What exactly is semi-retirement? As the burgeoning FIRE community continues to grow, we are seeing different kinds of early retirements. It’s clear that one size does not fit all when it comes to retiring early. Retirement itself is no longer about giving up work entirely to live solely on your assets. It’s more about having the freedom and flexibility to do what you love to do. This often turns out to include some form of paid work, like turning a hobby into a lifestyle business or consulting in your former industry or field. Early retirees often find life more enjoyable if they have a comfortable mix of work and play. And, a modest “extra” income of $1,000 a month could reduce the amount you need invested in your retirement portfolio by $300,000. So, doing some paid work makes it easier to retire early.
I recently read Michael Kitces article, 3 Types of Retirement and Their Very Different Savings Strategies. What I didn’t realize until reading it is that how you choose to retire significantly impacts the amount you need to save for retirement.
Kitces modelled three different types of retirement and compared how much you’d need to save for each. Most of us are familiar with the traditional retirement plan. You study the first 20 years of your life, then work for 40 or 45 years, then retire completely with no earned income for the remainder of your life, usually 30 years or so.
The FIRE community encourages going for a much earlier retirement by increasing your income and having a huge savings rate (50-70%). So you can retire in 10-20 years and then live off your investments. Obviously, the earlier you retire, the greater your savings rate needs to be as you now have fewer years to save and more time to spend those savings.
Yet, in reading various FIRE bloggers, most seem to be doing some kind of work generating income, even though they have enough to never work again. Apparently, all play and no work makes Jack a dull boy. Work can add a sense of purpose, challenge and structure to what could otherwise quickly become an amorphous and boring day. This accounts for the growing number of encore careers for retirees.
Another form of early retirement is taking a series of mini breaks or sabbaticals throughout your life. Maybe you take a year off to travel around Europe. Or you take a few years off to raise children. You could take a number of short breaks or fewer longer breaks. You do this with the assumption that you’ll work longer because you are claiming your retirement years while you can enjoy them as fit and healthy. That makes a lot of sense when you think of spreading work out so that you avoid burnout.
In practice, it could be challenging to stop and start your career. One shouldn’t assume you can quit a job and then come back to it after a year. Although, depending on the demand for what you do, this may be entirely possible. You’d also have to think about keeping your skills up to date.
I was surprised how much more you’d need to save to have the sabbatical style retirement. You’d need nearly double that of the traditional retirement! This is because you don’t give your retirement pot a chance to grow before you start dipping into it to fund your periodic mini-retirements. This makes it hard for compounding to work it’s powerful magic.
This is where semi-retirement comes to the rescue on a number of fronts and is ideal in three ways.
First, your work hours are reduced so you no longer feel the strain and stress of excessively long working days.
You might work part-time, change fields or careers, or start your own lifestyle business. This is effectively what I did at 30 when I left my full-time banking career to become a life coach. I’ve been working part-time ever since, running an international coaching company, writing a few books, and doing some 1 on 1 coaching in addition to speaking.
Second, you get the benefit of having a flexible schedule or reduced hours, income, social stimulation and mental challenge.
My favorite parts of the day are the calls I have with my 1 on 1 coaching clients. And it appears that keeping your brain engaged helps stave off dementia (an added bonus). Working can also give people a sense of purpose and meaning in life, helping ward off depression.
Third, (and this could be the biggest benefit for many) you don’t need to save nearly as much in your retirement pot.
You can make this transition to working on your terms much sooner than the traditional retirees. A winner on multiple fronts! If a traditional retirement requires a $350 month savings, the semi-retirement path only requires $120 a month. This enables you to spend more while you can enjoy it! Or, you could choose to keep saving the $350 a month and move into semi-retirement sooner (what I did). I continued to add to my retirement pot and only withdrew from it to buy my first house (which is really just shifting one investment in stocks into another investment in real-estate).
While taking a series of mini retirements or sabbaticals requires saving nearly double the amount compared to the traditional retirement ($650 instead of $350), semi-retirement needs 2/3 less in savings! To me this is a no brainer, but to someone else, the mini retirements throughout life might be the way to go.
There is a lot of flexibility here. The key takeaway is that you should be aware that your choices may require a change in the amount you’ve been setting aside for retirement. One must carefully consider the impact your choice makes on the amount you need to save and invest. Unfortunately, most retirement planners still assume the traditional retirement and aren’t suitable for those taking the unconventional paths. I’d recommend you play around with Todd Tressidder’s Ultimate Retirement Calculator to get a feel for how different scenarios will play out. You can also use his tool to determine how much you actually need to save once you’ve accounted for various income streams (i.e., pensions, rental income, business income).
If you aren’t already playing for FIRE (Financial Freedom, Retire Early), the sooner you get started, the sooner you’ll arrive!