Investing and Financial Independence

With three stock market crashes in just over a decade (the 2000 tech wreck, 2008 and the one that threatened this August), it’s worth asking why investors even put themselves through all this agony.

The holy grail presented by the financial services industry is dubbed “retirement,” the premise being that by working hard for three or four decades in your prime income-earning years, you can take a load off in one’s twilight years. I question whether ending your life with endless rounds of golf, bridge and daytime television is what people really want or need, but that appears to be the vision presented in the TV advertisements of the nation’s banks and mutual fund companies.

The baby boomers and the generation after them are, however, discovering that the Defined Benefit pensions of their parents are not likely to be around to furnish their own retirements. Forced into investing in their RRSPs or Defined Contribution (DC) pensions, they are also forced to accept stock market volatility. Yes, they can rely on government pensions (CPP, OAS and the GIS) for a moderate baseline retirement income, but odds are that they’re going to have to supplement it with a healthy investment portfolio and/or by remaining in the workforce in some capacity.

I suggest that we “retire” the word retirement. My preferred term is “financial independence” or “findependence” for short. I use the phrase “Findependence Day” to denote the point when one can, in theory, generate enough income from multiple sources that it’s no longer necessary to work in a traditional corporate “job.”

The crucial distinction, however, is that one doesn’t necessarily stop working just because that day has arrived. You may indeed continue to work to generate income but you would do it because you want to, not because you have to.

So why put up with the heartache of investing in stocks that often plunge? I’ll answer that in depth over the next six months in this space (on a weekly basis), but the short answer is that the key to financial independence is spending less than you earn (via a practice I call “guerrilla frugality”) and saving the difference.

Traditionally, saving meant putting a little money in a bank account paying small amounts of interest. Given that the U.S. federal reserve has promised to keep interest rates low for another two years, thereby dooming savings to not even keeping up with inflation, savers must take the next step and become investors, which means embracing stocks and other securities offered by financial markets.

More about this next time.

Jonathan Chevreau is the National Post’s columnist and author of Findependence Day.

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8 Responses to Investing and Financial Independence

  1. Pingback: 7 in 10 willing to sacrifice market upside for peace of mind | Wealthy Boomer | Financial Post

  2. Marybelle Miller says:

    How much is enough? Would like to know what I need for financial independence? Thank you

    • That’s the $64 million question of course. It comes down to whether or not you have a good employer-provided Defined Benefit pension or not. If you do, $500,000 may be enough. If you don’t, $1 million to $2 million would not be out of line, depending on how much you want to live in style and whether or not you plan to cut into capital versus leaving an estate for the kids or society at large.

  3. Jack says:

    hi Jonathan, I have been a fan of your collumn for many years. I agree completely with what you say. at this point in my life, I have 12000 in my rrsp, no high interest debts and plan on socking away about 7000 to 8000$ for the next 25 years. I have been researching extensively because I don’t know where to put this money. Two days ago I came across a book that blew my mind. You may have heard of it: The millionaire teacher by Andrew Hallam.

    this article sums up his approach well:

    My question to you is this: he says he made a million in twenty years by investing as much as he could in a simple stategy: three market index funds, one canadian, one american and one international, and one bond fund ( short term canadian governement bonds). All he does is readjust the assest allocation so that the bond portion is always equal to his age (he is currently 41). He is a buy and hold type, never worries about the ups and downs of the market and says anyone doing this is going to quite likely earn between 8 to 10% with little risk. It sounds reasonable to me and i have not found one single negative article about him, or his approach. Do you think this is realistic? because if it is, and I start withing the next three months, according to my calculations, I could reach that million by 65. And this is exactly the number you have quoted in the response to the gentleman above, as being what would be necessary to live comfortably for say, 25 years. I really hope you can answer this for me, as this is by far the most important financial decision i will ever make. thank you!

  4. Thanks, Tristan and sorry for tardy response. I reviewed Andrew’s book on my Wealthy Boomer blog a few months back. His indexing portfolio is quite realistic: in fact it’s virtually the Couch Potato Portfolio that’s outlined in the MoneySense Guide to the Perfect Portfolio, by Dan Bortolotti. If you’re socking away $7 or $8000 a year you’re doing fine. Malcolm Hamilton has said low-income people expecting significant government benefits in old age could get by with about $2,500 a year saved just in a TFSA.

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