Flexibility – the Key to an Earlier Semi-Retirement?

Flexibility is an important factor in making our financial independence plans a success. Semi-Retirees are, by default, a flexible bunch. We are able to scale our active income up or down as needed because we are not fully retired.

So far, it has been difficult to put numbers around the impact of flexibility and active income during and after semi-retirement. That has changed. A massive shoutout to Dave from Strong Money Australia, who uncovered a fantastic FIRE calculator that is super useful for aspiring semi-retirees: The Rich, Broke or Dead? Post-Retirement FIRE Calculator.

In his article, Dave did a great job demonstrating how a certain degree of flexibility (either on the earning or spending side) can cut our journey to FI short, reducing our FI targets by hundreds of thousands of dollars. Dave refers to this as the “Flex Rate”, which I think is a really cool term. I have to admit that I spent way too much time running different scenarios in the calculator – I find tools like this a little addictive.

Today, I would like to focus on flex rates for semi-retirees and how some part-time work can get us our time back sooner while also making our FI plans safer.

What Is The Flex Rate?

The Flex Rate (called “Spending Flex” in the calculator) is simply a measure of your flexibility in full retirement.

If you have a flex rate of 20%, you are happy to cut your spending by 20% or do some work to generate 20% of your annual spending when times get tough.

There is also a “Flex Threshold” field for the threshold at which your flex rate kicks in. Like Dave, I use 80% (meaning your portfolio value dips below 80% of the expected value at the time).

Flexibility and Withdrawal Rates for Semi-Retirees

Flexibility when it comes to reducing our spending and/or earning some extra income in retirement is a valuable tool to make our nest eggs last in retirement.

But what if we already know that we don’t actually want to fully retire for a while and that semi-retirement is our medium-term goal?

The truth is that most people who reach FI before the traditional retirement age continue to work in some capacity. By choosing a semi-retirement strategy, we acknowledge this fact and avoid over-saving and wasting time accumulating assets we likely won’t need.

The Rich, Broke or Dead Calculator allows us to test our semi-retirement and FI plans and determine if our save withdrawal rate (SWR) assumptions are possibly too conservative.

Let’s look at some Semi-FI strategies and how the calculator can help.

For the examples below, I’ve used an allocation of 95% stocks and 5% cash and a retirement “end date” of age 100. I’ve picked the mortality table for healthy, non-smoking females.

Note: Just like the 4% rule, the results of the Rich, Broke or Dead Calculator shouldn’t be taken as gospel. As far as I can tell, the calculator is based on historical US data, which a) isn’t a predictor for the future and b) doesn’t necessarily apply to other parts of the world. It also only provides options for a small set of asset classes. Have some fun and take the results with a grain of salt! If you want to read more about flexible spending for early retirees, I recommend this article by Vanguard, and this Choose FI episode.

Coast FI and Flamingo FI

Depending on when you want to reach full FI and have the ability to fully retire, both Coast FI and Flamingo FI are good options. Coast FI will get you to financial independence by the traditional retirement age. Flamingo FI will likely get you there in 10-15 years. With both options, you work to cover all your living expenses while your nest egg compounds in the background until you are ready to retire.

The Semi-FI Calculator is the most straightforward way to calculate our Coast FI and Flamingo FI numbers and ages. The Rich, Broke or Dead Calculator complements the Semi-Retirement Calculator perfectly and allows us to test our assumptions.

You may find that depending on your flexibility in full retirement, you might be able to get away with a higher withdrawal rate (which in turn will lower your Coast FI, Flamingo FI and FIRE numbers!).

Let’s work through an example.

Kate is 40. She earns $120,000 per year and spends $80,000. She wants to semi-retire soon, at which point she will only make enough to cover her expenses. She has a $650,000 nest egg and believes it will generate returns of 7% (inflation-adjusted) over time. Kate wants to (fully) retire early at age 55. She assumes she will require the same annual amount of $80,000 in full retirement.

Coast FI

The Coast FI strategy is a great option in Kate’s situation. Let’s calculate her Coast FI and FIRE numbers using the Semi-Retirement Calculator (assuming a standard 4% withdrawal rate):

Kate’s “traditional” FIRE number is a cool $2,000,000. Based on her current savings rate, she will reach Coast FI (for her target retirement age of 55) in three years at age 43. She will be able to semi-retire and coast to full FI over the next 12 or so years.

Now let’s look at the Rich, Broke or Dead Calculator to test this plan. We’ll assume that Kate will live to age 100 (45 years of retirement).

What? A success rate of only 81%?! Yes, you read that correctly. One thing often ignored by those who follow the 4% rule to the tee is that it is only based on 30 years of retirement AND doesn’t guarantee a 100% success rate, regardless of what people say. To get a 100% success rate, Kate needs to accept a flex rate of 24% (80% threshold) OR lower her withdrawal rate to 3.1% – which will increase her FI number by A LOT.

This might entice the hardcore FI people to get back into their spreadsheets and work for another 5+ years just to be “safe”. However, I hope most of you will choose the first option – flexibility.

If Kate accepts a flex rate of 40% (80% threshold) – getting by on $48,000 if times get tough – she will not just have a 100% success rate, but she will also be able to increase her withdrawal rate to 4.8%!

