When can you pretire?

leaf sprout
Introduction:

Great news for the FG ROI clan this week… my brother and his wife had their first baby!  Big ups to the proud new parents!! ;)

So their new bundle of joy got me thinking about what kind of life I want to have when I have young one/s running around.  I would like to be able to retire by the time my kids start grade school so that I can be an attentive and involved parent, but quitting work in 6 or 7 years is basically out of the question given our current trajectory (more on the math of early retirement here).

However, we should have a decent-sized nest egg by that point, and a second best option would be to transition to a part-time career where it would be much easier to balance work and family life.  The pay would be lower, but it would hopefully still be enough to cover our living expenses.  It would also mean slowing down or completely stopping retirement contributions, but on the bright side, we wouldn’t have to touch our existing savings, which would continue to grow in the background.

To be clear, the obvious trade-off of pretirement would be a longer waiting period until full retirement, but we’ll get to that below.

A formal definition:

I’ve heard others refer to this one-foot-in, one-foot-out kind of arrangement as pretirement.  My formal definition is as follows:

Pretirement (noun) \pri-ˈtī(-ə)r-mənt\ : a stepping-stone compromise between full-time work and full-time retirement, where retirement savings have been suspended but withdrawals have not yet begun

The numbers:

So when are you eligible to pretire?  It all depends on your current savings and desired retirement income:

imageTo use the chart above, find your current savings along the bottom axis and trace directly up to the colored line that represents how much income you want each year in retirement.  Now trace over to the left-hand axis.  Where are you at… 15 years… 20 years?

This number represents how long you would have to wait to fully retire if you never saved another dime.  And by fully retire, I mean quit work completely and live off your passive investment income without ever having to touch your principal investment.  In other words, this is the anticipated length of your pretirement.

The way I used this was to guess what my total savings would look like in 6-10 years (when my kids are still relatively young).  Then I figured out how long I would have to work part-time if I wanted to pretire during that time.

Here is the table version as well:

pretirment table

Same thing… find your total existing savings and then trace over to your desired retirement income column.  Add this number to your age and you can see how long your pretirement period would probably have to last.

There are a few caveats to this information.  First, I’m assuming a 4% safe withdrawal rate and a 4% real rate of return.  The rate of return assumption might be a little conservative for long-term, inflation-adjusted growth on a stock portfolio while the 4% safe withdrawal rate might be a little aggressive, depending on whom you ask.

The idea behind the 4% withdrawal rate is that you could theoretically maintain it forever because investment growth will cover or outpace withdrawals… your $1,000,000 nest egg never really gets any smaller even though it keeps throwing off $40,000 in passive income per year.

An older retiree could probably sustain a much higher withdrawal rate due to shorter life expectancy because they wouldn’t need their savings to last as long.  Check out this link for more on successful allocation, withdrawal rate, and retirement period combinations.

What I’m cautious about:

Pretirement does come with some obvious risks and downsides.  Some of the main risks include slower investment growth than predicted (stock market does bad) and higher income needs later in life (expensive college, unexpected major life event, increased travel to visit kids/grand kids, etc.).  Depending on timing, there is also the possibility that you end up putting your career on the back burner during your peak earning years, a time when you could really accumulate savings.

You’re also sort of closing the door a bit on the upside chance of being really wealthy, having the kind of money that could maybe double or triple your lifestyle or that you could pass on to your kids, if you’re into that kind of thing.  There is also a little less flexibility in this arrangement versus full retirement, but opting for contract work over part-time work could be a possible solution.

On the whole, the downside risks of pretirement basically amount to a smaller margin of error for retirement planning.

What I like about the idea:

Ever heard the phrase, “it’s a marathon, not a sprint”?  It’s a little like that.  Or it’s a little like “everything in moderation.”

In real terms, keeping one foot in the working world helps keep your skill set sharp in case you ever need to go back to work full-time.  Also, old age is supposed to be pretty grand, but having a part-time gig even when you have enough money to fully retire seems like a nice way to keep you mind sharp and stay engaged.  Why delay what will eventually be the new normal when you retire anyway?

Additionally, there is the chance that maybe you will find more success and/or a clearer purpose in your pretirement working career.  I’m thinking of people who use pretirement as an excuse to start their own business and end up making much more than they did in the past.  This scenario actually seems pretty likely given the reduced stress, increased health, just generally improved well-being that comes from working less.  There is evidence that disposition drives success more than the other way around, so it isn’t crazy to think pretirement would earn you more money and fulfillment, especially on a per hour basis.

crab

don’t let a crabby attitude get in the way of success… set aside a little more time for yourself in pretirement

Another thing, working 40+ hours a week can really wreck your body, even if you’re an avid exerciser during off hours.  More balance and moderation seems like a good thing in both the desk jockey and manual laborer world.  Take care of that body.  And also save money on some transportation expenses with extra time for cheaper modes and fewer office commutes.

And finally, depending on how you time it, you might not need to do any fancy tricks with your tax-advantaged retirement accounts to get the money out early.  Just wait till normal age like most folks and don’t worry about blowing up your tax brackets either.

Conclusion:

For my situation, I think the upside potential outweighs the downside risks.  A lot of people say losing their job was the best thing that ever happened to them because it forced them to pursue a new and ultimately more rewarding path.  I’m hoping for a similar kind of experience with pretirement (minus the pressure to find more work) and of course some more quality time with my family.

So that is the current plan, at least while our kids are young, aren’t embarrassed by us, and still live in the house.  Personally, I think it will be pretty hard to take my foot off the gas when I’m close to the finish line, but unfortunately I’m not in a position to make that choice just yet :)

What do you think?  Would you consider pretirement as a stepping stone or do you prefer a speedier route to full-time retirement?

chameleon

what’s your retirement pace?

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Comments

  1. Dwayne Hoover says:

    Cool post. Looking at the FI charts is a bit depressing because I’m so early in the game. Given that, I’m also eager to explore the numbers underlying pretirement. I’m a little bummed because I’m not yet on the chart (Savings right around 100K). Any way you can add a field? :)

    Seems like these numbers can turn significantly on a couple questions:
    1. Are you going to contribute to the kids college?
    2. What are you setting aside as a monthly healthcare expense for the next 30/40/50 years?
    3. Are you figuring to continue paying off the home, or to kill off the mortgage completely before (pre)tirement?

    • Yep, those questions are super important, all part of the planning how much income you will need in p/retirement.

      For 100k in current savings and never contributing another dime, it would be a 41-year pretirement if you wanted $20k in annual income, 52 years for $30k, 59 years for $40k and so on.

  2. I like your evaluation of adding flexibility to your life. Pretirement certainly adds a great deal of flexibility to life and the potential to get a great deal more enjoyment at every stage than trying to save it as a lump sum to spend “near the finish line”. I hope you go for it. Working on your terms is SWEET. I can’t see myself ever going back to work full time for an employer without some major (read unbelievable) non-monetary incentives.

    • Thanks! I’ve seen you advocate for this kind of flexibility elsewhere, and it really rang true with me. Glad to hear from someone that has actually tried this kind of thing out and is happy with their decision. Big ups on keeping it F2P!

  3. Love the graph! I will only be able to pretire at 60. Then I would like to go down to 3 days per week or maybe 0. We’ll see in 5 years.

    • Thanks! And good luck with your last 5 years of saving… if there’s one thing I’ve noticed about the PF blog community it is that everybody overachieves on their goals; I’m sure you’ll be set for 0 days per week by then. ;)

  4. Visiting from Rockstar Finance. I have been a part-timer since my 25 yo was born, best decision ever. Not exactly pretired, since still contributing to 403, thanks to relatively high paying work. I think I will keep working longer than I would have if full time, not because I need the $, but because I like it more by virtue of having a balance of work and play in my life.

    • Liz, so great to hear! This basically encapsulates everything I would hope for from a successful pretirement. And the fact that you are still able to contribute to 403 makes it that much sweeter. Thanks for sharing-

  5. Samantha says:

    This was a very good article and got me thinking. Right now, I love my job and don’t plan on quitting until we’ve got enough to be FI. However, that may not always be the case and it’s nice to have this tool in the box if I ever need it.

    • Lucky you for loving your job, or good job designing your career that way! A lot of people, in my life at least, continue working part time through retirement because they love what they do.

      I think there is this tendency, especially when a job or career isn’t that fulfilling, to sort of define happiness negatively, as basically the absence of this crappy career once I’m retired (weekend warrior, early retirement fanatic, etc.). My thoughts have wandered that direction from time to time, but lately I feel that this kind of thinking isn’t 100%.

      Leaving a crappy career solves only 1/2 the problem at most; the second half of the problem is figuring out what a fulfilling and purposeful life looks like for you. I think for most people it’s not drinking margaritas and relaxing on the beach all day every day (or reading fiction all day in my case). There is this important element of doing something that you love, something that is productive and contributes to society in one way or another, and that, in my opinion is the tougher and often overlooked part of the equation.

      So props on having the hardest part of the problem solved already and setting yourself up for an early retirement at the same time… I’m envious, but not in a spiteful way ;) Even if you decide never to work another day in retirement, I’m sure that self-knowledge will be a strong compass for whatever you decide to do with the extra free time. Thanks for the visit!

  6. I definitely agree that working 40+ hours long-term is a sure fire way of wrecking one’s health… even with regular exercise.

    As I’m getting closer to early FI myself, I’m getting close to the point where I’m thinking about just asking for reduced hours. That would be a first step towards pretirement… and ultimately, full retirement from the corporate workplace.

    It’s amazing the difference an extra day off can do for mind, body, and spirit!

    Cheers!

    • Great idea. I was thinking along the same lines, especially if we have kids in grade school, working say from 9-3 or about 30 hours per week since they wouldn’t be in the house anyway…. not exactly part-time but definitely reduced hours… There is something nice, however, about having that full day off versus just a bit of time every day.

  7. Interesting, but you’re showing retirement income in future dollars, which most people don’t have an intuitive sense about. Your chart shows that with a current savings of $200K, they could retire in 41 years with an annual income of $40K. While this may be technically true, it’s almost useless.

    What it doesn’t show is that that $40K retirement income will only have the purchasing power of $11K in 41 years (assuming the long term 3.21% inflation quoted here: http://inflationdata.com/Inflation/Inflation/AnnualInflation.asp). This would be a far more useful number to show.

    The *real* answer is that, given your assumptions and average long term inflation, it would take 205 years for someone with current savings of $200K to retire with what feels like $40K in annual expenditures.

    • Gerrat, I’ve already factored inflation into the 4% Growth rate. The common number thrown around for nominal growth on a stock portfolio is 7 plus percent, so taking the 3 percent inflation out leaves roughy 4 percent of real growth. This means the purchasing power of 40,000 is constant across all time periods, so those retirement incomes are actually current 2014 dollars, not future dollars. Thankfully it doesn’t take 205 years to achieve these kinds of savings goals!

      • My apologies. You’re totally right. I realized later that you did say *real* rate of return. Sorry about the noise.

  8. Nat Humphreys says:

    Why does it seem all of these retirement models/discussion presume no taking from principle and address only the interest your holdings will throw off…thus scaring as all to death at the insistence that you’d better have the better part of a million bucks or you’re toast? Who doesn’t take from principle, too? Is the idea to leave the kids rich?

    • Haha, yeah, this is model is definitely biased towards a younger retiree, or at least someone with 30+ years of planned retirement. I do mention being able to sustain higher withdrawal rates for more mature retirees. I think the answer to your question is in three parts:

      One, it is just easier to model without life-expectancy contingencies. Two, I think a lot of people tend to write with a target audience of early retirees (we’ll call this the mr money mustache phenomenon). And three, it just adds a little more buffer for downside risk.

      Mr. Money Mustache has a nice post about the 4% withdrawal rate. One of his points is that a 30+ year retirement isn’t really much different than an infinite retirement in terms of withdrawal rates. So that is another reason I think you see a lot of people modeling on a infinite retirement period. http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

      Thanks for the visit and comment!

    • Also, I found this other link as well. Which illustrates the withdrawal rate vs. retirement period. These calculations are based on a more conservative portfolio of 40% stocks and 60% bonds but you can still see the relationship. I’m sort of surprised personally to see that the curve flat-lines as late as it does, but I imagine it would flat-line earlier with a more aggressive portfolio. Also worth noting that Pfau is an expert and uses 5.5% inflation adjusted stock returns as his default assumption, which really makes my 4% growth seem conservative, which is good (a little extra margin of error).

      Anyway, here is the link – http://www.marketwatch.com/story/sustainable-withdrawals-vs-retirement-duration-2013-07-24

      And the graph – http://ei.marketwatch.com/Multimedia/2013/07/19/Photos/ME/MW-BF703_pfau2_20130719165942_ME.jpg?uuid=25d19c36-f0b6-11e2-922f-002128040cf6

  9. Are the retirement income amounts in todays dollars or future dollars (adjusted for inflation)? 40k in 30 years will be worth 20k in todays dollars.

  10. ted novak says:

    I have been retired for 19 years. Who ever writes these articles does not deal in reality. 4%? Why would I use a 4% return or withdrawal calculation when I am receiving 8%+ on preferred dtock funds and 7.25% on individual preferreds? I am getting 12% on Business Development Corporations and 8%+ on equity option income closed end funds. Mortgage Reits pay in the teens and equity reits of decent quality pay in the 7s in a blended portfolio. It has been working for 19 years. I don’t spend everything the portfolio earns and reinvest the remainder so I have a larger income next year. In 2 years social security kicks in and I can save it all. Who ever writes these columns is dealing is theory that makes sure to cover the writer form any possible lawsuit. I am retired in reality for 19 years and only 2 years away from a fairly large cash flow increase. The writer may tell you that what I am doing id filled with risk. It’s not. Risk is believing you can only receive 4% on your retirement investments. You can easily construct a portfolio paying 8% live on 6% and reinvest the remaining 2% for a larger income next year. Good luck.

    • Hi Ted, thanks for the comments. To echo some of the above discussions, I just want to reiterate that the 4% growth rate is inflation adjusted, or about 3% lower than a nominal growth rate of 7%, which is closer to some of the returns you are describing above. Congratulations on such a successfully engineered retirement portfolio, especially one that weathered the great recession so well. I plan to do the same thing, withdrawing a little bit less, especially in the early years.

      And you do have me pegged talking about risk :) The risk-reward tradeoff is unavoidable. Higher returns inevitably come with higher risk. There is a reason the T-bill has such a low rate of return; it is believed to be one of the safest investments around. More on risk-reward and the efficient frontier here: http://www.investopedia.com/terms/e/efficientfrontier.asp

      And to repost a link from above, here is some more commentary on “safe” withdrawal rates from one of the experts in the field. http://www.marketwatch.com/story/sustainable-withdrawals-vs-retirement-duration-2013-07-24

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