Having planted a stake firmly in the camp of Financial Independence, I’m often asked exactly how the phrase Findependence is different from Retirement.
There are a lot of distinctions between the terms, many of them subtle ones. I often say that Financial Independence means working because you want to, rather than because you have to financially speaking. In the latter case, the situation is akin to the bumper sticker that says “I owe, I owe so off to work I go.”
I may also say that Findependence (I’ll use the contraction of Financial Independence here now) often occurs years if not decades before traditional retirement. There are several Early Retirement practitioners running websites about how they achieved Financial Independence in their 30s or 40s, although they usually add that they continue to “work” in the sense of doing some work for money. That “work” will typically be as an independent supplier rather than an employee and may consist of writing books, running web sites and perhaps publicly speaking. They call this “Early Retirement” but I’d argue the better term is “Early Financial Independence.”
You can find more on this topic by simply googling the term “Financial Independence vs. Retirement.” You’ll find several results, including a couple of articles by me that have appeared in various web sites both Canada and the United States.
Consider this piece from FI Journey entitled Financial Independence vs Early Retirement: What’s the Difference? Here’s how the writer sums it up: “Financial independence is setting an annual income goal for yourself, and putting your money to work in such a way that you can live off the proceeds from your investments without ever reducing your retirement account. If you started your ‘retirement’ with a million dollars in the bank, the idea is that you would die with a million dollars in the bank, whether that was 5 years or 50 years later.”
Working even if you don’t need to do so
Then there’s an article from a year ago featuring a dialogue between two Early Retirement gurus, J.D. Roth of the Get Rich Slowly blog and the blogger known as Mr. Money Mustache: Coming to terms: retirement vs. financial independence. There, Roth notes that both bloggers have accumulated nest eggs that would allow them “never to work again” yet “both of us have elected to continue doing work for money.” Even so, they still consider themselves “retired.”
Mr. Money Mustache, aka “Pete”, replied that only certain personality types will sit around doing nothing in retirement but for him, retirement “just means you’re free to do what you really want to do.”
Roth said they both think it’s possible to call oneself “truly retired” even if they continue to work for money but added that not everyone agrees. One reader maintained that “retiring is stopping doing work for pay.” Then Roth segued to an excerpt from his one-year Get Rich Slowly Course that outlines four types of retirement: traditional “full-stop” retirement at 65 or so, Early Retirement that can occur between 30 and 50, Semi-Retirement and finally a series of “Mini Retirements” that can be distributed at various points of a long career of work.
Let’s retire the loaded word Retirement
Roth concludes much as I would, saying that because Retirement is a loaded word, he prefers to use the term Financial Independence, which he says “is essentially the same idea but without the baggage.” He also talks about something we’ve mentioned in this blog before: that there are degrees of Financial Independence, ranging from dependency on parents or employers, to dependency on creditors, to freedom from debt, to what I’ve called “barebones” Findependence and finally “complete” financial independence. He decides that once you’ve saved enough to fund 25 years of your current lifestyle, you’ve achieved financial freedom.
Regular readers will know that if I had my druthers, the headline would read more like the one we’ve displayed above: “Why Work probably won’t end after your Findependence Day.” (that is, the day you achieve Financial Independence).
I don’t view the terms Retirement and Financial Independence as interchangeable. By definition, Retirement (or at any rate, traditional full-stop Retirement funded with a generous Defined Benefit pension) means no longer working for money. Financial Independence (aka Findependence), on the other hand, can occur years and even decades before traditional Retirement and so seldom means the end of productive work.
This very web site — as well as the now six-m0nth-old sister site, the Financial Independence Hub — is dedicated to clarifying this distinction. And of course the Hub also constitutes a big element of my own personal Encore Act: next Tuesday will be the one-year anniversary of my own Findependence Day. In my case, I define that as no longer working as an employee of a giant corporation or government entity, and having the financial resources to work if I choose to, and not if I don’t.
A global study on retirement finds 15% of Canadian workers don’t expect to ever fully retire, but many plan to downshift gradually into semi-retirement.
Compared to 14 other countries surveyed, Canadians do well in reaching their later-in-life goals, even if they have to spend all their wealth and leave less to their children.
