Many people hate their jobs. Survey after survey observes “80% of Americans hate their jobs” or a similar statistic. Maybe that’s why so many people called it quits after the pandemic lockdown and the labor market is tight.
Many people, including clients and many advisors, keep working because they rationalize, they don’t have enough money to retire. This is a major benefit of financial planning. Retirement planning seems to focus on the distant future. Financial independence can sound like a nearer term goal.
Some clients will remember the 1981 film, You Can Take This Job and Shove It. The title of the movie has stayed in the popular memory for decades. It describes a goal. You want your client to reach the point when continuing to work becomes a choice, not a requirement. Suddenly the power is in their hands. They become more confident and less scared. Reorganizations aren’t that scary.
Suppose you brought up the idea of financial independence with your client. If they have been buying lottery tickets, you know they have been thinking about it. FYI: It’s been said 80% of Americans play the lottery. Financial independence isn’t an alien concept to your client (a good thing), but they are assuming they need “the big score,” literally, “hitting the lottery” to achieve it.
As their advisor, you are in a position to help them develop a roadmap towards financial security. Let’s assume your client is in their 40s or 50s and their children have grown and left the nest. What would it take for your client to achieve financial independence?
Let’s start by asking some questions:
1. What does financial independence mean? To some, it might mean never working another day—living off your assets. To others it might be one spouse retiring and the other working awhile longer. Some clients might never want to totally stop working, preferring the occasional consulting gig to running in the rat race. Get a definition.
2. How much money would they need at a minimum? This is a complicated question. Start with basic expenses. What does it cost to run their lives, taking out the exotic vacations, country club membership and always driving a new car. Put another way, what does it cost to keep the lights on and get fed? You are establishing a minimum expense baseline.
3. What lifestyle would they want to have? The first calculation put food on the table. Now it’s adding more detail. Don’t assume the answer is: “I want to do everything I am doing now.” That would require replacing their earned income dollar for dollar. That’s “winning the lottery” thinking. They might see a simpler life, living in their vacation home. They might surprise you, wanting to sell their house, buy an RV and travel the country as a lifestyle. Their spouse gets a vote too, so having this discussion together is a good idea. Establish the cost of the ideal lifestyle.
4. What does the asset side of the ledger look like? Your client owns securities. If not, they wouldn’t be a client! They have retirement assets with you and possibly elsewhere. If you don’t know about all of them, now is a good time to learn more. How much property do they own? They might own their house or condo in the city. They might have a vacation property and rental properties. They might own hard assets like cars, wine, jewelry and art. Realistically speaking, what is everything worth?
5. What income could they generate immediately? This would come from their base of investments. They might also have a retirement plan that was converted into an annuity by a previous employer. What could they collect by taking payments in the near future? Taking Social Security early might be an option. Do they have rental income from property they own? What does their income stream look like today?
6. What income is available in the near future? Social Security is an obvious example. Their spouse might be a teacher with an annuity as a savings vehicle in addition to a pension. Collecting might be a few years away. What income will be available in the near future?