Love or Confusion?
Financial Independence Or Financial Security?
In the world of financial services, both clients and (mostly) advisors often throw these terms around: Financial independence; financial security. I do not believe they mean the same thing. I also think that the terms trigger different brain and emotional responses. One is more of a fact, given a certain set of circumstances, which also drives behaviors and emotions. One is more purely a set of emotions. You describe one with numbers, assumptions, and quantitative scenarios. The other is described with a narrative.
Independence may not feel good even though, in the context of the scenario, it is good.
Independence: the ability to live your life without being helped or influenced by other people:
It's important that parents should allow their children some independence.
Security, when you believe you have achieved it, feels good but might not objectively, factually be accurate.
Security: the fact that something is not likely to fail or be lost:
If it's a choice between higher pay and job security, I'd prefer to keep my job.
I'm on a temporary contract and have little financial security (= cannot be sure of having enough money to live on).
Like most of the jargon advisors love to use (and I hope I use less jargon than most), these are confusing terms. Search the web. See how many answers (and, sorry, promotions and advertising - but hey, everybody gotta get paid) you get.
Financial Independence
The definition of financial independence to which I ascribe is the ability to do what you want, when you want, with whom you want, for as long as you want, with no concerns for the cost of doing so and/or the money needed to live this way1. Financial independence is intensely personal because we all value different things, which is why I laugh when folks talk about “The Number” and/or you “should feel rich when you have some number of (generally) millions of dollars”. You can quantify it, and you need to quantify it your way, with your spending, income, investing, tax, and estate plans. To do the math, you need to understand how much you spend today, your planned spending in the future, your current and projected income streams, the time horizon for your spending, (i.e. your estimated date of death, or, if planning for more than one person, the estimated last death) and the likely behavior of your investments.
The math is relatively easy to do. We have plenty of software tools. That is all well and good. The problem in quantification is our brains. Most humans are deterministic thinkers. Unfortunately for us “give me the answer” humans, we live in a probabilistic world. We like certainty. Probabilities involve uncertainty. Even a 1% probability can will happen. That is why it is a probability. We cannot predict the future, so we have to assign probabilities and can only guess at who will actually experience them, which we generally do using Monte Carlo simulation. So, even in the best case, while we can calculate independence, it has some level of uncertainty for nearly everyone. However, when we start seeing Monte Carlo results showing 70% or more likelihood, we find that our clients tend to believe they are financially independent (and, of course, in the great majority of the simulations, and concomitantly in actual life, they are). We can state this with a set of facts and assumptions. And we can regularly re-estimate this over time.
The estate planning portion of your plan is not quite so straightforward, since it typically involves family relationships, thinking about death and disability, trying to define your legacy, plus executors, guardians, and trustees. None of this can be done with a mathematical model (well, you can model estate taxes, potential legacy amounts, and the like, but these are not, again typically, driving estate planning decisions) and they are all subjective decisions. While estate planning is important for feeling secure, it typically is not germane to being independent.
Financial Security
Realistically, and especially because of the uncertainty of the future, both independence and security are, ultimately, feelings. One seems provable (at least within the context of reasonable probabilities), and the other seems to exist mostly as a feeling. Which one is more powerful? Security. Because the “knowing” you are safe, whether it is true or not, feels terrific. Go ahead, stop reading. Say to yourself: “I am secure”. Say it again, breathe deep. Say it again. Feel it. How do you feel right now? Did you do any math? That’s what I figured.
“The fact that something is not likely to fail or be lost”. Well, looked at this way, my premise maybe doesn’t hold up so well, assuming security is based on a fact. My experience tells me otherwise; security is a pure emotion. People say: “I feel secure”. They don’t say: “I feel independent”. They say: “I am independent”.
Harmony
Ideally, we have both - we are independent and we feel secure. Can feeling secure disrupt becoming independent? Sure, if it leads to overconfidence. Of course, there is also the potential for manifestation: feeling secure leads to the confidence to take actions that result in becoming independent.
Regardless of the path you take, being independent and feeling secure result in feeling powerful, confident, good. And that’s not bad.
Current Reading
Leonardo Da Vinci, Walter Isaacson. This dude? Genius, like, wow.
Lessons Of History, Will and Ariel Durant. The more things change, the more they stay the same. I am bookmarking like crazy and will, absolutely, read it again and again.
The Waiting, Michael Connelly. My version of junk TV.
I am not the originator of this definition. I adopted it from Ted Klontz.