The internet likes to talk about two competing terms – Financial Independence and Retirement. Sometimes they combine them in an acronym FIRE, which stands for Financial Independence, Retire Early. But: what exactly does retirement mean? How about financial independence? Where does the difference lie?
There is a huge battle over what, exactly, it means to be 'Retired', and (especially for people below the age of 65) who can claim the title.
Let's make some waves and discuss!
Where did the retirement and financial independence discussion come from?
Even though the 'Retire Early' concept has no doubt existed for a long time, the majority of modern discussion on the topic goes back to the book Your Money or Your Life by Vicki Robin and Joe Dominguez.
For the first time when it was released, that book brought (simple) cost-benefit analysis to everyday purchasing decisions. One would, for example, ask how many hours of work would it take to buy some unnecessary good... and weigh that against the financial freedom that could be gained by forgoing the purchase.
The term FIRE was a later phenomenon. The acronym literally means “Financial Independence, Retire Early” even though adherents often change the order to Financial Independence and Early Retirement, and look at the two topics as non-equivalent.
The two movements have inspired everything from Early Retirement (ahem, early Independence) calculators to movement blogs and everything in between. Yes, sacrificing early to live large later has become a big deal.
What is financial independence?
We turn to the adult language (that's your warning about the next few paragraphs) of two legendary men – starting with Johnny Carson.
Now Mr. Carson wasn't the person to invent the term, but he was the first to write it down – that term being “F*** You Money”.
The phrase, literally, means having enough resources that you don't have to worry about who you offend. You can curse at anyone you want. You are literally not dependent on a paycheck for your money... there's enough in investments or passive cash flow to get by indefinitely.
Feel like saying 'no'? Say it! You have enough money to wait for another opportunity... if you want.
Bill Murray on having enough money
Dragging the FU money phrase into our current times is the inimitable Bill Murray, who dropped this gem of a quote in an interview with GQ:
I had these agents at the time, and I said, "What do they give you to do one of these things?" And they said, "Oh, they give you $50,000." So I said, "Okay, well, I don't even leave the f***in' driveway for that kind of money."Bill Murray
Indeed. Anyone who can drop a quote like that certainly deserves to carry the torch for Financial Independence.
What is early retirement
The greater debate in this whole mess is about the definition of the word 'Retirement'.
You see, there is a group (sometimes affectionately nicknamed the Internet Retirement Police) which, well, polices the usage of the phrase 'Early Retirement'.
The most extreme members of this crowd frown upon any utterance of that term by an ER blogger or devotee who is doing a task they disapprove of. They claim a monopoly on the answer to our key question, "what does retirement mean?".
This of course sets up a combination of the famous One True Scotsman fallacy (“No TRULY retired person would run a blog”), mixed with a bit of Fight Club (“Rule number 1 of early retirement: You can't blog about it.”).
Since you no doubt detected the hint of sarcasm, you probably think that I've got a beef with the so-called I.R.P. Well, I do think the whole argument is pretty funny, I actually lean the other way. We've even defined the early retirement age as at or before 55.
Of course, internet arguments aside... government long ago hijacked the meaning of the word retirement.
How does the government define retirement in the United States?
The government has worked its way into the definition of retirement. It leaves its mark in three main ways – let's address them piece by piece.
How the Old Age Program in the United States defines retirement
The Old Age Program in the United States, Old-Age, Survivors, and Disability Insurance (OASDI, or commonly Social Security) has a very strict definition of what retirement entails.
There is a defined 'Earnings Amount', over which benefits will be reduced if Social Security is taken early (before 67, nowadays).
Now, the benefit is later added back, but that is a little known provision, which has led many seniors to curtail their earning right at the limit. And – of course – the Social Security Administration even defines which income is acceptable. To the SSA, the following forms of income don't count as active:
"We do not count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains."
How Government Statistics deal with retirement
Government Statistics also define retirement. For example, the Current Population Survey has specific methods of determining retirement.
Surveyors will allow people to self-report retirement status, but then I quote (page 6-7), “If individuals 50 years of age or older volunteer that they are retired, they are immediately asked a question inquiring whether they want a job. If they indicate that they want to work, they are then asked questions about looking for work and the interview proceeds as usual. If they do not want to work, the interview is concluded and they are classified as not in the labor force—retired.”
Yes, any work disqualifies retirement in the CPS. Also interesting? The 50 year old minimum age limit.
How taxes and retirement interact
Retirement also comes up – surprise, surprise – in Taxes. You might not think it matters too much where your income comes from, but to the IRS, it does.
Separate forms were created to determine 'work' income versus other sources.
Take this site, DQYDJ, for example – our profit is reported on a Schedule C and it's is run as a business, therefore 'work'.
Your W-2 income? Some of your 1099s? Work.
However, there are sections for hobby income and, of course, separate forms for interest, dividends and the like. That's right – these generally follow the mold stated in the Social Security Administration section.
Our Government's Retirement Definitions
I know, it's a weird system when you go by the United States Government definitions!
Your uncle who spends 50 hours a week building model planes and selling them on eBay? Retired – that's hobby income.
Your aunt who spends 30 hours a week managing her portfolio? Retired - that's investment income .
A Blogger writing for 5 hours a week and filing a Schedule C? Working, sorry!
Various Forms of Retirement Definitions: Strange but True
Do I think official definitions of retirement are absurd? Of course I do – but to government, retirement literally means cessation of employment.
Look back at the beginnings of some official pension plans and you'll see why government treats retirement this way. There's a belief that older workers might just continue working forever (“Going through the motions”), crowding out spaces for young employees. You know, as if the number of employees is some sort of a fixed pie.
The Government doesn't define financial independence
Our solution is simple: worry about financial independence, don't worry about retirement. Even if you don't particularly care about retirement – we certainly aren't optimizing for it – it's easy to recommend aiming for financial independence. Circumstances change, and financial independence means if you want to stop working... you can.
Also, ironically, writing about retirement disqualifies your retirement. Beats me!
Any superfans of the terms care to chime in? What does retirement mean to you? How about financial independence?