Coming to terms: Retirement vs. financial independence

Last Sunday, I shared the transcript of a recent conversation between me and Mr. Money Mustache. We talked a lot about retirement and what it takes to get there.

“You and I are both supposedly retired, and yet we’re doing this work here where we’re talking to each other about money,” I said at one point. Pete and I have both accumulated nest eggs that would allow us never to work again. We both considered ourselves retired. Still, both of us have elected to continue doing work for money.

In his reply, Mr. Money Mustache explained it like this: “This is the whole point. [During retirement,] you’re not going to sit around doing nothing unless that’s your true personality type…Retirement to me just means you’re free to do what you really want to do.”

Are we truly retired if we continue to work for money? We think so, but not everyone agrees. In the comments on that conversation, Patrick wrote:

I don’t understand what the definition of retired is. If you get to the point where you are financially independent and don’t have to work, but continue to so — did you really retire early?


To me, retiring is stopping doing work for pay. When people stop doing something for pay that they don’t like and change to something they do like doesn’t mean they’re retired.

Patrick isn’t the only one who struggles with a definition of retirement that includes work. To some, retirement specifically means that you no longer work for money — whether you enjoy it or not.

Note: The following section is taken directly from the Be Your Own CFO guide, which is a part of the year-long Get Rich Slowly course.

Four Types of Retirement

To many people, retirement means one thing: reaching a ripe old age — 60 or 65, usually — and leaving the workforce to enjoy the money saved over the preceding few decades. This money might come from many sources: a company pension, personal savings, government benefits. In this view, retirement is a time to travel and try things you never had time to do before.

While that’s how most people approach retirement, it’s certainly not the only way.

Early retirement is exactly the same as a conventional retirement, but it doesn’t come at the end of life. Instead, it’s achieved at age 50 or 40 or 30. To retire early, you have to save more than average. To retire very early, you have to save a lot more than average. Some folks believe early retirement is a pipe dream, but it’s not. If you can boost your saving rate to 50 percent — which is tough but possible — you’ll probably be able to retire in about 15 years.

Another option is semi-retirement. When you’re semi-retired, you continue to work — but on your own terms. You have significant savings– maybe even enough to be truly retired — but you choose to earn an income so you don’t have to draw down your savings as quickly. I consider myself semi-retired: I could probably quit working and live out my days happily, but I opt instead to do meaningful work. Doing so lets me travel more than I might otherwise be able to. Bob Clyatt explores semi-retirement at length in his book Work Less, Live More.

In The 4-Hour Workweek, Tim Ferriss describes another approach to retirement. He argues that instead of deferring decades of retirement until the end of our lives, we’d be happier, more fulfilled, and more productive if we instead redistributed this time in the form of mini retirements throughout our careers. These career breaks allow us to explore new people and places while we’re still young and fit, and while we still have time to change course if we discover a new opportunity.

As you can see, retirement comes in a variety of shapes and sizes. There really isn’t one definition of the term. For people like Patrick, retirement means you no longer work for pay. But a lot of folks who meet this definition would chafe at the notion that they’ve retired.

In Work Less, Live More, Bob Clyatt writes:

Plenty of people are uncomfortable using the term “retirement” to describe their lives after leaving full-time work, even if they are already collecting Social Security. For them, that word conjures up images of frail elderly people who have hung up their spurs…They think of themselves as fully engaged in living life, not withdrawing from it in any sense.

In the end, it doesn’t matter how you label your lifestyle. Whether you’re retired or not, all that matters is making sure your work and spending match your mission statement. If you do, you’ll be happy.

Forging Financial Independence

Ultimately, “retirement” is a loaded word, and I try not to use it except in casual conversation. I prefer to talk about “financial independence,” which is essentially the same idea but without the baggage. (This is precisely why I use the term “global climate change” instead of “global warming.” The latter is more common, but it carries so much baggage that it tends to cloud conversations about an important subject.)

Financial independence occurs when you’ve saved enough to support you for the rest of your life without needing to work for money. You might choose to work for other purposes — such as passion and purpose — but you no longer need an income to meet your expenses.

Re-framing the conversation in terms of financial independence has another advantage. There are clearly different degrees of financial freedom, so it’s possible to talk about progress along a sort of FI continuum.

  • At one end of the spectrum, you are completely dependent upon others for your financial security. As a child, for instance, you’re dependent on your parents for support.
  • When you no longer need financial support from your family, you achieve one degree of financial freedom. You still might be dependent upon other creditors (your bank, your credit card company), but these are companies and not people.
  • When you break free from the chains of consumer debt, you achieve another degree of financial freedom.
  • Further along the continuum, you achieve greater freedom when you do things like eliminate your mortgage or have enough F-U money saved that you’re no longer glued to your job.
  • At the far end of the spectrum is complete financial independence. Here, you have enough in savings that you could fund your lifestyle for the rest of your life.

How much do you need to achieve full financial independence? The answer depends on the assumptions you make about inflation, investment returns, your lifespan, and so on. However, I’d argue that in general, the following holds true:

When you’ve saved enough to fund 25 years of your current lifestyle, you’ve achieved financial freedom. If you’re cautious and/or make conservative assumptions, you might want to save 30 years of expenses before considering yourself financially independent. If you’re aggressive and/or make bold assumptions, you might save only enough for 20 years.

Here’s another way to look at it: Making standard assumptions, for every $25 you have in retirement savings, you can afford $1 of spending per year. If you have $2,500 saved, you can fund $100 of annual spending. If you have $25,000, you can fund $1,000; $250,000 funds $10,000; $2,500,000 funds $100,000. And so on.

Note: These numbers highlight the power of frugality. If you spend less, you have less to save before you can retire — and you’ll save it more quickly!

What about you? What does the word “retirement” mean to you? What’s the difference between retirement and financial independence? How will you know when you’ve achieved financial independence? And what will you do once you get there?

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