 30 years if they don’t want to outlive their nest eggs.

These two factors – the fact that retirement is decades in the future, and the fact that retirement itself may last decades – makes it hard for Gen Yers to get excited about the concept of retirement planning. It’s overwhelming to think of putting away your hard-earned money today for a time in life you can’t even imagine, and it’s overwhelming when you think of the lump sum of money you’d need to save to rely on for more than 30 years in your old age.

Making the Shift from Retirement Planning to the Idea of Financial Independence

The idea of a “retirement” wasn’t originally designed for what millennials will likely face in the future. The economy, job market, and corporate culture has changed (read: no more pensions, no more life-time job with a single company). It’s unlikely that younger generations will reach a certain age and simply stop working – and reasons why they shouldn’t keep piling up.

It seems that avoiding work that leaves you unfulfilled or stressed, and taking occasional breaks from hard work, is rewarding and good for us. But putting a complete stop to work? That leads to boredom and other problems for retirees.

Ultimately, research suggests we need to have purpose at all stages of life. So instead of putting the focus on retiring from work at some distant, fuzzy point in the future and being inactive until our lives come to an end, we need to focus on building a great life right now while making progress toward financial independence.

What Is Financial Independence, and Why Is It Better for Gen Y?

Financial independence means developing enough income to pay all expenses indefinitely, without needing to work full-time to bring in that money.

Why is the concept of financial independence something easier for Gen Y to grasp than the concept of retirement? Because it completely changes the goal and makes it much more realistic and attainable.

You’ve probably heard of the 4% rule, which says that you can take 4% out of an account on an ongoing basis. According to this, a nest egg of $1,000,000 will produce around $40,000 per year. The flip side is by creating an income stream of $3,333/month, it is equivalent to having saved one million dollars! For many people, it’s much easier to create a passive income stream of a few thousand dollars per month than it is to save up a lump sum of a million dollars.

And for most people who are financially independent, they use this freedom from an obligatory job to pursue (paying) work they feel passionately about. So they don’t feel the need to just stop working, and view financial independence as an opportunity to pursue activities they enjoy without having to stress about the amount of money they generate.

How You Can Get Started Now

In addition to what you save and invest from your full-time job, you can get started on financial independence by creating additional income streams on the side. The goal is to make these streams as passive as possible, to create cash flow that funds your freedom.

It’s important to start now because very few streams of income are 100% passive – and almost none are passive when you begin to establish them. To get you going, consider these ideas that you could take to build a small stream of passive income:

 

  • Real estate: When you’re ready to move out of your starter home, don’t sell the property. Rent it out and let it become an income source for you instead. Note that this path is not for everyone; being a landlord can be tough and expensive if you want to go 100% passive (by hiring a management company to handle your tenants for you).
  • Building a side business: Your own business can become passive with time – but it takes a tremendous amount of work to grow it to that point. So start now! Create a side hustle or side business that you can work on and grow in your free time. This generates more income for you to invest now, and can provide an income stream in the future when you’re ready to scale back on your working hours.
  • Monetize a hobby: You can always take something you already enjoy and monetize it. If you work with something tangible (like creating art or other products), start selling what you make. If your hobby is something like an activity you do (think running or golfing), share your expertise and start teaching others.
  • Leverage your current assets: Wisely investing your current assets is another way to create passive income (via dividends, for example). This is another path that won’t be for everyone, but it is an option that’s available.

There’s no limit to what kind of small income streams you can create, especially if you’re willing to work hard and establish them now. Financial independence is within reach, and much more so than any fuzzy concepts about a far-off retirement that sees you generating zero income, forcing you to live off a massive amount that you had to first save.

So forget about trying to plan for retirement. Work to reach financial independence instead. You’ll get there sooner and have more fun doing it.

XYPlanningAlan Moore, MS, CFP® is the co-founder of the XY Planning Network and president of Serenity Financial Consulting, a fee-only RIA and location-independent financial planning firm. He is passionate about helping financial planners start and grow their own fee-only firms to serve Gen X & Gen Y clients largely ignored by traditional firms. Alan has been recognized by Investment News as a top “40 Under 40″ in financial planning, and by Wealth Management as one of “The 10 to Watch in 2015.”  He frequently speaks on topics related to technology, marketing, and business coaching, and has been quoted in publications including The Wall Street Journal, Forbes and The New York Times. He lives in Bozeman, MT so he can hit the slopes on powder days.

