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My FI Journey » Reflections » Financial Independence and Retirement – Let’s get our definitions straight

Financial Independence and Retirement – Let’s get our definitions straight

1094608_retirementI am a big believer in first and foremost laying out definitions.  That way we’re all on the same page.

“Financially independent” is used to define recent grads starting their first job, wealthy investors, and small business owners.  “Retirement” somehow applies to people who quit their job in order to work at another job, and to people who quit their job to be a stay at home mom, and to people who quit their job to spend their days playing golf.  As you can see, very confusing.

In order to clarify things, I’ve broken down your entire financial life into five basic stages.

  • Financial dependence
  • Financial independence via employment
  • Financial independence via entrepreneurship
  • Financial independence via passive income from investments
  • Retirement

Financial dependence

If we’re going to talk about financial independence, it might help to start by talking about it’s opposite, financial dependence.  Financially dependent is what most of us were as kids and in high school and college, in-whole or in-part reliant upon someone else to pay our bills.

Most college students are financially dependent.  Stay at home moms are financially dependent.  Twenty-somethings still sponging off their parents are financially dependent.

Unfortunately, if you are dependent on someone else to pay your bills, you’ve got to play by their rules.  Compromise may or may not be a dirty word in these kinds of relationships.

This is where I was as a child and in college.  I was fortunate enough to have my parents help me with my living expenses while in college while my scholarships covered my tuition.  But since I took their help, I had to obey their rules.

Financial independence via employment

This is where most of us wind up from graduation until retirement.  We’re financially independent from parents, guardians, or spouses.  But we rely on our employer to provide us with wages to pay our bills.  And much like the above situation, since our employer pays us, we play by their rules.  These rules usually include things such as 40+ hour workweeks and business casual dress codes.  For most people, these rules aren’t a problem, but for some they’re an excessive burden prompting people to seek self employment

From the time I started graduate school until the present, I’ve been in this category.  I’ve paid my own way for everything.  The bank of mom and dad is still there if I need it for an emergency, but I stopped making regular withdrawals a long time ago.

Financial independence via entrepreneurship

Some of us wind up in this category, striking out on your own to start a business.  Maybe you run the local comic book shop, or you own and manage a fleet of rental properties, or make a living day trading stocks, or you make a living blogging and selling eBooks from a beach in Thailand.  No matter how you cut it, you’re in this category.

Unlike those of us with day jobs, people in this category don’t have bosses and they don’t have to follow any rules outside of the conventions of their industry.  Would you trust a lawyer who dressed in half-buttoned Hawaiian shirts?  No, probably not.  But let’s not kid ourselves, most business owners work hard, real hard.

I’ve thought about starting my own business several times in the past.  But I never really had much of a strong desire to be an entrepreneur.  Outside of a side gig, it’s unlikely that I’ll ever wind up here.

Financial independence via passive income from investments

When all your expenses are covered by passive income derived from investments, you’re in this category.  When you get here, you can officially start calling yourself a rentier (a person who lives on income from property or securities).  Having French origins this word automatically makes you sound classy and sophisticated.  For best results use a snooty accent while sipping a glass of wine.

This is the category that I’m trying to get into.  This is the category that this blog is all about.  When you get here, you get to start making the rules, not just obeying them.

Retirement (early or otherwise)

Sitting on a beach.  Doing nothing economically productive.  Following your passions and hobbies.  Spending time with your family.  Spoiling your grandkids.  Retirement should involve serious slacking off.

I’ll probably get here eventually, but that is likely still a long way off and entirely dependent on me first becoming a rentier.

Readers:  What are your thoughts on the stages of financial life laid out above?  Would you add any?  Where are you on your journey?

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15 Responses to "Financial Independence and Retirement – Let’s get our definitions straight"

  1. addvodka says:

    I’ve been financially “independent” since I was 18. I moved out when I was that age, in my first year of college, and paid my way ever since with no help whatsoever from my parents. While it’s difficult (incredibly so), I’ve very much enjoyed being independent and not relying on anybody except myself.

    1. Daisey,

      Thanks for stopping by. I think it’s awesome that you were able to be independent of your parents from age 18.

  2. I know the idea of all of these things are subject to opinion and I respect yours. But wouldn’t you say that we are financially dependent on our jobs when we are working. Because without them we cannot sustain ourselves. You can consider it independence in the sense that you aren’t receiving money from your parents, or the government as you are earning your own money. But you depend on your business or employer to pay you.

    1. Johnny,

      You raise a good point. I think it would be fair to modify the list as follows:
      Financial dependence on parents
      Financial dependence on employment
      Financial dependence on entrepreneurship
      Financial independence via passive income from investments
      Retirement

      One of the problems I encountered when writing this post was that the term “financial independence” changed meanings according to age. Young people consider FI holding their own job and paying their own bills. I was thrilled when I no longer needed parental support. Older people would consider FI more associated with passive income.

