How to Prepare Financially for a Mini-Retirement or Sabbatical

One of the most common questions people ask me about mini-retirements and sabbaticals is how much to save.

Financial planning is an important part of the mini-retirement preparation process. In this article, I’ll walk you through the three steps you should take to ensure your finances are ready for your time away from work.

We’ll discuss how to estimate your expenses and create a mini-retirement budget. We’ll also cover different ways to fund your break. Lastly, we’ll also look at the effect mini-retirements might have on your journey to financial independence.

This article is part 2 of the mini-retirement special. You can find the first article here. It discusses what a mini-retirement is (and talks about the differences between career breaks and gap years), who should consider taking one and how to get the timing right.

Let’s get started!

Step 1: Answer the Big Questions First

To figure out a financial plan for your mini-retirement, you have to answer the following questions:

– How much time will you spend away from work?

– How will you spend your time during your mini-retirement?

– What will your return to work look like?

Not all mini-retirements are created equal, so it’s impossible to develop a blanket budget rule.

Spending three months relaxing at home in your paid-off house will have a much different price point than taking a year off to travel or start a business.

A common approach to planning a mini-retirement is to devise a budget and then figure out what kind of activities you can afford during your break. I believe planning your ideal mini-retirement first and then fitting your finances around it is a much better approach.

Step 2: Figure Out How Much You Need

Go through your current budget and list the expenses that will remain the same (mortgage, insurance, etc.) during your mini-retirement. Then list all mini-retirement-specific costs like travel(plane fares, accommodation, daily eating out budget…), courses you want to take, extra spending money, etc.

Websites like numbeo.com and nomadlist.com are helpful to get a feeling for the living costs in different locations around the world.

In my experience, a good rule of thumb is to estimate how much you will need and then add another 30%-50% to that amount.

If you don’t have a job or business to return to after your mini-retirement, it is wise to save up enough to cover the first few months after your mini-retirement ends, just in case.

Step 3: Decide How to Fund Your Mini-Retirement

Below are some funding options for your mini-retirement or sabbatical. It is not an extensive list, but hopefully, it will give you some ideas to consider.

Option 1: Save For It

With this option, you’ll have to front-load all the money you’ll need during your mini-retirement. You don’t expect to work and generate active income during your break, and you don’t have passive income from investments either.

An accurate estimate of how much money you will need to comfortably cover your expenses is crucial. The last thing you want to do is stress about money during your break.

This is especially true if you are planning a big trip, as your only options if you run out of money are a) to cut your trip short or b) to be more frugal.

As mentioned above, it might be a good idea to add a generous buffer to your expected monthly mini-retirement budget just in case.

Option 2: Short-term Barista / Passive Income

If you’ve been saving and investing for a few years to get to FI eventually, you might be able to use a strategy I like to call “short-term barista”. It has nothing to do with serving coffee. With this strategy, you follow the Barista FIRE strategy, but only for the duration of your mini-retirement.

This means you could draw some passive income (using the 4% rule or whatever withdrawal rate you are comfortable is) to fund part of your monthly mini-retirement expenses. For instance, if you have $600,000 invested, you could withdraw $2000 per month.

You can then fund the rest of your expenses with savings or active income.

Once your mini-retirement ends, you return to saving and investing for financial independence.

Option 3: Find a Job

This one is self-explanatory. You could simply find a fun job, a “side hustle”, or some other form of part-time work to fund all or part of your expenses. The important thing here is not to overcommit or be too dependent on your active income source. Otherwise, you might end up stressed and working too much, which is obviously not the goal of a mini-retirement.

Option 4: Start a Business

This is a very popular choice among mini-retirees. An extended break could be the perfect time to try out a business idea you’ve been thinking about.

If it works out, your new business might generate enough income to fund all your mini-retirement expenses.

It is super important to have plenty of savings or other income with this option in case your new business does not take off. There is also a chance you don’t actually enjoy your new venture (this is what happened to me during my failed mini-retirement back in 2014).

It’s a good idea to have a plan for what you will do with your time during and after your mini-retirement in case your idea doesn’t work out. It’s good to have a job to go back to or at least another business idea.

