The personal finance corner of the internet has recently delved into the minor differences between two competing terms – Financial Independence and Retirement. But: what 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.
*Our name, of course, is a tongue in cheek reference to the formal qualifications lacked by 2/3 of our writers lack to talk about finance and economics, but hey – it fits this topic perfectly.
Where Does the Dichotomy Come From, and What Does Retirement Mean?
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 [amazon-product text=”Your Money or Your Life” type=”text”]0143115766[/amazon-product] by Vicki Robin and Joe Dominguez. For the first time, 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.
Well, you’ve got your early retirement devotees – how then, do you define the other side of the coin, Financial Independence? On that, 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, but he invented the term “F*** You Money”. The term, literally, means having enough resources that you don’t have to worry about who you offend – you can curse at anyone you want. Feel like saying ‘no’? Say it – you have enough money to wait for another opportunity… if you want.
Dragging the euphemism 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 (that pun was intended, or is that an oxymoron?) for Financial Independence.
The great 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 ER: You can’t blog about ER.”).
Take it to its logical conclusion, my friends – if you write about early retirement in any way, since you did the work to write about it… well, you’re no longer retired!
Since you no doubt detected the hint of sarcasm in those last two paragraphs, 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 (in an it’s-okay-to-laugh-it’s-of-little-import way), I actually lean the other way… at least when it comes to the way we use ‘Retirement’ in society today. But why?
Simple – government long ago hijacked the meaning of the word retirement.
Old Age Programs, Government Statistics and… Taxes?
Like most things that the private class pioneered (I’m talking about the leisure at the end of a career), the government has worked its way into the definition of retirement. As I implied in the heading to this section, it does this in three main ways – let’s address this (in an Americocentric way, check your own country’s rules for details!) piece by piece.
- 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’ ($15,120 in 2013), 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 plants a sloppy kiss on certain ‘acceptable’ ways of earning money in retirement: “We do not count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains.”
- Government Statistics – I’m going to concentrate on the Current Population Survey here, but other agencies might have other 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 will knock you out of the category in the CPS. Also interesting? The 50 year old age limit – I don’t know what fuels that.
- 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, and other sources. Take this site, DQYDJ, for example – our profit was reported on a Schedule C (this site made me somewhere $3 and $5.50 an hour in 2012, thanks for asking!)… it 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 same pattern as the ones which receive the sloppy kiss from the Social Security Administration.
I know, it’s a weird system. Your uncle who spends 50 hours a week building model planes and selling them on eBay? Retired. Your aunt who spends 30 hours a week managing her portfolio? Retired. A Blogger writing for 5 hours a week and filing a Schedule C? Working.
Strange but True
Do I think it’s an absurd system? Of course I do – but to Government, retirement literally means cessation of employment. Look back at the beginnings of some pension plans and you’ll see why – there was a belief that older workers would just continue working (“Going through the motions”), crowding out spaces for young employees (as if the number of employees is some sort of a fixed pie).
So, there you have it – as fun as it is to argue semantics, it seems the government forced its way into the “Early Retirement” niche long ago. I don’t like it either – since writing about Early Retirement (and making money for that exercise) means you’re not truly retired. How ironic.
Of course, being like Johnny Carson and Bill Murray is a solid second prize, am I right? Any adherents of the lifestyle care to chime in? What does retirement mean to you?