Thinking About Semi-Retirement? What You Need to Know
Whether you need time to rebuild your nest egg, or you want to ease into full retirement, some financial planning can make the transition a smooth one.
For those on the verge of retirement, last year’s market selloff was sobering. With stocks and bonds down sharply, you may be thinking that you need to stay on the job to rebuild your nest eggs. Fortunately, when it comes to retirement, there is a middle ground: semi-retirement. More people are embracing it as an option.
Semi-retirement allows you to keep working, but perhaps not as intensely as you did previously. It also allows you to spend more time on activities you enjoy, like volunteering or traveling.
If done right, semi-retirement can be beneficial both psychologically and financially. It gives you a chance to take a step back and ease into retirement rather than plunging in cold turkey. It also creates an opportunity to build retirement savings while putting off the need to collect from Social Security or make withdrawals from investments.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Different Ways to Approach Semi-Retirement
Some may semi-retire by continuing their current job for fewer hours. Or, alternatively, many go off on their own as consultants or start a one-person business. For the latter group, there are a few important financial planning decisions to consider that will make the transition a smooth one:
Self-employed status comes with benefits and obligations. Self-employed individuals can deduct business expenses on their Schedule C tax form. Those expenses could include travel, phone bills, home office costs and premiums for health care and long-term care.
When it comes to tax obligations, self-employment tax rates are 12.4% for Social Security on net earnings up to $160,200 and 2.9% for Medicare on total net earnings. However, half of that self-employment tax is deductible.
Reduced income can provide a planning opportunity. For individuals who haven’t started taking Social Security or required minimum distributions (RMDs), the reduced income from a semi-retirement may ultimately put them in a lower tax bracket. This provides opportunities, such as taking some income out of a traditional individual retirement account (IRA) at a lower tax rate or doing a Roth IRA conversion.
Continued employment will affect the timing of when retirees take Social Security. Trying to collect Social Security before full retirement age is problematic if you also have earned income. The Social Security Administration will withhold $1 in benefits for every $2 you earn over the earnings cap, which is $21,240 in 2023.
If you have benefits withheld before reaching full retirement age, you will recoup them once you hit full retirement — you’re just simply limited on how much Social Security you can collect in those years.
Self-employed individuals can continue to contribute to a retirement plan. There are two types of retirement plans from which to choose: a SEP IRA and a solo 401(k). Both allow you to contribute a substantial amount toward your retirement, but there are subtle differences to note between the two.
A SEP IRA is somewhat simpler to set up and can work if you are the only employee or if you employ others. A solo 401(k) works best if you or you and a spouse are the only employees. A solo 401k allows you to take a loan against the plan, and there is the option to contribute on an after-tax basis to a Roth; a SEP IRA does not offer these features.
Additionally, SEP IRA contributions are viewed entirely as employer contributions, and in 2023, the maximum allowable contribution amount is $66,000. Solo 401(k)s are funded with a combination of employee and employer contributions, and those over 50 can add an additional $7,500 as a catch-up contribution, for a combined total of $73,500. An adviser can help you decide which plan is a better fit.
Semi-Retirement Can Serve as a Transition to Full Retirement
For some, semi-retirement can last a long time and serve as a second leg of a career. But that is often the exception to the rule. Most use it as a transition period to connect work and retirement, as that allows you to keep working while exploring what you may want to do when you completely retire.
At first, filling up all your hours in retirement may seem daunting. But after a few years, you’ll find yourself comfortable sliding into the next phase of life. Semi-retirement can be both enjoyable and financially gratifying — a nice, rewarding combination.
-
How to Avoid Medicare Late Enrollment Penalties ForeverWhether you are still working or planning to retire this year, understanding the 2026 late penalties for Parts A, B and D is essential for your financial health.
-
The New Fed Chair Was Announced: What You Need to KnowPresident Donald Trump announced Kevin Warsh as his selection for the next chair of the Federal Reserve, who will replace Jerome Powell.
-
Ask the Tax Editor: Taxation of Social Security BenefitsAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on the taxation of Social Security benefits
-
6 Key Ways to Plan for Financial Success in 2026 (and Avoid a Portfolio 'Death Spiral')Use last year's tax data to help guide you as you consider this year's taxes, asset allocation and sources of the regular income you'll need in retirement.
-
A Financial Plan Is a Living Document: Is Yours Still Breathing?If you've made a financial plan, congratulations, but have you reviewed it recently? Here are six reasons why your plan needs regular TLC.
-
Your Guide to Financial Stability as a Military Spouse, Courtesy of a Financial PlannerThese practical resources and benefits can help military spouses with managing a budget, tax and retirement planning, as well as supporting their own career
-
3 Steps to Keep Your Digital Data Safe, Courtesy of a Financial PlannerAs data breaches and cyberattacks increase, it's vital to maintain good data hygiene and reduce your personal information footprint. Find out how.
-
Here's Why You Can Afford to Ignore College Sticker PricesCollege tuition fees can seem prohibitive, but don't let advertised prices stop you from applying. Instead, focus on net costs after grants and scholarships.
-
Today's Senior Living Communities Are Not Your Grandma's 'Old Folks' Home': An Expert Guide to Shopping for the Right FitSenior living facilities have improved and are as diverse as the people who inhabit them. Now, they're more than just a place to go — they're a place to grow.
-
3 Common Misconceptions About Working With a Financial PlannerThink financial planners are only for the wealthy and that AI can replace human advice? Nope. Even people with moderate wealth need professional advice.
-
Should You Consider Investing in the Quantum Computing Sector? This Investment Adviser Has Some SuggestionsInvestors interested in quantum computing could consider ETFs focused on cloud services enabling small businesses to use big technology.
