What is a Financial Independence Analysis?

 Ben Schwartz By: Ben Schwartz

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When can I retire? Can I afford to send my child to a good college? Will I be able to take the trip to Italy with my parents which they still can?

Amid consideration of investment types, allocation models, tax strategies and more, we tend to forget that the heart of good financial planning is helping you answer questions (big and small) about your future. But great financial advisors do not simply give you answers based on gut feelings, there is a lot of research and data modeling that goes into putting your mind at ease. The main tool used is what is known as a financial independence analysis.

How does a Financial Independence Analysis work?

The financial independence analysis is powered by three things:

  1. Your financial data (income, savings, assets, spending habits, and more).
  2. Your financial goals (ideal retirement date and asset level, large expenditures, etc.)
  3. A probability model known as the Monte Carlo simulation.

The Monte Carlo simulation takes the aforementioned information and lays it against potential market outcomes over time to give you a likelihood you are financially independent enough to achieve your goals. To do this, the model does not consider one, two, or even ten possible market outcomes for the coming decades. A whopping 1,000 possible outcomes are run given your current path to determine the likelihood you can do something like retire at 60 with enough to live comfortably. 

As you can imagine, seeing how your own plan could play out given one set of market conditions would be helpful. Now imagine that you do that against 1,000 potential market conditions, evaluating how often you would still be able to achieve your goals. That's what the Monte Carlo simulation offers within the financial independence analysis.

What information do you put into a Financial Independence Analysis?

The most complex part of running the analysis is collecting all the information needed to make the result valuable. Here's a short list of the things that are important to share:

  • Current Income and Assets
  • Debt (credit cards, mortgage, loans etc.)
  • Healthcare and Annual Expenses
  • Savings Accounts, (emergency funds, certificates of deposit, bonds etc.)
  • Current Retirement Accounts (Roth IRA, 401k, etc.)
  • Any equity compensation you receive
  • Any financial life goals like early retirement or owning a vacation home

What can you do with your Financial Independence Analysis? Am I on track?

It's difficult to grasp just how helpful this information is as you build and maintain your financial plan. Understanding the likelihood you're on track to achieving your goals helps you make strategic decisions along the way and gives you peace of mind. It is incredibly common, even for families with a solid financial plan, to carry stress that they are one bad market swing or one big purchase away from falling off track. This can help ease that worry and empower decisions on everything from savings to risk tolerance.

Here are three examples of ways we might put information discovered through an independence analysis to work for a financial plan:

  • Savvy Saving: Many, especially those earlier on in their financial planning path, discover their current saving habits aren’t enough to achieve their goals for the future. It's common the results of an independence analysis shed light on a new savings goal to hit those long-term plans, not just short-term desires. Seeing it spelled out on paper how saving even 5% more each year adds up can help make that easier today.
  • Shy Spending: On the flip side, families who have been dedicated to a saving and investment pattern for a decade or two may be surprised to know that they can afford to splurge a bit and still meet their long-term goals. This can often be more difficult to process and accept than needing to save, but seeing the data can help you make the most of your wealth without buyer’s remorse.
  • Investment Strategy: Not that you should opt into an investment strategy you aren’t comfortable with simply to improve your independence analysis, but seeing how the data stacks up against your goals may help those who feel overly cautious about the stock market feel more confident about a long-term investment position.

Confidence in Your Financial Plan

What does it really mean to have "enough money"? The truth is achieving financial independence looks a little different for everyone, but one thing our happiest clients have in common is the ability to feel and process the results of their analysis, positive or otherwise, and move forward with a plan of action.

At the end of the day, hard work that goes into collecting information, selecting an appropriate investment allocation, and setting up things like an estate plan or a new tax strategy are built to do one thing: make you feel empowered and confident that you are on the right path.

It is not unusual to feel emotional when you’re reviewing your independence analysis for the first time. Whether the numbers are pointing toward opportunities for improvement or are showing that you have “made it” to a goal, it can bring up big feelings. In many cases these are long-held patterns or goals and like it or not, money influences life significantly.  If you’re comfortable, unpack the emotions you’re feeling with your spouse or wealth manager because having this clear picture of your financial path is a gift.


Disclosures: Plancorp is an SEC registered investment advisor. All investing involves risk and past performance or modeled performance is not a guarantee of future results. This material has been prepared for informational purposes to better understand how a financial independence analysis is used in financial planning. You should always consult your own tax ,legal and accounting advisors.

Ben brought with him several years of experience in investment management and financial planning when he arrived at Plancorp in 2013. Ben’s immersion in the industry gives him the insight necessary to determine customized and thoughtful solutions for each of his clients. More »