  3. Michelle says:

    I’m similar to Daisy. I’ve been financial independent since 18 and now I’m working towards being self employed!

    1. Michelle,

      Congratulations on being financially independent of your parents since age 18. I hope your goal towards self employment is progressing well.

  4. Good post! I like the breakdown of definitions and we’re in the entrepreneurship category. We love it, we get to see direct benefits from our work and you’re right in that it is a truckload of work. That said it is worth all of it, as long as it’s meant for you. I do understand your point in regards to financial independence in regards to stay at home moms, but I would have to disagree on it. I view marriage as being part of a team and if I were in the traditional job setting and my wife did not work, the money would still be ours to spend regardless of who brought it in and decisions would be made jointly on its use.

    1. I wasn’t really sure what to do with stay at home parents. I’m still not sure. If you take the team approach to marriage, then your point makes sense. If you take the dual income approach, then the stay at home parent would have to provide their own income.

      In terms of retirement, I am not sure whether to call a stay at home parent retired or not. On the retired side, the stay at home parent left their job, likely for an extended period of time and will probably not be earning money on the side. On the non-retirement side, stay at home parenting is a ton of work. Much of which (e.g. diaper changing) is not exactly fun.

  5. Journey,

    I disagree with this. I don’t envision “retirement” as only being completely sedentary and disassociated with regular society…sitting on a beach somewhere. Certainly there can be days like that when you’re retired, but there can also be days when you’re productive. And being productive sometimes pays and sometimes it doesn’t. If you have a blog are you no longer “retired”? You are somehow precluded from ever earning money again, even if it’s something you’d otherwise enjoy and do for free? That’s crazy talk. To me being retired means being free to do whatever you want. If it’s “productive”, so be it. If it’s not, so be it. It’s almost like you have to sloth around on a couch all day for some people to consider you “retired”. If you write a book about your “early retirement”, you’re no longer retired because you wrote a book. What if you gave it away for free? Now you didn’t do anything “economically productive”, so you must still be retired? That’s just crazy.

    I much prefer Mr. Money Mustache’s take on this, as he posted today:

    http://www.mrmoneymustache.com/2013/02/13/mr-money-mustache-vs-the-internet-retirement-police/

    Best wishes.

    1. I read that article too. I plan on retiring at age 35. And I’m going to consider myself both financially independent and retired. Because the two terms mean the same thing.

      I think there is a difference between the terms independent financially and financial independence. The first meaning you can pay your bills on your own, the second meaning you don’t NEED to actively pursue money for the rest of your life.

    2. Mantra,

      I disagree with MMM on this point. Specifically because the most commonly understood definition of retirement conjurers up images of old people spending their days with grandkids, or on beaches, etc. I am not going to redefine words and then act surprised and slightly hostile when the majority of people don’t understand what I’m saying.

      I wish to differentiate between FI and retirement. FI gives you the ability to do whatever you want. But it doesn’t imply anything more than that.

      Retirement is a personal choice to use your financial independence to no longer do much of economic value. You don’t have sit on the couch all day watching TV, but you shouldn’t be overseeing a fleet of rental property, holding a part time job, holding a full time job, being an entrepreneur, etc.

      Where I see a grey area is for creative types and other hobby-jobs. If you retire from a traditional job and become an artist who makes money from selling art, or writing books, etc. Is that a job or retirement? Unfortunately, my answer for this sadly defaults to a variation of the Miller Test.

      But I do feel that certain segments of the early retirement community takes a few too many liberties with the word retirement. A few years ago it was in vogue in the lifestyle design circuit for people to aspire to “retire” when all they did was career shift from a corporate desk job to blogging and hocking e-books. They basically traded a full time job for full time internet entrepreneurship. Career shifts are not retirement as you’re still dependent on working in order to support yourself.

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  8. Integrator@financiallyintegrated.com says:

    My FI,
    I do agree with your definitions. To me financial independence suggests that I could stop working if I chose to because I the financial means to not have to work. In all likelihood, I would continue to work past this point.
    Retirement to me suggests that I would have no intention to rejoin/continue in any organized workforce. I’m content to kick back, doing whatever it is I love to do. That may involve some mental stimulation, it may not, but certainly I don’t envisage any sort of “organized work” where I stroll up for a paycheck.

  9. Very concise article I must admit. I think dependence on the employment or any other things apart from yourself it is like hoping for the wind that blows.

    It might change and ruin the journey. Rather risky and uncertain strategy.

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