Are you ready to leave your job, ride off into the sunset and devote time and energy to more personally meaningful pursuits?
If you answered yes but are still 20 to 30 years away from a traditional retirement, you may want to consider taking a “mini retirement.”
Unfamiliar with this concept? Author Tim Ferriss created and defined it in his book “The 4-Hour Workweek.” Essentially, mini retirements are a series of intentional breaks throughout your career, rather than one final retirement after a life of labor. This is different from a sabbatical or unpaid leave. We’re talking about a clean break from your employer, followed at a later date by reentering the labor market or maybe starting the business you’ve always dreamed of having.
Sounds exciting, right?
Well, before taking the plunge and drafting your resignation letter, it’s important to understand that mini retirements are not without drawbacks. Financial barriers usually represent the biggest obstacle, as taking six months to a year out of the labor market is expensive and requires significant planning. It can take years to save and pay down enough debt for a mini retirement to be financially feasible. But if you’re enamored with the idea, here are some considerations.
First, you need to have a solid understanding of your budget. This includes housing costs, utilities, food, transportation, insurance and debt service, among others. Debt can really put a damper on mini-retirement goals, since payments related to student loans, auto loans and credit cards tend to have a major impact on cash flow. Before embarking on a mini retirement, you should work to pay off debts that require substantial payments each month. Being debt-free is the ideal scenario.
Budgeting, frankly, is the easy part. The real challenge is saving enough funds (in addition to long-term retirement savings) to pay for a mini retirement. This can take years of dedication and discipline to accomplish. Those who have gone down the path before recommend setting aside 30 percent to 40 percent of your income just for a mini retirement — a noble but challenging target. For most people this would require substantial changes to their current standard of living.
Another significant hurdle is finding and affording health insurance. In several states private insurance is no longer available, leaving healthcare.gov as the only option.
To that point, the average premium for single-coverage health insurance now stands at $440/month ($5,280/year), according to the 2018 Health Insurance Price Index Report from ehealthinsurance.com. A family that needs coverage is faced with an average premium of $1,168/month (more than $14,000/year).
To make matters more complicated, these figures represent only the monthly premiums for what are often high-deductible plans. The average deductible stands at $4,578 for an individual and $8,803 for family coverage. Being healthy goes a long way toward keeping mini-retirement costs down, so keep taking those daily vitamins.
While mini retirements can be expensive, you could be on your way with proper planning, a solid budget and aggressive savings. However, there’s a big cost to not saving during crucial early working years.
An individual making $60,000 a year and saving 10 percent of his or her income for retirement (with an additional 3 percent employer contribution) can expect to have around $1,207,143 after 40 years of saving, with a 6 percent average rate of return. Taking just one year off after only five years of working can reduce your nest egg by as much as $56,000. However, taking a year off after 15 years of saving reduces the long-term impact to $31,000. Missing those critical early years of saving is much more costly.
The real sticker shock comes from looking at what your mini-retirement funds could grow to if they were instead invested for the future. Let’s assume you aggressively save for a mini retirement and set aside $30,000 for this venture at age 35. Alternatively, if you invested that savings for the next 30 years (until age 65) with a 6 percent average growth rate, the $30,000 would increase to $172,304. Looking through that lens, the cost of a mini retirement can be quite high.
If you’re committed to the idea of a mini retirement, you should work to establish a passive income stream to improve the likelihood of accomplishing your goal without damaging your financial future. Examples include rental or investment income. Even turning a hobby into an income stream can go a long way toward making a mini retirement more financially feasible.
Another increasingly popular option is early retirement. It’s part of the so-called FIRE movement, which stands for “financial independence, retire early.”
If you find yourself in the fortunate position of being able to save 30 percent to 40 percent of your income, it’s possible you could fully retire and be financially independent in your 50s or even sooner, perhaps in your 30s or 40s. This alternative could be more desirable than a mini retirement, depending on life stage, family and career path.
Mini retirements are obviously less about maximizing your 401(k) plan at age 65 and more about achieving life goals and pursuing passions. That said, those considering mini retirements should weigh the long-term costs versus the short-term benefits.
Such lofty goals are rarely accomplished by accident, so reach out to an experienced financial professional to help you navigate the process.
— By Billy Lanter, fiduciary investment advisor at Unified Trust Company