When you picture your retirement, what comes to mind?
You might envision yourself relaxing on a beach, spending time with family, traveling the world, or participating more in your favorite hobbies. It’s an exciting vision of a luxurious, enjoyable life.
However, not everyone is excited about the idea of retirement. Some people don’t like the idea of leaving work or being forced out of the workplace. Some people are anxious or concerned about outliving their savings. And some people just don’t like the idea of retirement in general.
If you find yourself among one or more of these groups, a full retirement may not be the right move. Instead, you might consider a soft retirement.
What Is a Soft Retirement?
A soft retirement, also known as “semi-retirement,” doesn’t have a standard definition. Generally, a soft retirement has at least some similarities with a full retirement, but there are specific limitations that prevent it from being categorized as a traditional retirement.
For example, instead of leaving the full-time workforce, you might go down to part-time, working 20 hours a week in a position identical or similar to what you held before. You can enjoy your free time and still stay connected to the career you’ve held for years.
You could also leave your job entirely, officially retiring from it, and seek alternative work. Depending on your priorities and skills, that could mean switching to a totally different field, going back to school, or accumulating a collection of different side gigs.
During this time, you may or may not make traditional retirement moves, like withdrawing from your retirement accounts, collecting social security, and tackling old bucket list items.
Why Consider a Soft Retirement?
Today’s working world is rapidly changing, and it’s leading to some exciting developments. Generative AI is completely transforming multiple industries, and business leaders all over the world are scrambling to take full potential of it (and stay ahead of their most powerful rivals). If you’re interested in helping your business evolve during this transformative time, or if you just genuinely like the work you do, you may want to stay in the workforce. For most people, retirement is an excuse to stop the drudgery of work, but if you don’t consider your work to be drudgery, this doesn’t apply to you.
Delaying social security payments.
You’re technically allowed to retire as early as age 62, but if you retire this early, you’ll see a massive reduction in your Social Security benefits. Each year you delay your official retirement, you’ll see an increase in your benefits payments. The most significant benefits become available to you at age 70. If you’re currently in your early 60s, and you like the idea of having more social security income, you may choose to strategically delay your retirement. At the same time, you may not have the energy or desire to remain in the full-time workforce. A soft retirement is an intermediary step that can help you achieve your goals.
Maximizing retirement account contributions.
For some people, soft retirement is an appealing option because it allows them more time to maximize their retirement account contributions and accumulate wealth. This is especially valuable to people who have a late start with their retirement savings. There’s a maximum limit to how much you can contribute to each type of retirement account in a given year; this limit increases with age, but if you’re significantly behind on retirement savings, you may need more time to reach your financial goals.
Increasing current and future income.
When you formally and fully retire, two important financial things happen: you typically start withdrawing from your retirement savings, and you no longer have a sustainable source of income. This one-two punch immediately starts reducing your wealth or hinders your potential wealth growth, but you can stave off both effects by remaining in the workplace. Even working part-time, you may make enough money to cover all your basic living expenses, and your wealth can continue to grow.
Preparing for the transition.
In retirement, many people struggle with depression and other mental health ailments. Pathways, a Utah addiction and rehab recovery center, points out that while not everyone with depression has the same experience, it is common to experience overlapping warning signs. After leaving the workforce, many people struggle with a lack of purpose, and they don’t feel as fulfilled as they used to. If you spend too much time in isolation, or if the people around you aren’t yet retired, you may feel disconnected and listless.
You may feel bored or directionless in retirement, especially if you haven’t spent much time thinking about what you’re going to do when retirement arrives. If you’re concerned about this transition or just want to take retirement for a kind of test drive first, soft retirement could be a great move.
There aren’t any rules or restrictions here. You can choose a soft retirement just because you want to or because you’re feeling indecisive.
Financial Considerations for a Soft Retirement
To make a better decision, there are several financial considerations you should bear in mind:
Retirement Savings
One of the most important factors you’ll need to consider is your retirement savings. The historical recommendation has been the 4 percent rule, which stipulates that you should only withdraw up to 4 percent of your principal each year to avoid outliving your retirement savings. Using this calculation, you can quickly ballpark whether you have accumulated enough retirement savings to fully fund your retirement.
For example, if you have $5 million in assets, you should be able to comfortably withdraw $200,000 every year – which should be more than enough to cover all your needs and wants. But if you only have $500,000 in retirement savings, this rule would stipulate that you can only comfortably withdraw $20,000 every year – which probably isn’t enough, even if you have other sources of income. If you aren’t satisfied with your current retirement savings, you should feel some pressure to consider a soft retirement. During your soft retirement, you’ll still be making money, you’ll still be able to contribute to your retirement savings, and you’ll have more time to grow your wealth.
