Sunday, January 22, 2012
Ever Consider Semi-Early Retirement?
One of my biggest goals in life is to have the freedom to retire early in life, if I so choose. I plan to be financially independent by 40 years old, earning passive income from investments I'm making now. I've said many times in the past that this is no noble goal, and may not necessarily be a better way to live than someone who chooses to spend most of their money "living for today". There is no doubt that I am delaying gratification. But, what if there was a way to balance earning yourself more time and living in the moment? What if you could have significantly more time to do the things you'd like, but not have to sacrifice for years on end toward that goal of more time? This is where the idea of semi-early retirement comes into view.
What is semi-early retirement?
My take on this idea is that one would try to amass a significant asset base that can generate passive income, but not have to work so long, and live so frugally, so that the passive income exceeds 100% of known expenses. For instance, generating 50% of your expenses with passive income may be what you want to target here. In order to pay the rest of your expenses you work part-time, take on intermittent projects, perform consulting work on a need-to basis or even try to find work you really enjoy for a reduced income. This plan could allow you to reach some of your goals much earlier in life and perhaps earn yourself significant flexibility without having to delay gratification too far into the future. The asset base not only provides you a source of passive income in these examples, but also provides a "cushion" just in case things do not go as planned.
Why consider this idea?
The idea of semi-early retirement or "partial financial independence" could provide you the flexibility to have a lot more time on your hands to spend with loved ones, relax at the beach, build things, write a novel or whatever else you want to do with your time. Perhaps even some of these hobbies would produce some kind of small income. That would be even better. This flexibility could come much earlier in life than if you were to try and aim for passive income that meets 100% of expenses. In exchange for gaining access to this type of flexibility earlier in life you would have to find a way to pay for any expenses your passive income does not cover.
Let's take a look at my own situation
My income and expenses have been well documented on this blog. My expenses average somewhere near $1,200 a month. In order to generate passive income that meets this expense level, I'd have to have $360,000 invested at a 4% safe withdrawal rate. $360K is a lot of money, and with my middle class income and savings rate I'd need at least ten years to build a portfolio of that size. My journey, as it stands, is planned out to be a 12 year journey starting from 28 years old and ending at 40. But, what if I could cut that journey in half?
Let's say I only want to cover half my expenses with passive income. That means I'd have to have $180,000 invested, at a 4% SWR, in order to generate $600 per month of income. Based on what I have now, I could likely reach that figure in less than five years. At that point, I'd only need to earn $600 per month from outside sources, such as paid part-time employment. I know that the unemployment rate is historically high, but earning $600 per month shouldn't be terribly difficult. Even in this environment, part-time employment providing that type of income should be relatively easy to find.
What does it all mean?
Having a portfolio that provides passive income to meet half my expenses in less than five years from today means that I could potentially get away from the grueling 50 hour workweek I have now and move into something that I might enjoy quite a bit more with a much less demanding schedule. That means at 35 years old I could potentially work 20 hours per week or less for the rest of my life. Or, perhaps I could work seasonally...or just work really hard for 3-4 months per year. This could provide me significantly more personal time than I have now.
One reason one might want to consider this idea is the likelihood you might get bored once you reach early retirement. Being retired at an extremely young age will likely put you in a precarious position. You'll likely be home when all your friends and family are at work. Fighting boredom might be something that will be a daily battle, and something that you might not be used to. And, if you do find yourself bored what are the odds that you look for some type of paid employment? Paid employment, at the point of early retirement, will provide you with not only a way to fight boredom but also as a method to acquire additional income to fund some of the desires you may have above and beyond living frugally.
If you're the type of person that will be extremely bored without employment, the argument could be made that early retirement of any form is probably not something that you're going to seek out anyway. The flip side of that coin is that you likely do not know how you'll respond to early retirement until you're actually there. If you think it's likely that you'll seek out some type of part-time income source even if your investments provide you more than 100% of your expense level, then maybe getting out of the rat race early and doing something that provides you more flexibility might not be a bad idea. Basically, if in the end you're going to work part-time anyway, and it's a foregone conclusion, should you not skip ahead to that conclusion? It's an interesting question. It's also something that I don't really have an answer for.
Partial Financial Independence
Although semi-early retirement isn't something that's talked about often, the idea of being able to work part-time indefinitely might be something that's attractive to some. The idea of this partial financial independence gives you flexibility as to what kind of employment you choose to engage in, gives you flexibility to choose your own schedule and gives you a lot more time to spend on personal interests. You get most of the rewards of early retirement, but much earlier than you would be led to believe possible.
Will it work for you?
This lifestyle wouldn't work for all. But, if you're already living fairly frugally, are aiming for retirement extremely early in life, do not identify yourself through your job, do not particularly enjoy your career and/or the time it requires to be proficient at it, would love more time than you currently have, are a flexible and open minded person and willing to work extremely hard for 5-10 years of your life this might be an idea to consider.
What about you? Ever consider semi-early retirement?
Thanks for reading.
Photo Credit: digitalart