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.
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:
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?