For many people, financial planning is synonymous with retirement planning. In my view, however, retirement itself is not necessarily a worthy goal. First and foremost, you should find work you love and not be engaged in activities that mainly inspire you to daydream about when you won’t have to be doing them. We’ll talk more about your career in a later lesson.
For now, let’s identify the true goal: financial independence. What you want is to know that you don’t have to work in order to cover the basic costs of living. Working by choice rather than necessity can and should bring great happiness to your life. The goal, therefore, is knowing that you will be OK financially if you choose or need to stop working.
I don’t know what your personal cost of living is. Oddly enough, you probably don’t know either. Human needs have a remarkable ability to adjust to available income (plus 10%). There is also a good amount of evidence that, beyond having adequate food, clothing, shelter, and utilities, your happiness depends far more on the quality of your relationships and your sense of meaning in life than on your surplus wealth. Even health, surprisingly, has little long-run correlation to happiness. Through a process psychologists call hedonic adaptation, people adapt over time to their changed circumstances. Whether you win the lottery or become a paraplegic, a couple of years later you will probably be about as happy either way.
Given all the uncertainties as to when, or even if, you’re going to retire and the enormous flexibility in the cost of living, you might not want to bother calculating a specific number for financial independence. If you’re already retired, you’ll just have to make do with what you have. If you’re far from retirement, then the simple habit of fully funding your IRA (better yet, Roth IRA) or 401 (k) plan at work may be all the planning you need. Just find people and work you love, set up an automatic investment into your tax-favored plan, and stop worrying about retirement for the next several decades. We’ll discuss where to invest those funds in later lessons.
If, however, you aren’t yet retired but are within a decade of hoping to do so, or you really do want to compute a financial-independence number, then a more detailed calculation is probably warranted — which is our next lesson.