Ready to Take the Plunge into Semi-Retirement? Here’s What You Need to Know.

The stock market crash of 2017 was a wake-up call for people nearing retirement age. After seeing your savings dwindle due to the recent declines in the value of stocks and bonds, you may feel compelled to hold on to your employment until the market recovers. Thankfully, there is a compromise when it comes to retirement: semi-retirement. There has been a recent surge in the number of people considering this alternative.

Under a semi-retirement arrangement, you continue to work, albeit at a reduced rate. Because of this, you’ll have more spare time for things like volunteer work and vacations.

Semi-retirement and monetary rewards can be maximized with careful planning. It’s a way to ease into retirement instead of jumping headfirst into it. It also provides an opportunity to save for retirement by delaying when one must begin drawing down their investments or Social Security.

Other Strategies for Transitioning into Retirement

Some people may “semi-retire” or work in their current employment but for fewer hours. Many people also choose to go out as consultants or launch their own solo ventures. There are a few critical financial planning decisions that the latter group should make to ensure a seamless transition:

There are perks and burdens to having the status of a self-employed person. Schedule C of the IRS tax return is where self-employed people can deduct their business costs. Travel expenditures, phone bills, the price of setting up a home office, and medical and long-term care insurance premiums are all examples of this kind of expenditure.

Self-employed individuals must pay 12.4% of their net earnings (up to $160,200) into Social Security and 2.9% into Medicare. The good news is that you can write off half of your self-employment tax.

Taking advantage of the breathing room that a drop in income can afford is essential. Reduced revenue from semi-retirement may place persons in a lower tax rate if they have not yet begun claiming Social Security or RMDs. One possibility is to convert a portion of a traditional IRA to a tax-free Roth IRA or to withdraw income from an IRA at a lower rate.

When retirees begin collecting Social Security benefits depends on whether or not they continue working. Prematurely claiming Social Security benefits while still working can create financial difficulties. If your annual earnings exceed $21,240 in 2024, the Social Security Administration will withhold $1 from your benefit check for every $2 in excess earnings.

The amount of Social Security benefits you can receive before you reach full retirement age will be restored to you once you reach full retirement age.

Those who are self-employed can still put money into a retirement plan. A SEP IRA or a solo 401(k) are two options for retirement savings (k). While both plans let you put away a lot of money for retirement, there are some important distinctions to remember.

A SEP IRA requires less paperwork and can function whether you’re the only worker at your company or one of several. If you or your spouse are the lone workers at your company, a solo 401(k) might be the best option. When comparing solo 401(k) plans to SEP(IRA) plans, it’s important to note that the former allows you to borrow money from the plan, while the latter gives you the option of making after-tax contributions to a Roth(i).

Additionally, the maximum contribution amount to a SEP IRA is $66,000 in 2024, and these funds are treated solely as employer contributions. A Solo 401(k) can be funded with employee and employer contributions, plus a catch-up contribution of $7,500 for people over 50, for a total of $73,500. Confer with a financial advisor for assistance in selecting the best plan.

Semi-retirement can be a stepping stone to a full retirement when adequately planned.

Some people’s semi-retirement periods are decades lengthy and function as a second career. This, however, is a rare case. Most people utilize it as a bridge between their working years and retirement to continue earning money while considering their options for when they stop working permanently.

Though it may seem frightening initially, retirement is a great time to try new things and fill every spare moment. You may feel a little uneasy about the transition, but you’ll be ready to move on in a few years. Enjoyable and financially lucrative, semi-retirement is a win-win situation.