HSBC’s latest global report — The Future of Retirement, Choices for later life – surveyed 16,000 working-age and retired people, including 1,000 Canadians.
When asked about their attitude towards spending and saving, 27% of working-age Canadians say “spend all your money and let your children create their own wealth.”
The study also found Canadian retirees are much more likely to reach their later-in-life goals than some of their counterparts in other countries. 44% of Canadian retirees have reached “at least one of their retirement hopes and aspirations,” well above the global average of 24).
Mixed sentiments on semi-retirement
Canadian retirees are among the most likely to feel forced into semi-retirement, but almost half of those still in the workforce are planning for it. Only 17% of today’s fully-retired Canadians say they semi-retired first, versus 45% of working-age respondents who say they plan to semi-retire before taking the traditional full-stop retirement.
While semi-retirement can be forced on some as employers look to downsize older more expensive workers, many full-time workers actually aspire to semi-retirement. 15% of Canadians who are retired say they made the decision to semi-retire due to a lack of employment opportunities later in life. Only Australian retirees (17%) reported a lack of job prospects in greater numbers than Canadians, and respondents from both countries were well above the global average (10%).
“This latest research suggests that older Canadians and those approaching retirement age may also be feeling the pinch of underemployment at time when saving for the future is often at its most crucial,” said Betty Miao, Executive Vice President and Head of Retail Banking and Wealth Management, HSBC Bank Canada, via a press release distributed Wednesday (April 29).
Semi-retirement can also be forced on mid-career workers
Even among younger workers, 10% of survey participants between the ages of 45 and 54 admit their shift into semi-retirement wasn’t their personal choice. HSBC suggests that in the post-downturn job market, many experienced workers are being overlooked for full-time positions. In fact, half of all semi-retired respondents globally say they changed careers when they stopped full-time work. HSBC says some of these will be high achievers who reached their career aspirations and financial goals before retirement, but the figures “also point to a pool of wasted potential among experienced employees.”
The research also shows a major shift in how Canadians plan to retire in the future. While only 17% of those now fully retired say they semi-retired first, 45% of working-age respondents plan to semi-retire before taking full retirement. Around the world, an average 26% of working-age people plan to semi-retire at some point.
Miao says that with expected shortages of skilled labour in some sectors and professions “career opportunities look bright for at least some of those planning to work into their golden years.”
The full global and Canadian retirement survey reports and online retirement planning tool are available online here.
My friend the inimitable Norman Rothery posted a blog at MoneySense.ca Thursday that was inspired by a Twitter exchange last weekend: the post is titled Apple Watch Delays Findependence.
On Twitter, I had publicly disclosed that I had pre-ordered the new Apple Watch, even though delivery is several weeks away. Norm made a query about the possible impact on Findependence, then followed up in his blog by suggesting that young people buying these gadgets might seriously be delaying the arrival of their Findependence Day(that is, the day they reach Financial Independence) by 17 days for the cheapest model and for as much as two years for the expensive glitzy gold model.
I have no great problem with the blog, a typically contrarian piece by a great value investor: it’s all grist for the mill, as they say and I’m happy to see an influential writer like Norm use the term Findependence. Even so, let me assure readers out there who may have fancied me to be a frugal kind of guy that I quite definitely did NOT purchase the expensive gold-banded version. For the curious, I picked one of the simple entry-level models with a black band and the smaller watch-face, roughly the model illustrated above.
I entirely agree with Norman that the first generation of technology tends to have kinks and it’s never a bad idea to wait for a few releases and let the pioneers suffer the slings and arrows of outrageous technology fortune.
If you’re intrigued by the kind of content we publish here and on our sister site, you should be fascinated by The Big Shift, a book published originally in 2011 by Marc Freedman.
The subtitle tells it all: Navigating the New Stage Beyond Midlife. Freedman is a “social entrepreneur” who founded a firm called Civic Ventures (now Encore.org), and previously published (in 2007) a book called Encore: Finding Work That Matters in the Second Half of Life. We’ll review that in the next few weeks.
Both books have crystallized my thinking of what our sister site is all about, so much so that we have renamed the fifth of its six major blog categories Encore Acts, (from the previous Business Ownership). As we noted Saturday in the Hub’s new weekly wrap, an Encore Act may or may not include entrepreneurship but there are many Encore Acts that may not involve launching a new business.
