What’s the difference between retirement and financial independence?

I’ve spent a lot of time lately reading about retirement and Financial Independence over at Reddit. Reading other people’s questions and comments helps get a feel for the sorts of challenges they face as they boost their saving rate and cut their spending in order to pursue bigger goals.

For those unfamiliar, Reddit is a large internet community with discussion boards dedicated to different topics. Though redditors would cringe at this characterization, in many ways it reminds me of America Online twenty years ago.

I like to browse forums (or “subreddits”, as they’re called) on subjects like:

That last one merits more explanation. I’d never heard the term “lean FIRE” until I found the forum on Reddit. But I think it’s something that might appeal to a certain group of Money Boss readers. According to the LeanFIRE subreddit: “If you want to retire before 60 with less than $40k in planned yearly expenses, this is the place to discuss it!” In other words, “lean FIRE” is a term for early retirement with minimal money.

Note: FIRE is an abbreviation for “Financial Independence/Retire Early”. It’s a catch-all term for folks who want to stop working before traditional retirement age. But what are the differences between early retirement and Financial Independence? Stay tuned! That’s what this article is all about.

It’s strange to me that the LeanFIRE subreddit considers a $40,000 annual expense “lean”. That’s 75% of what the average American household spends ($53,495 per year), which doesn’t seem particularly parsimonious. My normal spending when I’m not traveling the U.S. in an RV is about $36,000 per year, and I don’t consider myself frugal at all.

To my mind, people like Pete from Mr. Money Mustache (household spending of around $25,000 per year) and Jacob from Early Retirement Extreme (household spending of around $14,000 per year) qualify as lean FIRE. But $40,000? That’s just slightly less excessive than the Joneses next door.

My desire to argue over what qualifies as a “lean retirement” highlights one problem we all have when we talk about money. Different words mean different things to different people. Today I want to explain what I mean when I use certain words and phrases at Money Boss.

Defining Retirement

To many people, “retirement” means one thing: reaching a ripe old age — 60 or 65, usually — and leaving the workforce to enjoy whatever money they’ve managed to save. For these folks, retirement is a time to travel and try things you never had time to do before. But it’s not a time for work.

While that’s how most people think of retirement, my own view of the term is more nuanced. I consider myself retired. So does Mr. Money Mustache. Are we crazy? I don’t think so. To me, there are many flavors of retirement. Here are a few.

  • Early retirement, which is the same as conventional retirement but 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.

To my mind, retirement comes in a variety of shapes and sizes. There really isn’t one good definition for the term. For many, 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 personal mission statement. If you do, you’ll be happy.

Defining 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.)

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.

Last month, I suggested that there are six stages of financial freedom:

[The Stages of Financial Freedom]

If you wanted, could get even more granular. You could create a list of sixteen stages of financial freedom. Or sixty. The key take-away is that the more money you save, the more freedom you have — and the greater risks you can take.

To me, as I’ve said, there’s little or no difference between retirement and Financial Independence. But I usually prefer to use the latter terminology in order to avoid fights with the Internet Retirement Police.

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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There are 10 comments to "What’s the difference between retirement and financial independence?".

  1. chacha1 says 29 January 2016 at 10:39

    To me “retirement” means “getting the hell out of this expensive, polluted, noisy city” more than it means “stop working for a living.” If we were just a little more financially secure, I’d move us out of here now. Unfortunately, where we want to live, we kind of don’t dare move until we are a little older because I don’t want to start drawing down our assets quite yet (we’re 50 and 56), and though we both could find work up there, the income might not be sufficient to keep our hands out of the piggy bank before Social Security is available.

    I like the FIRE acronym but – at our age – it doesn’t seem to really apply. 🙂 And given that we got our financial act together pretty late, we will be counting on Social Security to cover a lot of below-the-line expenses. We both expect to start taking benefits late, rather than early, but anything can happen. So I don’t really consider we will ever be “financially independent” given that a significant portion of expenses will be covered by government benefits and not by our own savings. I think a lot of people leave SS out of the equation for various reasons; we can’t afford to.

