Dubai: For the most part, people who retire in their 30s or 40s are those who have been involved in the FIRE (Financial Independence Retire Early) movement because they have severely cut back on expenses and managed to become millionaires before they quit the workforce. That’s the reality.
If you’ve realised that an early retirement is not your cup of tea because it's not financially feasible for you, but you still wish you could retire early, a ‘mini-retirement’ may suit your needs. UAE-based financial planners walk us through the risks and rewards of taking such a step. But firstly, what is it?
“A ‘mini-retirement’ is a cross between a work sabbatical and the traditional retirement aimed at providing a much-needed career break used to rethink retirement goals – but only when he or she is in the financial position to do so,” said Abu Dhabi-based financial planner Andrea Barbara.
“It usually lasts for a few months or up to a year. However, financial advisors widely recommend that you should save 50 per cent more than you expect to need during your mini-retirement. The timing and frequency of mini-retirements is also completely up to you.”
A ‘mini-retirement’ is a cross between a work sabbatical and the traditional retirement aimed at providing a much-needed career break used to rethink retirement goals
Risks and rewards of a ‘mini-retirement’
Aside from planning your finances and estimating how much you already have saved or invested, a 'mini-retirement' also depends on other factors including your age and how long you're taking off. Also, bear in mind a mini-retirement can affect end-of-career retirement plans, if not planned well.
“If you’ve been actively investing for your retirement, you may have noticed how negative investment returns in the first few years can derail plans more substantially than in later years. With a mid-career mini-retirement, you get to see how those first few years pan out,” added Barbara.
“This way, if things aren't working out as planned, all is not lost, as you could always resume your career. However, a key risk to a ‘mini-retirement’ is potentially risking a setback half-way through your career. Still, if planned correctly, mini-retirements can be an investment in themselves.”
“With a ‘mini-retirement’, health insurance is another risk to consider. Given the obvious discontinuation of your employer-sponsored health insurance plan, you'll want to factor the cost of a plan into your budget,” added Barbara.
How do you plan for a mini-retirement?
Planning to take an extended time-out from work should be meticulous and should include some specific goals. Dubai-based money coach Mirin Raul and Barbara offer four tips and tricks to consider when planning for a ‘mini-retirement’.
1. Budget all expenses of your current life before pause in income
Creating a budget first means considering all aspects of your current life — everything from mortgages to car payments and education loans — and determining how you'll afford them while you're not working.
Maybe that means selling your home or car, or renting them out if you plan to travel. Just make sure you've got a plan for any ‘back home’ expenses in addition to the money you'll need during your time off.
2. Avoid taking a ‘mini-retirement’ break when you career peaks
Try to avoid taking a mini-retirement during the most important career years in your line of work. It may make sense to take a break from your job if you’re able to live without your salary or if you plan to return to work and retire later than your standard retirement date.
Creating a budget first means considering all aspects of your current life — everything from mortgages to car payments and education loans
3. Make plans for your years away from work during mini-retirement
You could also use your mini-retirement time to make plans for your later years away from work—figuring out your priorities, your financial needs, and how you want to live in the future.
Before you make the decision to take a mini-retirement, draw up a plan for how you will use your time, and come up with alternative methods for saving for retirement when you aren’t working.
4. Fix a timeline of your return to work, and how you plan to work next
Your plan should include the details for when and how you’ll return to work. If your plan is to go back to the same job or a different one, set aside time to search for it towards the end of your break.
Your short-term mini-retirement should be part of your long-term plan, so make sure you can afford to give yourself this break. It's also good to be proactive and think about the timeline for saving for a mini-retirement so that when the need arises to take one, you'll already have the cushion.
“From the day you enter the workforce, it's normal to start planning your retirement. With several investment savings vehicles available, one of the primary goals of working is often to save enough so that one day, you don't have to anymore,” said Raul.
“However, instead of viewing work and retirement as two significant work events, what if they were woven in together throughout the middle decades of your life? This is where ‘mini-retirements’ come into play.”
Simply put, a ‘mini-retirement’ can prove effective as a trial run for real retirement – helping you figure out what type of lifestyle you will be able to afford when you officially reach your retirement phase. But are mini-retirements the new early retirement? “It’s highly debatable,” added Raul.
“The key downside with early retirement is it may not be that easy to achieve; you will need enough money to last you throughout your retirement. From that perspective, a ‘mini-retirement’ can be a more financially realistic alternative than retiring early.”