By the time we retire, many of us will have spent decades working. Semi-retirement, not quitting cold turkey, can be a great way to ramp down, as a transition to retirement, or a way to continue working in some capacity indefinitely.
Like anything else in life, making a plan and executing it boosts your odds of success. If you’re considering semi-retirement, here are some steps to take to make sure your finances, and you, can go the distance.
1. Do Pre- And Post-Budgeting
You wouldn’t think of taking a trip without first plotting your course, right? By the same token, testing whether your semi-retirement plan is roadworthy should be done well before you hit the road. That way you have time to tune up any weak spots.
The simplest way to budget is to take it from the top. Start with your needs (non-discretionary expenses) and your wants (discretionary expenses). Keep in mind this rule of thumb. Non-discretionary expenses (medical insurance, prescription medications, housing, transportation, child or pet care, etc.) should not run to more than 50 percent of your total take-home pay. Target 20 percent of your income toward long-term/retirement savings. That leaves 30 percent for discretionary expenses such as dining out, travel, entertainment, continuing education, etc.
Next, you’ll want to estimate how ramping down your income could impact those ratios. If going into semi-retirement would leave them wildly out of whack, it’s time to make adjustments. Maybe you save more now while you’re still a few years away from a reduced income. You could cut expenses or boost your income with freelance or consulting work. If neither of those options is realistic and you don’t foresee extra funds coming your way, then you might need to reconsider if semi-retirement is realistic for you or if it makes sense to keep working full-time for longer.
2. Pay Down Debt
Going into semi-retirement with debt can leave you with fewer funds and less wiggle room to enjoy life, do work you’re passionate about, or even manage emergencies. Debt is a non-discretionary expense. You have to pay it, regardless of whether you’re on a reduced income or suffer a financial setback. If your current finances won’t allow you to become debt-free, think about taking on a side hustle to help pay down your debts.
Be strategic. Pay down your highest interest rate debt first, and watch out for debt that doesn’t have a fixed rate. Credit cards are the biggie since their interest rates change periodically. With average APRs of roughly 16 percent in November 2022, paying down your balances as fast as possible will help you avoid spending a small fortune on interest.
Mortgage debt, provided your monthly payment is manageable, and especially if you have a low-interest rate, is less concerning. The payments are predictable and usually fixed for the life of your loan. Interest is often tax-deductible (if you itemize on your taxes). Even with this year’s steep rise, rates for new 30-year mortgages are around 7 percent.
Pro Tip: Personal loans (from fintechs, credit unions, or banks) can be an option to consolidate higher interest-rate debt and lower your monthly payments. Unlike home equity loans or home equity lines of credit, these aren’t secured by your home. They do have to be repaid faster — typically in two, three, or five years. You need decent credit to get the best rates and you may have to pay an origination fee.
3. Step Up Your Savings
Getting older has its privileges! If you’re over 50, you can make catch-up retirement contributions of $7,500 a year on top of the maximum annual contribution of $22,500 you’re allowed to a 401(k), 403(b), or 457(b) retirement plan. Contributing to a pre-tax retirement plan can also reduce your tax liability.
For example, let’s say you earn $97,089 a year, the median income for Gen X in 2021. To greatly simplify things, assuming you take the standard deduction and are in the 22 percent tax bracket, if you contribute 20 percent of your income a year to a pre-tax retirement plan, you’ll reduce your taxable income by $3,053, $3,357, or $3,663 respectively, a year depending on your filing status (single/married filing separately, married filing jointly, or head of the household). Please contact a tax professional for advice on your specific situation.
Pro Tip: Do you have your own business? You can set up a pre-tax retirement plan (solo 401(k), SEP IRA, or SIMPLE IRA) to take advantage of tax-deductible retirement contributions. Depending on the plan and your revenue you might have the opportunity to stash much more away every year than you could with an employer-provided plan.
4. Make Sure You’re Covered
How will semi-retirement affect your health coverage and costs? You generally have to be 65 to qualify for Medicare. So if you’re planning for semi-retirement, healthcare costs deserve consideration. If your part-time work options come with health insurance, congrats! Otherwise, consider COBRA coverage — in most cases, you can be covered for 18 months after you leave your job. However, monthly costs can run as high as $645 for individuals. Affordable Care Act (ACA) premiums can range from $342 to $472 a month for an individual.
Since the likelihood of major health problems increases with age, expect your costs to rise over time. Your late 50s is the sweet spot timing-wise for applying for long-term care insurance if you’re considering that. Annual premiums depend on a range of factors but start at $1,500 for a single woman and $2,080 for couples in their mid-50s.
5. Work With A Financial Advisor
Making time to walk through your numbers with a professional can give you peace of mind and throw up potential red flags you need to address on the way to semi-retirement.
Your advisor will do scenario analysis and retirement projections taking into account your savings balances, and investment allocation — how your funds are divided across different types of investments — and make recommendations for adjusting them. A good advisor will take a holistic approach, looking at your investments and income sources (including future social security benefit payments), cash flow, assets (e.g., house, bank accounts, and retirement accounts), liabilities (mortgage, student/parent loans, and other debt), and insurance coverage to see how they impact your financial security. Together, you can draw up a plan to help you meet your goals.
Pro Tip: Advisors registered with the SEC or who hold the CFP designation must adhere to the fiduciary standard. This means they are obligated to put clients’ needs ahead of their own. Others, such as investment brokers, are only required to meet a suitability standard. To avoid potentially getting steered into investments that are too risky, don’t fit your needs, or are unnecessarily expensive, search for financial advisors who are fiduciaries and/or fee-only, meaning they don’t earn commissions from selling investment or insurance products.
6. Do A Trial Run
In theory, portable health insurance and the new flexibility around working remotely should make this transition easier to pull off than ever before. If you have vacation time banked, are in a field that offers extended seasonal breaks (e.g., education), or can take a sabbatical, use the time to try out work you might be interested in doing in semi-retirement.
Gather as much information and as many data points as you can as far in advance as possible. Encore careers and AARP have resources that help research your next act.