Let’s go back to the Semi-Retirement Calculator to see how this higher withdrawal rate impacts Kate’s Coast FI numbers:

Incredible – based on the 4.8% flex rate, Kate has already reached her Coast FI number. She can semi-retire immediately. Even better, she will reach FIRE at age 54 without saving another cent, one year earlier than her target age of 55 (all based on her assumed ROI, of course).

Flamingo FI

Let’s stick with Kate’s example below. What if she wanted to go for Flamingo FI instead of Coast FI? The calculator result above shows that she would have to continue working at the current rate until age 44. Her Flamingo FI number based on the 4% rule is $1,000,000.

Let’s have a look at the Flamingo FI calculator result based on the new SWR of 4.8%:

Kate’s new Flamingo FI number is almost $200,000 lower, and she could get there in only 2 years!

I think these examples illustrate the power of flexibility really well. At the same time, it shows that even the seemingly super-safe 4% rule isn’t so safe after all. Whether Kate goes with the Coast FI or the Flamingo FI option – she can significantly shorten her accumulation phase by accepting a small flex rate and working her semi-retirement income into her plans.

Let’s also not forget that as a former semi-retiree, you are much more likely to quickly find a job and earn extra income if your flex rate kicks in – simply because you have not been out of the workforce for long and have up-to-date skills and connections.

The Barista-Coast Combo Strategy

Suppose you prefer to draw some income from your investments in semi-retirement AND still want to become fully financially independent one day. In that case, you could also go for the Barista-Coast Combo Strategy. It creates a small income stream from your nest egg while most of your investments continue compounding. With this strategy, you don’t have to cover all your expenses with active income as you have some passive income from your portfolio.

This is where the calculator comes in. It’s perfect for testing our Coast-Barista plans and picking a balance that suits our lifestyle best.

Let’s look at some examples.

Example 1

Sue is 40 and has accumulated a nest egg of $1,000,000. She spends $65,000 per year. She wants to semi-retire and work part-time until age 55.

If she earns $45,000 per year during semi-retirement and is happy with a spending flex of 20% (80% threshold), she has a success rate of 100%.

In practice, this means that she will withdraw $20,000 in the first year and adjust this amount for inflation every year until she turns 55. After that, she can fully retire and withdraw the full $65,000 (again, adjusted for inflation).

Alternatively, she could opt for a flex rate of only 10% (80% threshold), but she would have to earn $50,000 until age 55.

Example 2

Ivy is 35 and has a nest egg of $800,000. She wants to take a one-year mini-retirement and then semi-retire. She would like to spend $80,000 annually but can get by on a lot less.

If Ivy is happy to accept a 60% (80% threshold) flex rate and commit to earning $50,000 per year until age 60, she has a 100% success rate.

Not a lot of people would be this flexible with their spending. Also, most semi-retirees want to have the option to fully retire before age 60. However, this example shows how you can make semi-retirement work with a smallish nest egg and a high withdrawal rate if you are willing to be flexible and work longer. 

Flexibility and Trade-offs

The examples above show that it’s all about flexibility and risk-reward trade-offs.

To increase the likelihood your FI plan will work out, you can…

– choose a low withdrawal rate. Reward: a low (or no) flex rate, little active income needed. Risk: you might over-save and waste years working that you could spend doing the things you enjoy. Or you might die or get sick before you can even reap the rewards of your hard work (the most significant risk of all, in my opinion!).

– choose a high flex rate. Reward: You need a smaller nest egg and can semi-retire or fully retire sooner. Risk: If the markets don’t perform, you might be pretty uncomfortable for a long time.

– choose to earn a higher active income in semi-retirement. Reward: A lower flex rate and a smaller required nest egg. Risk: You still have to work, whether you want to or not. So if you change your mind about wanting to work later on, it will be challenging to make changes to your plan.

The choice is yours; as you can see, there is no risk-free option.

I have often said that there is no clear finish line when it comes to financial independence. Life doesn’t take place in a spreadsheet.

To reap the rewards of all our hard work, we must overcome our fear, accept that there are always risks, and develop an abundance mindset. I call this “living in the green zone“. We must learn that things will probably be ok and that we will find a way to deal with adversity. If you want 100% certainty, you will probably never get to a place of “enough”.

I love the Rich, Broke or Dead Calculator because it’s another tool in our FI tool belt to help us optimise our journey and avoid over-saving, over-working and under-living.

Conclusion

The Flex Rate concept and the Rich, Broke or Dead Calculator allow us to put numbers around flexibility before and after our FI journey. They are very useful tools for aspiring or current semi-retirees. If you are pursuing a semi-retirement strategy, I encourage you to use the calculator to test your plan and figure out if you might be able to get away with a higher withdrawal rate. However, we should never rely solely on the results of a calculator to plan our future.

In the title of this article, I asked if flexibility is the key to an earlier semi-retirement. My answer? I don’t think it is THE key, but definitely a key element when it comes to speeding up the path to Semi-FI and beyond. There isn’t one big secret or one strategy that will make everything fall into place. Living a more intentional life with less work and more things you enjoy is a bit like a puzzle – and flexibility is an important piece.

Have you tried out the calculator? Has it changed your FI or semi-retirement plans in any way?