As Americans, we certainly value independence. Never is that more obvious than when we approach the 4th of July and celebrate the independence of our country. At the signing of the Declaration of Independence, John Adams wrote that it “will be celebrated, by succeeding Generations, as the great anniversary Festival” and that the celebration should include “Pomp and Parade…Games, Sports, Guns, Bells, Bonfires, and Illuminations from one End of this Continent to the other.” Nearly 250 years since that momentous occasion, this still rings true. Celebrating independence and freedom is a constant theme threaded throughout the history of America.
From the time you are a young child, you have been groomed for independence. First steps, tying your own shoes, getting on the school bus for the first time, first jobs, graduations, and a plethora of other “firsts” were all cause for celebration. As children, we struggle to “do it ourselves” suggesting an early desire for independence. As young adults, we strive to gain independence from our parents. As adults, we celebrate venturing out on our own, obtaining our first “real” job, purchasing our first homes, and eventually paying off that mortgage.
Yet despite a lifelong affinity for independence, many retirees find themselves losing it. Getting older is a fact of life but losing our hard-earned independence does not have to be a given. The truth is that most of us will outlive our ancestors, which likely means a much longer retirement. However, with careful planning, you can maintain your independence.
4 Steps to Ensure Your Financial Independence in Retirement
1. Have an Emergency Reserve
Save about six months’ worth of expenses in a liquid savings account that you can easily access in the event of an emergency. Consider a high yield savings account or a CD ladder from an FDIC-insured bank to put this money to work for you.
2. Build Your Nest Egg
Save at least 10% of all of your income in retirement (i.e., IRA, Roth IRA, 401K, etc.) and individual brokerage accounts. Be sure to invest in a diversified portfolio with low-cost funds. Most importantly, don’t touch it! Let the power of compounding work for you, and your portfolio will grow significantly before you need to start withdrawing from it.
3. Pay off Your Mortgage Before You Retire
Once you have an idea of when you would like to retire, it’s time to start thinking about getting that mortgage paid off. Going into retirement without a mortgage has huge benefits, both financially and emotionally. First, determine how much more you would have to pay monthly in order to pay off the mortgage by the time that you retire, then decide if the increase in payment is financially feasible and, if so, increase your payment accordingly. (Need help determining if this is the right decision for you? A Certified Financial Planner TM can help.)
4. Insure Against the Risk of a Long-Term Care Need
Nothing will derail retirement quite like an unanticipated major health event. Long-term care insurance can be a great option unless you have considerable assets to self-insure the risk. It can become prohibitively expensive though, so it’s important to start getting quotes early (i.e., in your fifties!)