As far as the finances go, it’s probably a good idea to have enough “bare bone” expenses saved for the duration of your mini-retirement, so you don’t need to stress if you don’t make money for the first few months or longer.

A good rule of thumb is to have at least 70% of your expenses saved or 8-9 months’ worth for a 12-month entrepreneur mini-retirement.

Option 5: A Mix

Of course, you could combine any or all strategies mentioned above to create your ideal income blend for your mini-retirement. This is a similar approach to the portfolio career strategy where you combine different sources of income.

You could, for instance, save a decent amount of money as a buffer, work in a restaurant one night a week, start a casual freelance business, and draw some passive income from your investments.

Again, the most important things here are to a) not overcommit work-wise and b) have enough money from savings or investments, so you don’t have to worry about your finances during your break.

Financial Planning for a Sabbatical

If you take your mini-retirement in the form of a sabbatical arranged with your employer, you might have a few other options to fund it. One option is to get your employer to withhold some of your pay for a while so that you can still get paid part of your monthly income during your mini-retirement.

This is what Mr. Flamingo did during his sabbatical in 2012. He worked for half-pay for six months and then received the same monthly amount during his break. At the end of the day, this is just a form of saving. However, there are obviously some tax advantages because this strategy means your pre-tax income is lower, so you pay less tax overall.

Other Options

Grants and Scholarships

Depending on how you would like to spend your mini-retirement, you could also explore things like grants or scholarships. I secured a government grant to start a freelance business in 2014. What options are available very much depends on where you live and what your plans are.

Extended Leave

Depending on where you live, you might have the option to take an extended period of annual leave. Some employers are happy for employees to “buy” or “borrow” additional days off. In Australia, there is also the option to take Long Service Leave. This option will probably not cover your entire mini-retirement period, but it’s a good start.

Debt

I know it’s very controversial, but you could use debt to fund your mini-retirement or sabbatical. I’m definitely not saying this option is right for everyone. However, that’s actually how I funded my career break in 2014 – and I am glad I did.

I borrowed money from my parents to fund our mini-retirement and move to Australia. This break allowed me to leave behind some pretty bad habits and a freelance gig I hated. It also did wonders for my mental health. It allowed us to make a fresh start, ultimately leading us to where we are now – happy, semi-retired, living our best green-zone life (and actually very close to FI!). I am 100% certain my life would be very different right now if I didn’t take this step.

It’s not wise to take out a high-interest personal loan, but one could, for instance, use the home loan redraw or pull some money out of the offset.

The decision to fund a mini-retirement or sabbatical this way should not be taken lightly, but sometimes you just have to do what you have to do to get the break you need.

Mini-Retirements and Financial Independence

Mini-Retirements are a great way to get frequent breaks on the path to FIRE. They are compatible with all types of financial independence. Do they slow down one’s path to FI? Most likely. Do they make it more enjoyable? Most definitely.

Here is what regular mini-retirements on the path to FI could look like:

If you choose a semi-retirement path to FI – like Coast FI or Flamingo FI – you can still incorporate regular mini-retirements in your journey. This is exactly what Mr. Flamingo and I do now that we only work part-time.

This strategy could look something like this:

Mini-retirements are one of many tools in our FIRE toolbox that we can use to make the journey more enjoyable. If you don’t mind extending your timeline to FI a little to smell the roses along the way, mini-retirements are a great option.

Conclusion

When it comes to preparing financially for your mini-retirement, it pays to be prepared. There are many ways to fund an extended time away from work – like saving, drawing an income from investments, or active income from a job or business.

The key to creating a good mini-retirement budget is knowing your expected expenses and planning accordingly. It is a good idea to build in extra buffers, so you don’t have to stress about running out of money.

If you take a mini-retirement along the path to financial independence, you will likely slow your progress and extend your timeline. Still, in most cases, the benefits will far outweigh any potential negative effects on your FIRE plans.

If you’ve already taken a mini-retirement – how did you fund it? Are there any options or tips you’d add to the list?