Semi-Retirement is something that is not widely discussed in the FIRE community and it is a concept that we should all think about a little more.
Depending on your plans for FI, semi-retirement will likely be part of the mix:
And then there are the people on the “standard” path to FIRE who plan for full FI and could retire early but probably won’t (I’ll bet that 99% of people in the FIRE community continue working in some capacity after they hit their number).
I think it’s time to do a deep dive into Early Semi-Retirement. Over the next month or so I’ll post a variety of articles on semi-retirement – including interviews with people who are already semi-retired or who are about to semi-retire.
Today we’ll start the series off by defining what Early Semi-Retirement means and how it relates to FIRE.
P.S.: I have created a Facebook group to discuss all things Semi-Retirement (and FIRE) with like-minded people.
If semi-retirement is part of your plan for Financial Independence, you are welcome to join the group!
What is Early Semi-Retirement?
Semi-Retirement means different things to different people, so it is important to define what semi-retirement means in the context of FIRE.
Semi-retirement is a step between full-time work and traditional retirement. Most importantly, as part of a FIRE plan, it can be an important part of the journey to the ultimate goal – Financial Independence. In contrast to many other definitions out there, we don’t see semi-retirement as an alternative to FIRE – it is part of the puzzle.
Semi-retirement means leaving one’s stressful, full-time career and creating a more balanced lifestyle that allows plenty of time to look after one’s health, spend time with family and friends, pursue hobbies and projects, and fulfilling part-time work.
What about the “Early” part of “Early Semi-Retirement”? Just like Early Retirement (the RE part of FIRE) implies a retirement date in one’s 30s, 40s or 50s, Early Semi-Retirement means that one stops full-time work (and moves on to doing some enjoyable, part-time work) decades before the traditional retirement age.
Semi-Retirement and FIRE
Once you have accumulated a certain amount of savings, you can stop adding to your nest egg and let it compound in the background. You are still in the accumulation phase, but your nest egg will do the heavy lifting for you from this point onwards (and you will eventually reach Financial Independence thanks to the magic of compound interest).
What exactly is the point at which you can stop saving? It depends on when you want to reach FI. I have written about this in detail in several blog posts. Here is a quick summary: The earliest feasible date is when you hit your Coast FI number (and your Coast FI number also depends on your planned FI date!). Flamingo FI is another option. With Flamingo FI, you stop saving once you have accumulated half your desired FI nest egg. If your nest egg grows by 7% (inflation-adjusted) per year, you will reach FI after 10 years.
Most of us in the FIRE community have a savings rate of over 40%. This means that you can now earn 40% less (or 50%, 60% – whatever your savings rate was). If you have worked full-time up to this point (5 days a week), you can now go down to 3 days! How good is that?
It is worth reiterating that this FI-focused version of Early Semi-Retirement differs from more traditional semi-retirement approaches in several important ways:
- “Traditional” semi-retirement is often used as a strategy by people close to standard retirement age who have not accumulated enough money in superannuation to fully fund their lifestyle. They might supplement their income from superannuation by working part-time until they become eligible for the age pension. This is not what our version of semi-retirement is about.
- Another version of semi-retirement (very similar to the version above) involves drawing an income stream from your nest egg (often people use the 4% rule for this). So a person with a nest egg of $500,000 and annual living expenses of $40,000 might semi-retire at 45, draw an income of $20,000 per year from their investments (4%) and work part-time to earn the remaining $20,000 required. The problem with this approach is that this person’s nest egg will probably never grow to the size required for Financial Independence. This means they will have to work forever or until they become eligible for the age pension.
With the FI version of Early Semi-Retirement, you leave our nest egg untouched and earn enough through paid work to cover all of your ongoing living expenses. The goal is still to reach FI eventually, regardless of when and if you plan to stop working altogether. So semi-retirement is not an alternative to FI and/or traditional retirement, but an optional step along the way. Choosing a FI approach that involves semi-retirement will push out your FI date, but you will likely enjoy yourself a lot more along the way.
Passive Income in Semi-Retirement
It is, of course, possible to draw a passive income stream from your investments during semi-retirement. This is, in fact, something we are considering. However, we would save up funds in a separate semi-retirement bucket for this purpose. One advantage of doing this is that you can use a much higher withdrawal rate for this bucket as it won’t have to last as long as your FIRE nest egg (which will hopefully provide an income for the rest of your life once you hit FI).
Here is an example: Kevin is 40 and has hit his Flamingo FI number. If all goes well, he should reach FI by age 50. In addition, he has saved up a semi-retirement bucket of $100,000. Each year, he can withdraw $10,000 for the next 10 years to supplement his semi-retirement income.
Advantages and Disadvantages
The major advantage of semi-retirement is that you can quit your full-time job much sooner than if you went the standard FIRE route where you save as much as possible until you hit FI. On the other hand, if you choose a path to FIRE that involves semi-retirement, the journey will be longer. It will probably be a lot more enjoyable, but longer nonetheless. That’s the tradeoff.
A possible disadvantage is that you still have to work, whether you want to or not. I don’t really see this as a disadvantage though. Mr. Flamingo and I want to keep working for the foreseeable future. One thing I have learned about myself is that I need a certain amount of structure in my life. A part-time job provides structure, social interaction and a sense of purpose. I believe that most people would benefit from the perks of a part-time job once they stop their full-time career. But everyone is different. If your goal is to retire early and not work ever again, then this path is simply not for you.
In contrast to the “work your ass off for 10-15 years” path to FIRE you can actually benefit from compound interest if you choose the semi-retirement route. The standard path to FIRE is all about a high savings rate, and in many cases, compound interest plays a very minor role during the accumulation phase. This is different if you semi-retire early and let your money grow for 20 or 30 years before you touch your nest egg.
You can’t touch your nest egg!
Of course, this plan requires you to leave your nest egg untouched. So not being able to withdraw funds from your investments for many years is definitely a disadvantage.
Working full-time is actually pretty inefficient. One good thing about semi-retirement is that you will likely move into a lower tax bracket as you only work part-time. This means that going from 5 days to 3 days does not really mean 40% less income. Here is an example:
Sue is currently working full-time and earns $100,000 per year before tax. This gives here a monthly after-tax income of $6123.33. Each of her 5 weekly workdays earns her $1,224.6 per month. She is ready to semi-retire and moves to 3 days per week. Her new annual salary is $60,000 and provides a monthly after-tax income of $3,977 per month. Now each of her 3 weekly workdays earns her $1,325.66 – over $100 more!
This is not an extensive list of advantages and disadvantages of course, but I hope it gives you an idea about the factors that need to be considered.
Is semi-retirement part of your plan for Financial Independence?