Bond fund managers loading up on cash

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American cashInteresting piece in the Wall Street Journal entitled Bond Funds Load Up on Cash. Of course, investors have been preparing — usually prematurely — for the “inevitable” risk in interest rates since soon after the financial crisis in 2008 and so far it’s yet to happen.

As the Journal reports, though, large bond funds in the United States are holding the most cash since that same financial crisis: 6.6% on average among the top ten American bond funds as of their last reporting date, according to Morningstar Inc. That cash position is more than double what it was last year (on average). The last time cash levels in bond funds were this high was 2007.

The expectation is that the Federal Reserve will finally start to act and raise rates sometime in 2015. And of course, now we’re in December of 2014, 2015 isn’t quite so far in the future as it may once have appeared. The Fed’s Quantitative Easing program ended in October (at least the latest incarnation of it).

The yield on the 10-year U.S. Treasury note was 2.169% as of Friday, the Journal reports, down from 3% when 2013 ended.

The Women’s Guide to Financial Independence

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Female hand holding up the number 5Hub Staff

From Sarah Ban and Michael Gordon at TheSimpleDollar.com, a well-researched and fact-based guide specifically for women. This 5-step post is designed to help women arm themselves with the information that many of them may not have, to help them secure their own financial futures free from outside influence (spouses, parents etc).  The steps are as follows:

Step 1: Understand Your Cash Flow

Or: make sure you know where your money is coming from, and going to. The article suggests using financial app Mint to keep track of your expenses. Click the above link to complete a specifically tailored exercise to find out your monthly cash flow.

Step 2: Determine Your Goals and Set Your Budget

Whether it be paying off your various debts or saving to buy your first home, figure out what your goals are and how long it should take to achieve them. The article also has some handy tips to help you cut those costs, many of which are discussed here as well!

Step 3: Eradicate Debt

Remember to prioritize your debt. Paying down that high-interest credit card should take precedence over your low-interest student loan debts.

Step 4: Save!

Packed with more staggering statistics about American women’s financial education, step 4 dives into what women really need to do to prepare themselves for retirement including opting in to your company’s 401 (k) plan. There is also vital information on American healthcare costs, emergency savings, housing and car savings, and different savings vehicles to help you get the most from your hard-earned money.

Step 5: Protect Yourself 

After following steps 1-4, you will no doubt be financially secure and confident, however there are always unforeseen circumstances that come out of left field, and it is important to be aware of those circumstances and have a plan in place to help you stay afloat in even the worst of times. By nurturing your credit score, staying on top of housing, and being aware of your marital status’ possibility to change, your ability to adapt to changing financial situations will be greatly strengthened.

Click through for a much more in-depth guide that covers just about everything American women need to know to make themselves Findependent.

Active managers suffer worst year in 30; indexing triumphs

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Joshua Brown; TheReformedBroker.com

As this article at Reformed Broker explained on Friday, Lipper data shows that active security selection is on track for its worst performance in 30 years, with 85% of stock-picking fund managers failing to beat their respective indexes. Brown sums up the gap between promise and the reality of fund managers pithily:

“They cannot do what they profess to do on a consistent enough basis to justify the extra trading costs, management fees or tax ramifications.”

Coupled with all the press over the failings of actively managed mutual funds and the cost and tax-advantages of exchange-traded funds (ETFs), and lately ETF-based “robo-adviser” services, it appears the message is finally getting through to ordinary investors. Consider these sales numbers published by Reuters:

“Through Oct. 31, index stock funds and exchange traded funds have pulled in $206.2 billion in net deposits. Actively managed funds, a much larger universe, took in a much smaller $35.6 billion, sharply down from the $162 billion taken in during 2013, their first year of net inflows since 2007…”

Brown suggests active managers need to cut their fees in half (and he’s talking about the U.S., where fees are already lower than their Canadian equivalents).

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WSJ’s Jason Zweig

But let’s give the final word to the Wall Street Journal’s eminent personal finance columnist, Jason Zweig. The headline says it all: Stock indexing racks up another triumphant year.

Picking up on the Thanksgiving theme, Zweig begins by nothing “It’s been another turkey of a year for active stock-pickers.” He notes that the decline is even worse than three months earlier, when he wrote this:

” … active fund management is outmoded, and a lot of stock pickers are going to have to find something else to do for a living.”

