Financial freedom not a pipe dream for semi-retirees, but strategy matters

Financial freedom not a pipe dream for semi-retirees, but strategy matters

Many people dream of achieving financial freedom and retiring early without realising that, with the right strategy, that could be their reality. Semi-retirement frees people to work less while progressing towards their financial goals, which may take less time than many expect, writes adviser Helen Nan.


Semi-retirement is a transitional phase between full-time work and full retirement, and it can apply to anyone who would like to reduce their work and devote more time to pursuing other interests, such as traveling, hobbies, spending time with family, and starting a side-hustle business.

It is an important phase for people to figure out how they want to live their life at retirement and assess if they have accumulated enough to make money last. Those wanting to transition to retirement at their own pace need the right financial strategies in place, and financial strategies for semi-retirement can vary based on a person’s age.


Younger generations and semi-retirement

Many younger people today hope to achieve financial freedom and retire early. Obviously, people can retire at any age if they are financially ready, as retirement doesn’t mean the end of work – it’s more about having options. Some simply want a better work-life balance or to spend more time with family.

Achieving financial freedom requires building an investment portfolio that generates passive income exceeding the investor’s expenses. The key is to never touch investment principal and withdraw only up to the amount of any investment growth.

How much does one need to be financially free? In theory, a person would need to have saved at least 25 times their annual expenses to be financially free after retirement.

For example, someone who spends $80,000 per year would need $2 million to retire on. Assuming their investment grows by 7 per cent (adjusted for inflation based on the average return of 10 per cent measured by the S&P 500) over a year, that investment would grow to $2,140,000.

If the investor withdraws at a rate of $80,000 – or 4 per cent of $2 million – a year, the value of the investment would have grown $60,000 after withdrawal ($2,140,000 – $80,000 = $2,060,000).

The good news is, that investor would not need to wait to accumulate the full $2 million before they slow down, and rather can stop saving once they’ve accumulated half that, or $1 million, letting the investment grow itself and still semi-retiring long before the traditional retirement age. Assuming the nest egg grows by 7 per cent per year, the investor would reach their financial freedom goals of $2 million after around 10 years of semi-retirement.

Semi-retirement is an increasingly popular concept for younger people seeking an abundant and free life not restricted by money, enabling them to enjoy their desired lifestyle much earlier than others – with the right strategies in place.

Less savings needed for older semi-retirees

I often see my retired clients returning to work after finding themselves struggling with a lack of purpose and loss of routine in retirement, especially when their careers used to be the main part of their life. Semi-retirement is a good way to figure out what they would like to do in full retirement, allowing them to slowly reduce working hours and transition to a more healthy and balanced retirement by finding their passion.

The financial strategies for them can be different, as they may be counting on the age pension in their retirement.

Based on information from the Association of Superannuation Funds of Australia, a couple needs about $68,000 per year to live comfortably in retirement. That would require just $640,000 in retirement savings, assuming 6 per cent investment returns.

Even if a retired couple wants to spend $80,000 per year, they won’t need $2 million because they may receive a full or partial age pension. Some self-funded retirees may have a chance to receive an age pension if their nest egg is under the asset and income test limit, as long as they live long enough and spend enough money.

Working with a financial adviser can help investors maximise their age pension entitlement with the right strategies and understand the investment risks they need to take to get a desired level of returns.

Overall, the key to a successful semi-retirement is to understand the numbers, have a solid financial plan in place, and map out the strategies based on age and needs. By taking a proactive approach to finances, investors can maximise the benefit of money to create the lifestyle they desire and eventually live life on their own terms.


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