What is financial
security?
It’s not quite retirement. The assumption of financial
security is that you’re still making money somehow, whether in residual income
from work you’ve already done or from small business opportunities you work to
maintain. It does look very similar to traditional retirement, though.
According to Investopedia, financial security is having
enough passive income to cover your expenses for the rest of your life. For
example, if you have rental property, dividend income, savings account interest
and a turnkey business that provide enough money to live on, you’ve achieved
financial security. As you age, more of your income is provided by these
opportunities, leaving you with more time to pursue your passions.
How do I get there?
Most of the advice that applies to retirement savings also applies
to saving for financial security. Putting away 50% or more of your income into
savings and investments is a good place to start. Avoiding debt for consumer
purchases or lifestyle maintenance is another sound move.
The real difference comes in timing. With traditional
retirement planning, you invest more as you get closer to retirement. The goal
is to accumulate enough savings to live on for a decade or two when your
expenses are at their highest, so you need to contribute more during your peak
earning years. Typically, these come just before you retire. You’re an
experienced veteran in your field and your salary is usually at its highest
just before retirement.
When your goal is financial security, the timetable
reverses. In the beginning, more of your wages need to go toward investments.
As they start to bring in returns, more of your income becomes disposable.
Because your savings aren’t locked up in a designated retirement account,
you’re free to use them to pursue non-work money-making strategies.
What tools can I use?
There’s still space in a financial independence plan for
traditional investment vehicles like IRAs and employer-matching 401(k)
programs. These investments offer preferential tax treatment, which can be a
valuable complement to other savings.
Rather than using these as principal retirement savings
vehicles, more flexible options, like savings accounts, money markets, and
certificates/CD’s allow for short-term savings. Money goes into these accounts
until enough capital is accumulated to invest in another money-making project.
Think of saving as a prerequisite for investment, not as a synonym.
Investing in stocks and mutual funds is also an important
part of financial independence. Focus on trusts and companies that provide
consistent dividends and steady growth. Avoid trying to “hit home runs” with
stock picks that triple or quadruple in value overnight, and instead look for
slow, steady growth. These investments are more about keeping your money safe
from inflation than they are about making it grow in value.
Another resource you will need in the journey is knowledge.
Much of financial security involves navigating a lot of unknown waters. That’s
where Pen Air can help. Our Asset Management staff can walk you through the
steps to being master of your own financial destiny.
If you’re interested in financial independence or just in
improving your financial future, call, click, or stop by Pen Air FCU today.