    Our plan is to continue living and working in the hellhole until we have the money saved to build our house (we are already buying property); have built it; and are ready to leave all this behind. It’s a plan based on practicality, which means it doesn’t sound like much fun. In the meantime we get up to our future environment a couple of times a year just to keep the motivation alive.

  2. ESI says 29 January 2016 at 12:45

    I prefer “financial freedom” but we are on the same page otherwise.

    I’m about five years out — sooner if the market would get its act together.

  3. MrFireStation says 29 January 2016 at 18:19

    Based on some 2010 research on “% people in workforce” from the University of MN that I found online, it looks like less than 5% of folks retire at 50, and less than 15% by 55. A huge percent of workers join the FIRE at 60, and a very small percent are left by 75. I’m turning in my retirement notice in less than 2 weeks @ age 49. I am not planning on working in retirement, so I will be fully “financially independent” and “retired early” … FIRE!

  4. Beth says 30 January 2016 at 04:30

    “Retirement” doesn’t mean much to me because technically I am retired. It’s a word on a form. This year, I decided to stop paying for a teaching license because I left the professional a decade ago. Apparently, there’s no “left the profession” checkbox on the form. You’re either “active” or “retired”. Silly.

    However, I’m working towards financial independence. That’s the term I prefer to use. I’ve had some rough times at work, so the idea of having enough resources to choose how much or if I work is really motivating!

  5. Gwen says 30 January 2016 at 06:20

    To me, financial independence is a step right before retiring. You may not have enough investments to withdraw from comfortably, but you’re stable enough to turn down pressures at work or even (as Jim Collins says) have FU money to find something better. Retiring is saying, that’s it, I’ll never be forced to find someone to pay me money to put food on the table.

  6. Thehappyphilosopher says 30 January 2016 at 23:21

    I also prefer the term financial independence or financial freedom. Retirement is an emotionally loaded word and is somewhat vague. It doesn’t necessarily mean you are financially free. It implies permanence but maybe not always. It implies a certain age or place in life. Is a stay at home mom ‘retired’? Is someone who never works ‘retired’?

    Freedom is everything and I love the stages you have developed.

  7. kym says 31 January 2016 at 12:57

    Financial independence can happen at any time. You can be born into money and be financially independent – or grow your business to the degree where money is not an issue. Retirement is when you call it a day – spend your time traveling and hanging out with the grandchildren 🙂 IMHO

  8. Justin says 02 February 2016 at 14:43

    I think the whole $40k/yr thing for LeanFIRE is an upper bound. Lots of folks over there are planning on FIREing with much less. It goes without saying that $40k for a couple or family in a high COL area plus possibly still paying the mortgage is a lot different than $40k for a single guy in a lower COL area or perma-traveling. The former group of folks definitely fit in the loosely defined leanFIRE camp whereas the $40k single dude will most likely feel more at home with the regular FIREee crowd.

    We are approaching that upper end of the $40k threshold but with a family of 5 I think we still live pretty lean compared to the average household (though there are so many luxuries we could easily slash out of the budget ha ha).

  9. Carmen says 17 April 2016 at 19:18

    I greatly enjoyed this article as well as your guest spot on M.O.N.E.Y. (which is how I stumbled upon your blog).

    My husband and I are in the the Independence Stage and are aggressively trying to get the Abundance phase. We are finding that getting from one stage to the next becomes exponentially difficult. I would love to see some more blog posts about people moving from one phase to the next and what they did to get there.

    While you are out traveling this summer if you are in Bend OR or Kent WA, you have an open invitation to use our gym for free! (You mentioned on the podcast that you were into fitness–just ping me if you are interested).

    Keep up the posts!

    • Stephen says 27 July 2016 at 06:29

      So would I, to be honest. I wouldn’t be surprised that if one tried to model the difficulties attaching to moving from one FI stage to the next, one might end up at something of a exponential curve. Although off the top of my head, I can’t really say what the variables should be. It would probably be a matter of defining the correct differential equations first.

      The $40k number to live on seems very high, especially for one person. I make a comfortable living right now (so much that I can afford to swing into the next savings phase), and minus my mortgage, I could maintain the same lifestyle for €24,000 to €25,000 per year, which is $27,250 p/a at today’s exchange rate.

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