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 travelling, 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 fully at retirement and assess if they have accumulated enough to make money last. If they want to transition to retirement at their own pace, they need the right financial strategies in place, and financial strategies for semi-retirement can vary based on the age of the individual.
Semi-retirement in their 20s 30s or 40s
Surprisingly, lots of young people would like to achieve financial freedom and retire early nowadays. Obviously, they can retire at any age if they are financially ready, as retirement doesn’t mean people stop working. It is more about having options. They simply want a better work-life balance or to spend more time with their family.
To achieve financial freedom, people need to build an investment portfolio generating passive income exceeding their expenses. The key is to never touch their investment principal and only withdraw less than their investment growth.
How much do investors need to be financially free? In theory, they need to have saved at least 25 times their annual expenses to be financially free after retirement.
For example, if an investor spends $80,000 per year, he will need 2M ($80,000 x 25). Assuming his investment grows by 7% (adjusted for inflation based on the average return of 10% measured by the S&P 500) over a year, he now has $2,140,000 invested. Imagine he will be withdrawing at the rate of 4% a year (2M x 0.04 = $80,000).
The value of his investment would look like this a year after withdrawal: $2,140,000 – $ 80,000 = $2,060,000. his investment will have grown by $60,000 after withdrawal.
He might think it would take too long to accumulate 2M before he slows down. But he doesn’t need to wait another 10 years, 20 years, or even longer to enjoy his life. He can stop saving once he has accumulated half of their desired financial freedom nest egg, 1M dollars in this case, and let it grow itself. When he accumulates 1M dollars, he can semi-retire long before the traditional retirement age. Assuming his nest egg grows by 7% per year, he will reach his financial freedom goals of 2M after around 10 years of semi-retirement.
Semi-retirement is a popular concept for the younger generation who are seeking an abundant and free life that is not restricted by money. they can enjoy their desired lifestyle much earlier than others with the right strategies in place.
Semi-retirement in your 50s or 60s
I often see my retired clients go back to work as they found 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. When they are semi-retired, it is a good time for them to figure out what they would like to do in full retirement. They can slowly reduce their 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 count on the age pension in their retirement.
Based on information from the Association of Superannuation Funds of Australia (ASFA), a couple needs approximately $68,000 pa to live comfortably in retirement. To live that level of lifestyle, they only need $640,000 in retirement savings, assuming they have 6% investment returns (more conservative estimates in retirement). Even if they want to spend $80,000 per year, they don’t need 2M because they may receive a full or partial-age pension. Some self-funded retires might have a chance to receive an age pension at some point in their life when their nest egg is under the Asset & Income Test limit, as long as they live long enough and spend enough money.
By collaborating with a financial adviser, investors can optimize their age pension entitlement through effective strategies and gain a comprehensive understanding of the investment risks required to achieve specific return objectives.
Overall, the key to a successful semi-retirement is to understand numbers, have a solid financial plan in place, and map out the strategies based on age and needs. By taking a proactive approach to their finances, investors can maximise the benefit of money to create the life they desire and eventually live life on their own terms.
Investopedia, S&P 500 Average Return, Investopia, viewed 22 May 2023,< https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp>