6 Things You Need To Consider for a Partial Retirement Strategy

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After working for decades on end, retirement can seem like a sudden shock. In an instant, you’ll lose your social contacts at work, your salary will fall to zero and you’ll have an immense amount of free time on your hands.

For some retirees, going from 100 to 0 like that overnight can be overwhelming. This is why the idea of partial retirement is gaining momentum. Phasing out your transition from work life to retirement can be easier to handle, and it gives you a longer runway to adapt to your new post-work reality. 

But before you embark on this type of strategy, it pays to have a road map of things to look out for. Although the changes might not be as dramatic as if you immediately went into full retirement, there are still many factors that you should consider that could affect your quality of life, not to mention the sustainability of your nest egg. Here are the most important things you need to think about when considering a partial retirement strategy.

Also see the downsides of retirement that no one talks about. 

Impacts on Social Security

Whether you retire early or slowly reduce your workload until full retirement age, it’s going to impact your Social Security retirement benefits. Assuming you already have the 40 quarters of coverage necessary to receive benefits, it’s important to check with the Social Security Administration to see how earning less in the years up until retirement can affect your benefit. 

The SSA has an excellent tool at ssa.gov that allows you to plug in your estimated earnings for the rest of your work career to see how it would affect your benefit payouts at age 62, 67 and 70, along with your spousal benefits, if applicable.

Remember that your Social Security benefit is determined by the amount you earn in your 35 highest-earning years, along with the age at which you file. If you start earning less in the years before you fully retire, you may see a reduction in your future Social Security checks.

Tax Brackets 

One of the benefits you might reap by lowering your income on the way to full retirement is a drop in your marginal tax rate. If you’re a single filer in 2023, for example, you’ll be in the 32% tax bracket if your income is above $182,100 but only the 22% bracket if your income falls below $95,375. The combination of a falling income and a reduced tax bracket will result in a much lower tax bill.

Budget & Spending Patterns

A good budget balances out income and expenses. As your income will likely fall during a partial retirement strategy, you’ll have to rework your budget so your new income and ongoing expenses remain in balance.

Realize also that with increased time on your hands during a partial retirement your expenses will likely go up. For example, you might spend more on travel or transportation as you visit friends or family or see the world. Or, if you’re more of a homebody, you might invest more into your hobbies or increase your streaming subscriptions.

Regardless of how you spend your time, your income and expenses are likely to need some level of readjustment as you transition toward retirement.

Retirement Plan Withdrawals

If you’re over age 59½ and your reduced income isn’t enough to cover your expenses, you might have to consider taking withdrawals from your retirement plan.

While helping to balance out your budget, there are a few negatives you’ll have to factor in when considering this option. First, your retirement plan distributions are likely to be fully taxable, meaning your tax expense will increase and you won’t get to use the full amount of your plan balance. Second, drawing down your nest egg while still relatively young increases the chances that you’ll outlive your money. 

Imagine that in your first year of partial retirement, say at age 60, you take a $24,000 withdrawal from your IRA or 401(k) to supplement your reduced income. If you had instead left that money in your account and earned a modest 6% return until age 80, it would have grown to almost $80,000.

While you may think you need that money now, weigh your current needs against the benefit of having an additional $80,000 to use once you’re 80 years old. 

Healthcare

Healthcare is typically one of the three biggest expenses that retirees face, so it’s important to plan for it, especially if you’re retiring early or starting partial retirement.

Medicare doesn’t kick in until age 65, so it’s important to ensure that you’re covered until at least 65. Even then, many retirees maintain their own private insurance as well to cover any gaps in Medicare coverage.

Geo-Arbitrage

A buzzword that has been making the rounds in recent years is “geo-arbitrage.” Originally named by Tim Ferriss, author of the popular “Four-Hour Workweek,” it has taken off with the rise of the “Financial Independence, Retire Early” (FIRE) movement and the increasing number of digital nomads.

The concept involves moving to an area of lower expenses while maintaining or increasing your level of income, but it also can apply to those phasing into retirement. Simply moving to a more affordable area can reduce your expenses to the level that you can improve your standard of living even while your income is falling. This can be accomplished by a move from Los Angeles to Dallas or Memphis, for example, or even to Thailand or Portugal if you’re more adventurous. 

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