The Art of Semi-Retirement

Older man on phone and laptop

When we look ahead to retirement, we tend to imagine a specific future date on the calendar when we will transition from full employment to full retirement overnight⁠—or perhaps over a weekend if we start counting from the Friday afternoon goodbye party at work to the first Monday of our new life.

Such an abrupt retirement was more common in an era when defined-benefit pension plans and Social Security were the dominant sources of retirement funding⁠—and when federal law discouraged Social Security recipients from working past their full retirement age.

For better or worse, things have changed.

Today, workers have more choices, but also more uncertainty. The advent of Individual Retirement Accounts and employer-matched 401(k) plans in the 1970s and 1980s empowered us to build up our own retirement funds, but now the pressure is on us to make sure we have saved enough. We may generally express confidence in our retirement plans, but we also have a steely post-2008 Great Recession awareness that even the best-laid plans could be undercut by some future economic downturn.

Healthcare costs are another big unknown. Each generation is living longer and has access to more advanced medical care—but at a cost. We pay higher premiums and more out-of-pocket expenses. In retirement, our savings have to cover those unpredictable costs—and do so for a longer period of time.

How semi-retirement can change the equation

When your financial advisor estimates how much monthly income your retirement fund will someday provide, that computation usually does not include any income from continuing to work. Your “Plan A” retirement plan assumes you will never work another day in your life.

But you probably will—and if you’re like most people you will probably want to. Not necessarily full-time, of course. “Flexibility” and “less stress” are the job qualities most often cited by pre-retirees who say they desire to have a retirement job. Multiple studies also indicate that working in retirement can be good for your health—if you do it right.

That means knowing what kind of work experience you’d like to have and including that in your plan for retirement.

According to Transamerica’s annual retirement survey, 22% of workers want to keep working indefinitely and another 22% want to immediately quit working upon retirement. But in between those extremes, 44% envision a period of semi-retirement in which they are either working fewer hours or in a less demanding type of job.

Semi-retirement—under your own terms—could also provide a significant boost to your retirement financial plan. The income from a few years of limited employment might enable you to delay taking much from your savings—letting it grow some more in the meantime. You might also opt to increase the dollar value of your future Social Security benefit by waiting a few more years before you start drawing on it.

What could semi-retirement look like for you?

Here are some semi-retirement models:

1.   Downsizing your current job

If you love your job and your employer highly values your skills and experience, you may be able to negotiate a reduction in hours from 40/week down to 30 or 20. As the Boomer generation reaches retirement age, Human Resources managers and the companies they represent are beginning to consider new strategies to retain high-value staffers nearing retirement age.

Advantages: You may be able to retain the per-hour rate that you spent your career building up to. If you’re drawing down a salary of, say $100,000, that’s about $50 an hour. You’re probably not going to get close to that hourly rate taking a part-time job outside of your profession.

Disadvantages: Some full-time positions, such as supervising other staffers, may not be adaptable to reduced hours. Also, many employers have been slow to adapt their policies to a post-retirement age labor force.

2.   Get a no-stress part-time job.

The pay rate might be low, but if that’s not a priority to you maybe this is just what the doctor ordered. This is a good backup for retirees who want to experience full-time retirement, at least for a while. After a couple of years of travel and leisure, boredom or the desire for a little extra cash flow might prompt you to put a toe back in the labor force.

Advantages: You get the social aspect of the workplace without the stress or responsibilities of your old career.

Disadvantages: Be prepared for a much lower hourly wage than you are accustomed to. If you had a successful management career you may find it hard to just be a worker bee and let others be in charge.

3.   Hang out your shingle as a consultant.

This is another way to keep working in your career, but now you can be your own boss.

Advantages: You work when you decide to and can be selective about which projects you take on. If you have a home office, you may be able to deduct certain business costs from your taxes.

Disadvantages: Now you have clients to please—talk about stress! Make sure you know whether you signed a contract containing a non-compete clause back when you started the job you are retiring from. If you do have to wait out a non-compete period, consider being an adjunct professor in your career specialty, or start blogging about your industry to keep your name out there and continue establishing your chops as a thought leader in your field.

4.   Launch a business or an “encore career”

Working in retirement is an opportunity to do something you’ve always wanted to do.  Granted, it’s probably too late to become an astronaut, but other dreams might still be possible. Perhaps you have a great idea for a start-up, or you may feel moved to devote your time to a more noble cause.

Advantages: Fulfillment—sometimes with a paycheck.

Disadvantages: You may end up putting in more hours than you did at your old job. Starting a business can also be a financial risk, so make sure you protect your personal assets from liability in case your startup goes bust.

Don’t assume that the only successful retirement plan is one in which you never work again. Ask your financial advisor to provide some additional calculations showing how a few years of semi-retirement could improve the long-term strength of your retirement plan. Beyond the financial impact, semi-retirement could be a rewarding “next act” when you are doing the kind of work you really want to do.

This replaces the earlier language of “—and when federal law discouraged Social Security recipients from working past their full retirement age,” which you raised a question about in your email.

This refers to the way the Earnings Limit worked in earlier decades compared to now.  Until about 20 years ago, it applied to your entire retirement years.  Your SS benefit would be reduced by $1 for every $1 you earned above a very modest income limit—potentially reducing your benefit to zero. That Earnings Limit still exists, but only until you pass your Full Retirement Age.  After your FRA, there is no earnings limit that reduces your benefit.  Granted, you might pay income taxes on a portion of your SS if your income is high enough, but that is not as much of a disincentive as the earnings limit.

If you think the reference is still problematic, it could be taken out altogether with the sentence ending before the dash.