The Longevity Bonus: centenarians galore?Read more
The word “think” needs to be emphasized, since the point is that I’m not so sure baby boomers really want to retire anymore, at least not in their 50s or early 60s. I actually had written this particular blog before reading and reviewing some books about Encore Careers and Second Acts, such as last week’s review of Unretirement.
Of course, this website and sister site Financial Independence Hub are dedicated to the proposition that there is a difference between traditional “full-stop” retirement and Financial Independence, or “Findependence.” To us, Findependence sets the stage for one’s true calling in life, which is why the six blog sections over at the Hub now include one called Encore Acts. From where I sit, it’s a lot easier to launch an Encore Act once you have a modicum of Financial Independence established.
For the full blog, click the blue link above.
For archival purposes and the convenience of one-stop shopping, you can also find the original blog below.
Unretirement is a concept not unlike Findependence or Financial Independence; it’s also the title of a recently published book by Chris Farrell, Bloomberg Businessweek columnist and senior economics contributor for American Public Media’s syndicated radio show, Marketplace.
I’ve also seen the term Unretirement used by Sun Life Financial in Canada but that seems to be more a marketing term the company uses to promote its surveys on traditional retirement. That survey has been going for six years now, which certainly predates the publication of Farrell’s Unretirement (it was published in 2014 by New York-based Bloomsbury Publishing plc).
The theme of the book is encapsulated in the title of the opening chapter: Work Long and Prosper. As we’ve noted in the Aging & Longevity section of our sister site, the Financial Independence Hub, advances in life expectancy suggests the Baby Boomers and succeeding generations may work long past the traditional retirement age of 65.
True, many boomers may no longer be employed by giant corporations — either because they choose to leave or are involuntarily parted from such employment — but Farrell sees most of them becoming free agents of some sort: finding new “encore” careers, starting new businesses or contracting their services back to former employers while adding other clients, volunteering and philanthropy, among other activities.
As mentioned in the MoneySense version of the blog, one of the readers highlighted — Oakville-based David Davidson — also sent along a photograph of himself, which we’re running here (on the left).
For continuity and archiving purposes, here’s the original version of the blog:
By Jonathan Chevreau
My recent column on planning for longevity attracted some good counterpoints from readers. In it, I suggested that with life expectancy rates steadily on the rise, people shouldn’t get too hung up with early retirement.
However, I recognize that my own preference to “just keep working” (at least for the time-being) is not necessarily shared by everyone.
There’s more to life than working
Click to the comments section of the story, and you can see one reader was concerned “the author can’t think of anything they would rather do with their time then work.” He or she cites such non-paid activities as volunteering, cultural activities, and visiting friends and family:
“Those activities would be mentally and socially stimulating, and wouldn’t require that I have to be somewhere at any given moment. I would be in charge of when and how often I participated.”
Well sure, but I’d argue much of that can be accomplished on nights and weekends. I don’t see paid work and other rewarding activities as being mutually exclusive. I certainly can see plenty of things I’d love to do that don’t result in attaching an invoice. One reason for my focus on “Findependence” has been my wish to pursue longer-term creative projects.
I’ve also argued that as the Boomers shift gradually into semi-retirement, they can find a more comfortable balance of paid work and those rewarding alternative activities. Several years ago, my wife went down to a four-day work week, precisely so she could visit her aging parents in the country, usually on Fridays. Both have since passed away and she has returned to a five-day week but the point remains. Those who are really well to do and who have an extensive network of friends and family can go to a three-day week if necessary, or do what one self-employed colleague of mine does: she works from home from 8 am to 2 pm, then takes the rest of the day off for all these other activities.
45 years of working is enough
While it wasn’t posted as an online comment, I also received an email from an Oakville reader happy to be identified by his real name (and supplied the above photo): David Davidson is 62 (as I will be in a few months) and has been working full-time since he was 17.
“After 45 years I think I’ll stop working and enjoy the fruits of my labour before it’s too late … I do get exasperated by all the ‘keep working and never spend your money’ retirement articles I see these days”
While Davidson agrees with my skepticism about “extreme early retirement” he draws the line at planning to work into advanced old age and having to save enough money to last beyond 100 years of age:
“That seems like ‘extreme working’ to me and a way to ensure the financial management business hangs on to my money as long as possible.”
