Retirement is often viewed as the golden years of life when one can finally kick back, relax, and enjoy the fruits of their labor. However, the reality is that many people struggle to make ends meet during their retirement years. Financial freedom in retirement is a goal that many people strive for, and it is essential to understand that achieving this goal is all about cash flow. In other words, the amount of money you have coming in each month needs to be sufficient to cover your expenses without having to rely on other sources of income or take on debt. We will explore the importance of cash flow in achieving financial freedom in retirement and provide practical tips on how to maximize your cash flow.
Determining Whether Your Money is Fulfilling Its Primary Objective
Money is an important aspect of our lives, and it’s natural to desire more of it. However, determining how much money is enough can be a challenge. Many people use arbitrary account balances and rates of return to measure their progress, but these metrics don’t indicate whether their money is fulfilling its primary purpose: income replacement or cash flow.
While money is part of the equation, it’s not the sole measure of success. People with substantial financial resources can still struggle with feeling financially free or confident.
To achieve financial confidence, it’s essential to answer two crucial questions:
- How much actual income do you have coming in that doesn’t require work to receive? This means money that is deposited into your checking or brokerage account.
- If you stopped working tomorrow, how much money would you need to cover all your expenses, including taxes, trips, and lifestyle expenses?
Most people have a gap between their current income and the amount they need to cover expenses. This gap is why they work. If you want to stop working, you’ll need to find ways to generate passive income to close this gap.
The Difference Between Financial Freedom and Financial Security
It’s crucial to comprehend the disparity between financial security and financial freedom. While financial security is commonly perceived as a sense of safety rather than a precise number or percentage, it often involves reducing debt and accumulating wealth. Many individuals believe that spending less, paying lower interest rates, and earning higher investment returns will lead to a prosperous retirement.
However, while having substantial savings can provide a sense of financial security, it doesn’t automatically equate to financial freedom. In essence, having a substantial amount of money doesn’t guarantee financial freedom if you’re still working to support your income needs, worrying about market returns, or uncertain about the future.
The Route to Financial Independence and the Role of Passive Income
However, there is a middle ground that provides both financial security and lifestyle flexibility in the short term, known as “financial independence.” Many business owners have companies or real estate properties that generate a revenue stream without their full attention, allowing them the flexibility to do what they want when they want. Nonetheless, they must still contribute to maintaining their income sources.
Rental properties are excellent examples of generating income to support your lifestyle and achieve financial independence. Although having these assets growing and producing income is beneficial, it still requires time and effort, including addressing repairs and upkeep, managing expenses, and dealing with unhappy tenants.
Running a business to provide cash flow isn’t wrong, and for some people, their business is their passion. However, it’s challenging to achieve true financial freedom when the business income relies on you showing up.
For this reason, many individuals with substantial rental properties cash out and move to sources of passive income, such as Social Security, pensions, annuities, private markets, and royalties. A genuine source of passive income is one that generates income without any effort on your part. Misunderstanding the differences between financial security and financial freedom can be costly. If the goal is to have enough passive income to cover your cash flow needs, then why measure progress based on account balances and rates of return for thirty-plus years?
Conclusion
The conflicting ideas surrounding financial security and financial freedom could be why many people believe they’re on the path to achieving freedom but never seem to reach it. They fall short of their goal because they lack a true understanding of what’s necessary to attain financial freedom and focus solely on accumulating assets.
To achieve financial freedom, you must have a reliable source of passive income. Therefore, focus on building these income sources to attain financial independence. Questions about passive income and how to achieve financial freedom? CF Financial may be able to answer those questions. Please fill out our contact form if you would like to learn more.