However, taking a balanced approach to the issue, Zweig notes that these things go in cycles and there will be times when active managers have their time in the sun and indexing lags.  He concludes:

” … most stock pickers are still likely to underperform a comparable index fund over time. But they aren’t going to look quite this bad all the time.”

 

A salon for would-be Boomerpreneurs & business owners seeing exit strategies

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Dining room
Brainstorming over a dining table like this one.

The other evening ten 60-ish baby boomers got together in a private home in mid Toronto to discuss Boomer retirement and related matters. There were two main groups: most were business owners who have been self-employed for 30 or more years. A handful (including myself and the hostess) had spent most of our careers working as employees in large organizations.

Long-time business owners looking for exit

In both cases, the great question before us was “What do I do with the rest of my life?” The business owners were concerned about exit strategies to monetize their years of sweat equity, which could include outright sale or passing the reins to younger family members.

Long-time employees looking to find a transition business

The other group is considering becoming business owners or entrepreneurs even at this late stage of life, or what I term “Boomerpreneurs.” We may or may not have left the workforce voluntarily but suddenly had some leisure and money to contemplate our next move.

In almost all cases, this was a high-achieving group and while one younger attendee (in his mid 50s) had spent a “mini retirement” of several months in Central America, most of us agreed we were in no way ready for endless days of daytime TV, golf or bridge. Some were conscious of the extended Life Expectancy theme underlying this website’s “Longevity & Aging” section, but others were acutely aware that we all entering the final few laps of the great race of life. The long-time business owners in particular seemed ready for a change, but were aware the transition or exit could well require four or five more years of continued effort.

Actually, this was the second time the group had met. I would have love to have attended the first one in October but had already committed to a three-week trip to Turkey. The focus of the first one was that many baby boomers can expect another 10,000 days of life on the planet, so what’s your plan on how you’re going to spend that time? As the facilitator, Alan Kay (more on him below) put it, it’s all about “repurposing yourself, not a blank canvas.”

Acquiring new skills — at 60

Interestingly, the hostess (one of only two women in the second meeting; the rest were obviously men) experienced almost the same events as I have in 2014. Both of us had quite independently chosen to attend Toastmasters weekly, to hone our public speaking and leadership skills (neither of which suggests sitting before a fire in your rocking chair). She is also attending a Rotman course that prepares you to assume positions on corporate boards. As if that weren’t enough, this high achiever is also taking acting lessons.

Does Business Ownership run in the family?

Her husband, and our host, has long been a business owner. In fact, long ago when I worked on a computer newspaper, I had naively written a piece about him extolling the fact that he was a “27 year old president” of his own computer company. At the salon, he said his own father was a business owner so it seemed a natural step for him at the time. I replied that my father was a high school teacher with security and a Defined Benefit pension plan, which may have explained why I tended to stick with salaried employment within other people’s businesses.

Regrets of the dying

We discussed life purpose, why we are even on the planet, and the five regrets of the dying, a piece published recently in the Globe & Mail. Some felt that one of the advantages of building something even at this stage of life would be to employ the generations following us, including our children.

There was a feeling it’s time to simplify, perhaps to slow down a tad but few seemed to seek a traditional “full-stop” retirement. Call it semi-retirement or phased retirement, depending on circumstances. I didn’t get the impression anyone was suffering financially, so the continued interest in remaining active was more about community, giving back and the like.

Naps in the home office

Some of us work from home, some still go to an office, even if they own the building in which it’s housed. Among the “work-from-home” crowd, which included our host and myself, we confessed there was the advantage of the occasional afternoon nap.

As for the session and what’s next, it’s all rather fluid although the hosts did facilitate an exchange of emails with the intent of connecting on Linked In.  Certainly, this web site will happily describe further developments and facilitate communications between members and would-be members. There are, for example, our so-far-dormant discussion forums, which could be used to continue the dialogue in cyberspace.  It was just such a salon that spawned the Huffington Post.

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Alan Kay, The Glasgow Group

Pending permission from the other participants, I’ve erred here on the side of protecting actual identities but may update this blog or post new ones with actual names and coordinates as they arise. I can say the session was moderated by Alan Kay, who is happy to be identified as “a fully recovered ad guy, facilitating change through tools like stakeholder consultations and roundtables using his Solution Focus expertise.”

And yes, this often means sitting around a kitchen table like the one illustrated above; you can find him via his website here. Or contact me at jonathan@findependenceday.com.