Davidson says he has “scrimped and saved all my life to pay off the house, and put my children through university debt free, all while maxing out both my and my wife’s RRSPs and TFSAs. This was not easy and involved a lot of long hours and sacrifice from everyone.”
Now that they are totally debt-free and the children launched, the couple have more than $1 million in combined registered savings “and we intend to spend it.” (She has a small indexed pension; he does not.)
Delaying CPP until age 70
As a hedge against extended longevity, they won’t take CPP until age 70, but it has “long been my plan to have all the savings spent by our mid-80s. After that, if we need money, we’ll have the house to sell (it’ll probably be too much for us to look after by then anyway) and we can rent an apartment or whatever.”
Davidson says his parents and grandparents had minimal expenses once they passed age 80:
“My father and his wife are both 89, in good health until recently, and don’t spend all their CPP & OAS (neither has a pension); my mother and my wife’s mother were the same. My wife’s father died at 68 so there is a downside to planning to live a long time – you might not make it.”
Well, yes, we all realize that. As a friend of mine says, “Live every day as if it were your last, because one day it will be.”
Enjoy the good early years of Retirement
Davidson sensibly counsels enjoying the “really good early years of retirement, before infirmities and just plain exhaustion set in.” He describes my hail-and-hearty 98-year-old friend Meta who still works part-time as “an outlier: the reality is most of us aren’t like that. My father rode his motorcycle until he was 88 so he’s been as healthy and active as anyone could wish for. This year at 89 he has inoperable cancer and most would say he’s had a good long life.”
The headline on today’s blog so perfectly sums up the subtle difference between “Retirement” and “Financial Independence” (aka “Findependence”) that I felt compelled to devote a whole blog to the idea.
It was used in a guest post earlier this week by certified financial planner Matthew Ardrey on our sister site, the Financial Independence Hub, and you can find the whole post here.
Foundation is a paid-for home
Ardrey, who is with T.E. Wealth, seems to view the topic of Financial Independence just as we do on these sites, even down to the basic principle repeated often in the book to which this site (FindependenceDay.com) is devoted. In the book, one of the two financial planning characters, Theo, tells his young clients more than once: “The foundation of Financial Independence is a paid-for home.”
Here’s what Ardrey tells clients just starting down the road to Financial Independence:
I’m often asked how one can get to this wonderful nirvana known as financial independence. The first step is to pay off your home. By having a debt-free residence, you have eliminated what is most people’s largest single expense. Without this hanging over your head, you have freed up significant cash-flow.
Even Ardrey mistook FI for Retirement early on
Ardrey and I have followed each other on Twitter for some time. Ardrey posts as@MattArdreyCFP. But it was only recently, in response to something on one of these sites, that Ardrey casually dropped the fact that he’s been preaching Financial Independence (as opposed to traditional Retirement) to his clients since he entered the financial planning business at the turn of the century.
He noted that the financial planning software used at the financial firm where he got his start did not have a retirement calculator. Instead it had an an analysis tool on “Financial Independence Needs.” At the time, being new to the business, Ardrey thought it was just a fancy way of referring to retirement planning but as the years progressed, “I would soon discover that financial independence was something else entirely.”
So, to return to the headline today, what exactly IS the difference? Here’s the key passage:
Retirement, by definition, is the cessation of work with the intent of not returning. Financial independence, on the other hand, is having sufficient financial assets to have the choice about whether or not you continue to work. So, one can be retired and not financially independent or vice versa.
It’s all about Freedom of Choice
This is of course pretty much what I’ve been saying, or at least the characters in the book and ebooks: “When you’re financially independent, you work because you want to, not because you have to (financially speaking).” And that’s exactly what Aubrey tell his clients:
The main differentiator is freedom of choice. If you are not financially independent, you have no choice but to continue working if you don’t want to alter other aspects of your life. Once you are financially independent, you can choose if you want to continue to work in the same capacity – or at all. This freedom to choose is empowering and it’s what I encourage all of my clients to work towards.
