Financial Independence: Early and Semi-Retirement

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Here’s a sobering fact: one in three Americans has saved $0 for retirement, according to a 2016 survey. An increasing student debt to become more competitive in the job market, an ever-present need to use high-interest credit card debt to make ends meet, and a lack of an emergency fund are among the top reasons why more and more Americans can’t build a nest egg. Still, there is another big trend taking place at the same time. According to the same survey, 13% of Americans have saved $300,000 or more for retirement. While you may think that all of those individuals belong to the boomer or older generations, 4.9% of millennials have retirement funds of $300,000 or more. Let’s review the key considerations for those seeking this type of financial independence and the increasing popularity of semi-retirement.

Many Americans retire before 60

When it comes to retirement, we seem to play it more conservatively than we need to. According to 2015 data from the Employee Benefit Research Institute (EBRI) and Greenwald & Associates, in 1991, while only 19% of surveyed workers expected to retire before age 60, 38% of them actually retired before age 60>.

The key to early retirement is saving and investing

In 2024, the maximum that you can contribute to a 401(k) is $23,000 per year ($30,500 for those age 50 and over). Over a 10-year period, you could sock away up to $230,000 (or up to $305,000 if age 50 and over) in your 401(k). And this is before including any gains from interest compounding. While you may think that you can’t afford to save for retirement, the reality is that not getting started is the biggest hurdle. If you were to start putting away $361 every month at age 20 in an index fund with a 6% return, you would be about $100 short of $1 million by retirement age 65. And that’s not even counting potential employer matches. By not maximizing their 401(k) contributions, one in four U.S. workers are passing on an estimated $1,336 in 401(k) matching contributions. Still not convinced? On top of reducing your taxable income, the IRS further rewards your retirement plan or IRA contributions through the saver’s credit up to $2,000 ($4,000 if married filing jointly) per year, when your adjusted gross income meets specific thresholds.

Early retirement is a different type of financial independence

Basketball coach and player Abe Lemons said it best, “The trouble with retirement is that you never get a day off”. I experienced this saying as I saw my father-in-law retire early, only to be bored out of his mind six months later, and he went back to the workforce on a part-time basis. He didn’t really need the money, but he wanted to continue doing something he truly enjoyed. As it turns out, he’s not the only one. Americans with investible assets of $1 million or more plan to retire by 56 and that 20 percent planned to retire by age 40. However:

  • 21% of those individuals plan to work part-time

  • 21% of them plan to start a new career

  • 11% of them plan to become entrepreneurs.

This means that more than half of people retiring early are looking into semi-retirement. Retirees working for pay isn’t a new concept. Whether it’s because they’re looking for extra income or just enjoy the act of working (or somewhere in between), it’s become increasingly popular in recent decades. It’s a great way to achieve financial independence and lifestyle flexibility without going into full retirement.

Financial benefits of semi-retirement

Benefit 1: You can maximize your social security benefits For those born after 1937, full retirement age varies between age 65 and 67. Starting your Social Security benefits before your full retirement age decreases them. By initiating your retirement benefits at age 63, you receive only 75% of your total monthly benefit. Continuing to work part-time may allow you to be eligible for health coverage, allowing you to delay your need for Social Security retirement benefits. Furthermore, you can continue to bump up your future benefits by up to 8% per year by working past full retirement age until age 70. Benefit 2: Increase the time you give your savings to grow

  • By fully retiring before age 50, you miss on the ability to make catch-up contributions.

  • By fully retiring before age 59 1/2, you’re still on the hook for the 10% early withdrawal penalty from the IRS. While there are ways to prevent that penalty, including substantially equal periodic payment (SEPP) plans, they require the help of a financial advisor.

Let’s assume that you could make $6,000 through a part-time job starting age 50 to your 401(k) with a 6% rate of return compounded annually. Here is how much you would miss out by fully retiring early:

  • One year: $6,193.26

  • Two years: $12,758.12

  • Five years: $34,912.01

  • Ten years: $81,632.15

  • Fifteen years: $144,154.23

Don’t miss out on reaching the maximum potential of your nest egg! Benefit 3: An active lifestyle wards off Alzheimer’s and other health issues Those extra years of physical activity from working part-time can help you fight off mental ailments as well. A 2013 study of about 429,000 self-employed workers by the French National Institute of Health and Medical Research found that every additional year of work before retirement helps you decrease the risk of getting dementia by 3.2%. Alzheimer’s disease is the sixth leading cause of death in the U.S., and any additional health issues can be very costly, especially late in life. Staying healthy may not seem like a financial benefit, but it is!

The bottom line

Early retirement can’t happen on a whim. You need to put great amounts of thought, planning, and research into your retirement strategy, particularly when looking to retire before age 50. Research suggests that semi-retirement is a smart way to make the most out of retirement, stretch a retirement budget, and continue to build a nest egg.

Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.

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