I used to think that retirement was about reaching a certain age, you hit 65 and now you're allowed to retire. I’ve come to realize that retirement has a lot less to do with your age and a lot more to do with your financial numbers. This doesn't mean that once you reach a certain number that you have to retire or that you will even choose to retire, but you are able to.
Depending on your age retirement might be the last thing on your mind. When I first started working people would suggest putting away money for retirement and I honestly didn't give it much thought because; I'm young and retirement is a million years away and I'd rather buy cool stuff now then put my money in investments. You may be too young to think about retirement, but you're not too young to think about financial freedom.
This is what retirement means to me; it’s financial freedom, the freedom to choose how I spend my days and with whom. I don't want to retire so that I can stay home and not do anymore work, that would be boring. What I want is the freedom to choose the work I'm doing, how I contribute to society and the freedom to play when I want to.
If retirement is a financial number, "how do I figure out what that number is"? Your number is going to be different from my number because we live different lifestyles with different spending habits, but to answer a difficult questions with a simple answer your financial number is the number at which your investments are growing at a rate that allows you to cover your needs and wants without diminishing the principal amount so that it can continue to grow with interest every year.
For example if you have a million dollars in investments growing at a rate of 10% a year you will have $100,000 a year to spend without diminishing your nest egg. So if you can live on $100,000 a year then you are able to retire and one million dollars is your financial number. This is obviously an over simplified example, but I think it gets the point across. Once you've saved up enough money that your investments are making more money than you are spending each year, you can consider yourself financially free.
This makes investing exciting, if you know the number that it’s going to take for you to retire you have a target and investing and saving become fun. If you spend less money to live each year the faster you will be able to reach your retirement number and the lower that number will have to be to sustain you.
By figuring out my retirement number I’m able to clearly see where I want my money to go. I encourage you to figure out what your number is because you will probably realize that it’s a lot lower than what you actually thought you would need to retire. This is a great exercise to figure out what you want out of life and the things you want to do with your life. By having a clear picture of what it’s going to take for you to be financially free it’s going to be that much easier to stick to your budget.
There’s a great exercise in MONEY master the game by Tony Robbins that lays out how to find your financial numbers and what to do to get there.
The idea of being financially free is exciting to me, because it means I can do whatever I want with my time and that is the most valuable resource that we have. Take some time and think about what being financially free would mean to you. If you didn’t have to worry about money how would you live your life? What would you do, who would you be and could you be doing some of those things now?
We don't have to wait until we’re retired to spend our time the way we want to.