Things You Must Know About the Concept of Semi-Retirement

The semi-retirement concept has gained immense popularity in recent times. Semi-retired life is becoming popular because of changing work dynamics, lifestyles, preferences, and increased life expectancy. As per a 2019 survey known as ‘Older People in the Workforce’, conducted by United Income, it was found that more than 20% of people above the age of 65 are either still employed or searching for work. The semi-retirement trend has been steeply rising since 2016. According to a 2016 survey by Pew Charitable Trust, 66% of the respondents worked post the official age of retirement (65 years). That said, irrespective of whether you want to willingly work post-retirement or have to do it forcibly, it is important to understand the concept of semi-retirement in detail.

Here are some things you must know about the concept of semi-retirement:

What constitutes semi-retirement?

Semi-retirement is a very subjective term. Generally, it means to work in a lower capacity than usual to make time for other pursuits in life. For some, semi-retirement includes lessening their working hours. While for others, it could be to take up a part-time job, work from home, consult, or venture into a business idea, etc. However, semi-retirement should be financially sustainable. Investments can be used to fund current expenses partially but in a manner that they are also able to provide for your future non-working years.

That said, there is no specific age for semi-retirement. However, most people consider opting for partial retirement beginning from the age of 40. But the timing depends on the individual and is affected by core values, goals, financial situation, tax-planning, career objective, and more.

What are the advantages of semi-retirement?

Semi-retirement can provide a host of advantages, some of which include:

1. More financial independence
2. Better finances and opportunities to maximize retirement savings
3. Opportunity to minimize federal income taxes
4. Chance to reduce capital gain taxes
5. Prospect to maximize Social Security benefits
6. More time to focus on other pursuits in life apart from work
7. Ability to contribute to society
8. Enhanced activeness and social life

How does semi-retirement impact your income tax?

A major reason fuelling the popularity of semi-retirement is its tax advantage. Generally, when you semi-retire, you are either working for fewer hours, employed part-time, or have a small business. According to the IRS (Internal Revenue Service), self-employed retirees are small business owners. As per this threshold, the reforms made by the Tax Cuts and Jobs Act (TCJA) in 2017, considerably reduced the taxes for the semi-retired. Each tax slab was reduced by 2%, and the corresponding tax brackets were broadened. Hence, you would fall in a lower tax bracket due to less income than before. This implies that each extra working hour fetches more after-tax income.

Additionally, as a semi-retiree, you are at a more advantageous position in terms of tax deductions. As per the law reforms of 2017, the standard deductions for those not filing for itemized subtraction was increased to $24,000, $18,000, and $12,000 for married, head of household, and another filing status, respectively. Also, the standard deductions for older people were made more beneficial. So, if you are 65 years or above (single or head of household), you can increase your deductions by $1,650. On the other hand, if you have a married filing status or if your spouse is 65 years and above, the standard deduction can increase by $1,300. This tax benefit accrues to semi-retirees because of lower incomes and increased reductions by a specific amount. As per the new IRS law, an additional exemption of 20% is granted to small business owners, provided they meet specific terms. That is not all, if you choose to opt for semi-retirement, you can also deploy effective strategies to cut taxes on capital gains and qualified dividends.

Alternatively, in case you semi-retire but earn more due to retirement income and part-time job earnings, you could fall into a higher tax bracket. But adjusting work hours and managing your withdrawals from the 401(k) retirement savings account can help avoid the burden of taxes.

What is the effect of semi-retirement on your Social Security benefits?

Semi-retirement has a very positive influence on your Social Security benefits. Typically, in a semi-retired life, you would be engaged in work in some capacity. Hence, there would be a flow of consistent income to support your existing lifestyle. This would imply that there is no urgent need to withdraw your Social Security funds before you are eligible. The advantages of delaying Social Security withdrawals are significant. Lawfully, you can begin collecting your Social Security benefits from the age of 62. But delaying withdrawal and keeping the money in the account, can enhance savings. The longer you can postpone your withdrawals, the larger the monthly benefits will become. For instance, if you take withdrawals at your official retirement age (66 years), you would be eligible for 100% of the monthly benefit. But if you withdraw even one year post the official retirement age (67 years), you can get 108% of the monthly benefit. Moreover, if you defer your benefits until 70 years, you get 132% of the monthly advantage.

That said, in case you fail to postpone withdrawing your Social Security benefits, and instead opt for early withdrawals from the account, the semi-retirement strategy would completely backfire. If you take your Social Security benefits before the official retirement age and continue to work and earn more than $18,240 in 2020, your monthly benefits will be reduced by $1 for every $2 exceeding the upper limit. This reduction will continue until you reach your full retirement age.

How does semi-retirement alter your healthcare plan decisions?

Another thing to keep in mind about semi-retirement is its impact on healthcare costs and related decisions. Often, it is assumed that Medicare is free and reimburses 100% of medical expenses. But that is not completely correct. Medicare sponsors hospital and medical care for people above the age of 65 or those disabled before the official retirement age. Since you can only become eligible for Medicare when you retire at 65 or later, you would need to figure out your healthcare costs and plans if you choose to semi-retire earlier. For instance, in the case of semi-retirement, you would need to pay for dental insurance, eye or hearing aids, and long-term care. According to a HealthView Services report, a healthy person retiring at 55 years is most likely to spend $13,165 in yearly medical costs by the age of 65. The cost of healthcare goes even higher if the retiree has an underlying medical condition, such as diabetes.

On the positive front, if you are retired but are still working in some capacity, you can apply for company-sponsored healthcare plans. Then as per the chosen plan, you can opt to delay Medicare Part B and D (outpatient procedure expenses and prescribed drugs, respectively). But because semi-retirement can considerably alter your healthcare plans, it is best to take this decision with utmost prudence.

To sum it up

With more than one-third of Americans working after retirement, the trend of semi-retirement is growing stronger by the day. Generally, semi-retirement is a very effective strategy, provided it is executed at a later age, and after holistic deliberations of all factors to maximize advantages and minimize disadvantages.

You can gain deeper insights and make the most of your semi-retirement by consulting professional Financial Advisors.