Some real examples
So far in this blog, I’ve reiterated Ardrey’s views. I want to close with some examples closer to home. I can think of a few friends or family members who are “retired, but not financially independent.” One couple in particular comes to mind: they do not work and live entirely on government largesse: some combination of CPP, OAS and GIS. Once upon a time they owned a home, a cottage and a car but today they rent a small apartment above a store. They have time freedom, yes, but no financial freedom. They depend entirely on the one source of income from the Government and if that dried up, I don’t know what they would do. Even with it, they are severely constrained in what they can do. So they are indeed “retired, but not financially independent.”
For the opposite situation, I need look only in the mirror. My wife and I choose to continue to work, and keep deferring future income sources that could be taken now if we chose: employer pensions, CPP, drawdowns from registered and non-registered investments, etc. Our home was paid for early in the 1990s, our cars are paid for and we have no debt. We are in fact financially independent but NOT retired, paradoxical as that may seem.
And finally …
Today is Boxing Day and I will probably CHOOSE not to do much more work on these sites, or for paying clients, until the New Year begins, apart from a few pre-arranged pieces and guest blogs. I wish all readers a very Happy New Year. See you on the other side!
Last summer I thought I’d be financially free by 40. Reality – and unplanned expenses – set in this year and I’ve adjusted that ambitious projection by five years. I’m still on track to reach a net worth of $1 million by the time I turn 41, but financial independence will have to wait a few more years. Here’s why:
Remember, financial independence doesn’t necessarily mean retirement. It simply means the date your income from investments exceeds your day-to-day expenses so that you no longer have to rely on regular employment to meet your needs.
My initial projection was indeed ambitious – with us having a paid-off mortgage by 2020 and increasing the income withdrawn from our business by 100 percent (from $3,000 per month to $6,000).
That’s okay – on paper the original plan didn’t factor in these expenses, plus I hadn’t fleshed out exactly how I’d make those numbers work. Now I have a better idea, but unfortunately it’ll cost us five years. Here’s our financial freedom 45 plan:
Financial independence at 45
In late 2016, once we pay off the HELOC and car loan, we’ll have $27,000 per year to save toward our ‘findependence’ goal. With that amount, we’ll put $12,000 into my RRSP and $10,000 into our TFSAs, plus throw an extra $5,000 payment toward our mortgage.
That pushes our mortgage freedom date back to January 1, 2025. At that time, our home should be worth $600,000 (using a conservative 3 percent annual growth rate), my RRSP should be worth $380,000, tax-free savings accounts should total in excess of $150,000, and the commuted value of my defined benefit pension will be roughly $310,000.
The key to paying our monthly expenses after financial independence will come from our business income. We currently withdraw $3,000 per month from our small business, which includes income earned from three websites, freelance writing, and from my fee-only financial planning business.
But the fee-only planning service has gone better than anticipated – earning $10,000 in less than one year and expected to grow to $18,000 in year two as existing clients stay on and I continue to add one or two clients per month.
After completing the CFP certification in two years I’ll have the opportunity to ramp-up my efforts and potentially offer fee-only planning services full-time. At that point, between existing and new clients, the service could bring in roughly $36,000 per year.
My three blogs collectively earn about the same – $36,000 per year – after expenses and so if I can maintain or increase that income then I’ll be able to meet my $6,000 per month goal for business income.
Our projected expenses haven’t changed. After the mortgage is paid off we could live comfortably on $36,000 per year, which leaves the additional $36,000 of income to go toward taxes, short-term savings, and retirement.
A financial plan is just words on a page unless you commit to taking action. Even if your financial independence date seems like a moving target, it’ll become more precise as you monitor and update projections based on your true reality.
While it’s disappointing to push financial independence back five years, it’s comforting to know that I’m zeroing in on a target date that’s based on reality and not a wild projection.
Editor’s Note: You can find the original version of this blog at Boomer & Echo earlier this week, here. Note too the several comments at the bottom. In his original headline, Robb used the phrase “Findependence Date.” When I asked why not “Day,” he said he “didn’t want to steal your thunder.” I realize that good bloggers respect others’ intellectual property but let me make it clear that I’m fine with people using the phrase Findependence Day and Findependence. Half the point of this site and sister site Financial Independence Hub is to bring these terms into general usage and displace “Retirement.” — JC