What Is the Difference Between Financial Independence and Retiring?

One of the most straightforward ways to take some of the uncertainty out of your future is with financial planning. If you’re like most people, your strategy will focus on whether or not you’ll be working as you get older and, if you do work, how much. The answer typically revolves around one of two goals: gaining financial independence or retiring. Here’s a breakdown of what these terms mean and the differences between the two.

What Is Financial Independence?

People who are financially independent have enough money to live their lives without having to work. In other words, if you are financially independent, you have enough residual income to support your lifestyle without having to report to a job if you don’t want to.

For example, suppose you have residual income coming from a pension, Social Security, and investments in mutual funds totaling $4,500 per month.

For expenses, suppose your home is essentially paid off, but you have a home equity loan that costs $1,500 a month, $400 a month in car payments. You pay another $2,000 a month for food, health, and other expenses like insurance, entertainment, recreation, and utilities. Because your total monthly expenses are $1,500 + $400 + $2,000 = $3,900, you could be considered financially independent. This is because $4,500 – $3,900 = $600, so that means your residual income is $600 more than your monthly expenses.

However, many people in this situation would still be careful with how they spend their money and save as much as possible for a rainy-day fund, vacations, and trips to see kids, grandkids, and friends.

Is Living off of Savings the Same as Financial Independence?

Living off your savings and financial independence are typically two different things, primarily because the savings many people have will only last for a relatively short period of time, such as 10 years.

For example, if someone has $250,000 saved up with living expenses totaling $25,000 a year, the person can live off their savings for 10 years. However, because there’s no residual income involved, this wouldn’t be considered complete financial independence, especially if the person is on the younger side, such as under 70 years old. It’s very likely that they will need another source of support in their lifetime.

What Is Retirement?

The concept of retirement is more subjective, meaning different things for different people. Here are some common takes on what retirement means:

  • When you stop working altogether and live off of money from savings, a pension, or other residual income—essentially achieving financial independence
  • When you discontinue work related to a long-time profession, such as being a teacher, police officer, professor, contractor, or doctor, but still work part-time
  • When you’ve stopped regular work and have residual income yet need to work to maintain it. For example, a retired physician may have several investment properties and run a business renting and maintaining those homes

How Are Financial Independence and Retirement Different?

The biggest difference between financial independence and retirement is that the concept of retirement is centered around no longer working a certain kind of job. In contrast, financial independence is based on having sufficient residual income.

Many people who are financially independent are also retired. At the same time, someone can be financially independent and still choose to work or earn money for several reasons, such as:

  • They want to earn a little extra to buy property, improve their lifestyle, or take vacations.
  • The desire to leave a bigger inheritance for loved ones.
  • The challenge and intrigue that comes with running a business.
  • To stay busy even though they really don’t need the extra income.

Ultimately financial independence means you live without the burden of having to work to support yourself. Whether you choose to work anyway is completely up to you.

Retirement boils down to discontinuing a certain kind of work—and perhaps working in general—so you can spend more time doing what you want, connecting with loved ones, or having fun.

By teaming up with Williams Financial, you get financial professionals that work on a fee-only basis, meaning we don’t profit by selling you any products. In this way, our expert financial planners can help you custom-design your future—whether you want to be financially independent, retired, or both—according to the needs of you and your family.

Learn more about how Williams Financial can help you craft your future by reaching out today.