Liquid Savings
If you plan on retiring or soft retiring early, you’ll also need to consider the amount of liquid savings you have. Certain retirement accounts are going to be inaccessible to you until you reach a certain age, and you won’t be able to capitalize on social security benefits until you reach at least age 62. Even if you have ample retirement savings, retiring early may be a bad idea if you want to avoid early withdrawal penalties. On the other hand, if you have seven figures of liquid or semi-liquid savings and additional retirement savings, a full early retirement is a legitimate possibility.
Income
In the future, where will your income come from? Do you plan to rely on a pension, proceeds from your retirement accounts, social security, an annuity, or some combination of these? And how much current income are you making? How much would you be able to make if you were working part-time or working in a different field?
If you don’t have ample retirement or liquid savings, but you could feasibly make plenty of money by remaining in the workforce, a soft retirement could be the perfect solution.
Expenses
And, of course, you’ll also need to consider your current and future expenses. Many people plan to reduce their expenses in retirement, downsizing their lifestyle considerably, but this isn’t the case for everyone. You may be able to fully retire if you move to a smaller house or make some lifestyle cuts, but if you want to maintain the lifestyle you currently have, a soft retirement is a preferable option.
Also, if you’re concerned about your medical expenses or other expenses increasing as you get older, you may want to spend more time making money and accumulating savings.
Non-Financial Considerations for a Soft Retirement
There are also some non-financial considerations that you should weigh in your decision:
Career Enjoyment
About half of people are truly satisfied with their jobs. And some people are practically obsessed with their jobs. If you find yourself in one of these groups, and you genuinely enjoy the work you do, you may not care about your retirement savings or what your life would look like in retirement. Your main priority is continuing to do the work that you love. This is a totally subjective factor, but it’s arguably one of the most important to consider if you’re debating the merits of a full retirement or soft retirement.
Career Flexibility and Options
You should also think about your career flexibility and the options available to you. Depending on your position, you may be able to preserve your favorite responsibilities or transition to a role with even more preferable responsibilities. But you also might find yourself in a less favorable position. And if you leave this position for the sake of retirement, even a soft retirement, there may not be a position waiting for you if you ever decide to return. If you’re totally open to new career possibilities, or if you like the idea of tinkering with many different side gigs, a soft retirement may look especially appealing to you.
Retirement Plans
Do you have any plans for what you will do when you retire? Some people want to learn something new. Alternatively, some people want to spend more time socializing with loved ones and new people. Some people want to travel or engage in their favorite hobbies.
If you have a clear plan for what you want to do in retirement and are genuinely excited about it, a full retirement may be for you. But if you’re not sure what you want, a soft retirement could give you an opportunity to dip your toes in the water and see what retirement feels like.
Health and Wellbeing
You may also want to consider your health and well-being. If your work is stressing you out, but you can’t afford to fully leave, a soft retirement could be a viable option to reduce your workload without overburdening yourself financially. Additionally, if your health is declining and you’re concerned about medical expenses, a soft retirement could give you more time to accumulate savings to cover those costs. If you’re concerned about depression or feeling directionless in retirement, maintaining at least some work could mitigate those risks. And if you feel totally confident in your health and wellbeing both in the workplace and out of it, almost any option could make sense.
Are There Any Risks of a Soft Retirement?
What about the risks and downsides associated with a soft retirement? Is there anything you should be cautious about?
Because this is a flexible, hybrid arrangement, you can usually optimize it to work in your favor. But there are some things that can go wrong. For example, if you choose to step down from a position, and that position gets filled by someone else, you may not be able to return to it. If your soft retirement includes dipping into your retirement savings, and you haven’t adequately financially prepared, it could significantly reduce your nest egg or jeopardize the sustainability of your retirement.
Also, the younger you are, the riskier an early retirement is – even if it’s a soft retirement. Being younger puts you further away from tapping into your retirement accounts penalty-free, further away from social security payments, and in line for more potential economic issues that can impact your savings and income.
The Big Picture
Soft retirement is a way of getting some of the perks of retirement without committing to a full, traditional exit from the workplace. There’s considerable flexibility in how you execute a soft retirement, so as long as you thoroughly think this decision through, you can likely find a path forward that satisfies all your wants and needs. There are many financial and practical considerations you’ll need to keep in mind. Still, if you’re intimidated by a full retirement or if you’re dreading retirement life, soft retirement may be the perfect solution.
Featured Image Credit: Photo by Anna Shvets; Pexels; Thank you.
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