The difference between Financial Freedom and Retirement

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retirement vs financial freedom

Many people get the two concepts between financial freedom and retirement mixed up. While the two could mean the same thing, this is necessarily always the case. In this article we’ll go through the difference of the two and the difference between a depleting and non-depleting investment portfolio.

Financial Freedom Definition

At Freedom Nova, we define financial freedom when all of your passive income exceeds your necessary bills whereby you won’t need to work a single minute at least actively. You have an investment portfolio, regardless of the contents, that provide you passive income that you barely have to put time into (hence the freedom) that will pay for all your expenses.

Because all of your expenses are paid for, if you reach financial freedom, you could essentially “retire” from work and not have to worry about money. This is the key with financial freedom, the fact that all your expenses are taken care of and that you can officially not work and still live comfortably.

Retirement definition

Retirement can mean many things. When you have put in your time at your job and you hit a set age, say 65 you retire from work and you don’t have to work another day in your life if you don’t choose to. However, if you aren’t financially stable or haven’t saved/invested enough during your working years you might have to either continue working (at a job that pays less) or lower your living standards which obviously isn’t ideal.

This is the biggest difference between those that are financially free and those that are in retirement. While financial freedom can mean retirement, the reverse isn’t always true. Many people are retired but aren’t able to afford the lifestyle that they once enjoyed because they didn’t put enough money away even including their pension income.

The depleting and non-depleting investment portfolios

When I say depleting I mean that as you make a withdrawal from your investment portfolio, you’re eating into the principal of the investment portfolio (the value of the portfolio decreases with each withdrawal). This means that you essentially have a time limit on your investment portfolio since you will eventually deplete all of the funds from your portfolio. If you have calculated your life expectancy and planned your investment portfolio so that you enough funds to live up to 85 then you’re ok until then but are in trouble beyond that.

I’m not a huge fan of depleting portfolios but many financial institutions use this number because it’s much easier to achieve than a non-depleting portfolio. Yes, you might be financially free or at least financially stress free until your life expectancy comes up but once you hit that date, you could be trouble.

With a non-depleting investment portfolio, you live strictly off of the income that the investment portfolio produces. So if you have a $1 million portfolio and have a 4% passive income from the portfolio in the form of dividends and interest, you’re getting a $40,000 passive income source from that portfolio. Let’ say that you’re in the 20% tax bracket and therefore have an after-tax income of $32,000. If you can live off $2,666.67 per month then you’re completely financially free and aren’t depleting the funds in your account and the $1 million portfolio would theoretically stay in tact forever, that means you could leave money for your loved ones or leave a legacy by donating some of the funds when your time to move on comes.

If you don’t know how much or how long it will take you to reach financial freedom, trying using Freedom Nova’s financial freedom simulator to find out!

Why is this important?

It’s important for a couple of reasons. First, it determines how hard it is to reach your ultimate goal of financial freedom. Second, you can decide if you want to leave anything behind for your loved ones or for good causes.

The difficulty of reaching financial freedom

No one said this ultimate goal was going to be easy. In fact, it takes a lot of work, time, dedication, and discipline to achieve. If you’ve used the financial freedom simulator then you know that if could take you 30-40 years depending on how much you put away, how much you need and the level of risk you’re willing to take.

But it’s a goal worth striving for. Imagine not having to worry about money any more. You can dedicate your time and mental well being on other important matters in life like family or experiencing new things. By having a non-depleting investment portfolio, it gives you the freedom to do as you please because you have much more breathing room compared to a depleting portfolio.

The reality is you can be somewhere in-between a depleting and a non-depleting portfolio by choosing to take some extra funds out of the portfolio if you need to.

Leaving something for the future generation

If you choose a non-depleting investment portfolio, you’re leaving a legacy behind that can help people whether if it’s your loved ones or through charitable donations. We all have our own reasons and differences in what we believe in. But this is a way to make an immense difference in the lives of many.

I hope this article cleared up the difference between retirement and financial freedom as well as depleting a non-depleting portfolio. You may or may not find these terms used elsewhere I just thought this specific vocabulary would make it easy to understand.

If you haven’t already please be sure to use the financial freedom simulator to see how much and how long it will take you to reach financial freedom!

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