Financial Independence vs Retirement: What’s the Difference?

When you hear the word retire, like most people you probably think of an elderly couple sitting on a bench in a park feeding the birds and then going back to the retirement home for bingo night. We are taught that we become adults, get a job, work for 45 years and retire at 65. But work for a few years and you will realize, something about this just isn’t right.

The FI/RE community (Financial Independence / Retire Early) is a rapidly growing movement of people who are leaving their profession at a much younger age. They are striving to reach a point financially where they no longer NEED to work to earn an income to support themselves. This is called Financial Independence and it is very different than what most have come to accept as traditional retirement. so what is the difference?

The main difference between Financial Independence and traditional retirement is the feeling of being obligated to work. Being retired means you no longer work. Someone who is Financially independent CAN retire and never work again but may choose to continue working.

Retirement Defined

Websters dictionary defines retirement as withdrawal from one’s position or occupation or from active working life. But this is not entirely accurate. Some will continue working after they “retire” while there are plenty of others who are not actively working that would not consider themselves retired.

Furthermore, many people will reach a point in there life where they have enough money to never have to work again but will continue to work. Still others retire from their long time career only to go find part time work somewhere else.

Retirement is defined differently for different people. It is a personal experience and can not really have a general definition that fits everyone. Similar to the word happiness. Happiness is the act of being happy. But what does it mean to be happy? It is different for everyone, just like retirement.

In defining retirement, society has attempted to make the subjective, objective. Retirement is such a personal thing, different for each individual that it is impossible to define. There is no one way to do it and there is no right or wrong way to reach it.

I wouldn’t call retirement indefinable but we are definitely mis-using the word.

Traditional Retirement

The traditional definition of retirement is the act of leaving intentionally ending one’s long held career with the intention of no longer working. This typically happens around the age of 65 but there are other retirement age benchmarks that have been defined.

The government has decided your retirement starts at 59 1/2 which is when they will allow you to begin penalty free withdrawals from your 401k. The government has also decided your retirement starts at 66 which is when full social security benefits kick in although the age will continue to rise based on when you were born. Or they will allow you to receive “early retirement” benefits at a reduced rate starting at age 62. So you see, the government can’t even decide on an age.

We have this idea of what retirement is and when it starts based on what we have been told throughout our lives but no clear definition, just our own misconceptions. It goes something like this, work for 50-50 years and retire completely some time between age 62 and 70. If you decide to go back to work after you retire from your life long career you are still retired you have simply decided to go back to work.

Financial Independence

Financial Independence can be defined as having enough money to make the choice to never work for wages again. Opposite traditional retirement, advocates of FI have intentionally left the age at which this happens undefined. It is not seen as some far off event happening after 35-50 years of working. It is a goal to be achieved as quickly as possible.

The purpose of achieving Financial Independence is to have the freedom to pursue what interests you now, not in 40 years when you can finally have the time. The main difference between FI/RE and traditional retirement then, is the intent with which one actively pursues the goal.

The Fi/RE movement grew organically on its own. People have been doing it for decades, it simply got more and more attention and had a name put to it. There is no entity (like the government or schools) attempting to define it. It is what you make of it. Nobody will impose an age limit or time restriction on your financial independence.

The problem is that there has been a socially accepted understanding of retirement for so long that it has become ingrained on our collective psyche. It has become difficult for many people to unlearn what they have about retirement and see that there is another, more efficient and fulfilling way to accomplish essentially the same thing. This fundamental misunderstanding of the FIRE movement has resulted in criticism and from quite a few high profile financial celebrities.

Critics of Financial Independence

The problem with critics of the FI/RE movement is that they are judging something that can not be judged objectively. You can not tell someone they need x dollars in order to be financially independent and “retire”.

Suze Orman makes a living telling people a dollar amount they will need to retire and she makes a fool of herself every time she does so (in my humble opinion). She is attempting to simplify something very nuanced and complex. What Suze Orman is doing is ignoring all the different variables and attempting to generalize something that can not be generalized in order for her own personal financial gain. It is like trying to tell someone do this one thing and you will be happy. That would be ludicrous and we all know it. The same holds true for retirement and any other subjective experience. The subjective can not be defined. Period.

Shark Tank Billionaire Kevin O’Leary was quoted as saying that “Early retirement doesn’t work” and that he tried it and was “Bored out of his mind”. I think he missed the point of FIRE. It is not to not work, it is to have the freedom to choose not to work if you wish. Most people who have achieved financial independence will tell you they still work. But they work on passion projects and things that interest them. Which is quite surprising because that is exactly what O’Leary did. You would think he would get it.

Perhaps it would have been best if the RE was simply left off the FI/RE acronym. It seems to be where all the confusion is happening.

What is better FI or RE?

The beauty of this argument is that they are essentially the same thing. The important thing is that YOU define what works best for YOU. Do not listen to other people’s definition of how they feel you should live your life and spend your time. If you enjoy working and spending all of your earnings now, go for it and enjoy life. If you can’t wait to tell your boss to go to hell, live frugal, save every penny, achieve financial independence at 30 and hire a marching band to parade you out of work on your last day.

The choice is yours.

Earl out

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.