Is a Mini-Retirement in Your Future?
The economics are reasonable
Can you imagine a mini-retirement in your future? Maybe you are already retired, max mode.
Katie and Benji Hobbs declared a one-year retirement to live on their terms.
Like yesterday.
Campers sitting on top of a truck with their morning coffee, off the grid most of the day, cruising national parks and the wilderness. They just wanted to take a break because they could.
The Hobbs are a couple of thirty-two-year-olds without kids who were old enough to graduate college before Covid but were in the midst of their consulting jobs when they were shunted back to their smallish Atlanta apartment to work from home.
WFH grew on them even in close proximity. Working life and leisure life became intertwined. Then, the Covid effect softened, and not everybody could WFH; clients want to see consultants breathe…and sweat.
When the Hobbs found themselves called back to the road, their “work/life” balance skewed back toward musty airports, over-populated airline clubs, and average coffee. To them, life tasted better at their work home. “We strategized how to approach our direct reports to get less time on the road?” they shared. They agreed it didn’t matter what their direct reports thought. Time off would be the outcome, but they feared losing their incomes. The plan: stay on board, if they could WFH. “Otherwise, we were out,” Katie said.
The Hobbs are out, at least for now. “Life is better,” says Benji. “We are retiring for a year, then back into the job market.” Can you get your old jobs back? “Maybe, but we don’t want to travel anymore.” “We like the consulting world and have a lot of experience. No travel is a significant constraint. We will see what is available when we start our job search in a year. We know we may need to move from Atlanta to find the next jobs.”
Is the Mini-Retirement Concept New to You?
I have been hearing about “work/life” balance for years, and I always encourage b-school students not to broach the subject in a job interview. I cannot imagine an employer who wants to hire a freshly minted undergrad hearing how much the applicant prefers to work. Don’t all employers want employees to “bust their butt?”
According to a Stanford report, work/life balance is a generational preference among silver-spoon members of Gen Z, who nonetheless value “collaboration and teamwork.” Do you find that ironic? Collaboration! Teamwork! Just not after 5 p.m.!
If you have them on your team, don’t expect the ball to be passed to you. Gen Z is in the locker room, prepping for the after-game.
Do the Economics Make Sense?
On September 3, the Wall Street Journal devoted space to “mini-retirement,” featuring a few households and citing a financial expert who stated that households who go out of the workforce and give up contributing to their 401(k) for one year or a few years would accumulate less money at age 65 than someone who doesn’t mini-retire. That is true. But there are many other effects, some of them financially good.
To judge the economics of the Hobbs’ mini-retirement decision, I explored two scenarios.
No mini-retirement. Work to age 70 and retire, at which point 401(k) withdrawals and Social Security retirement benefits support the living standard.
Mini-retire this year. Mini-retire for one year and give up all salary, 401(k) contributions, and employer matches for the year. Return to work the next year at the same salary and work to age 70.
The Hobbs’ household had a darn good income, around $325k. Last year, Katie’s pre-tax salary was $160k and Benji’s was $165k. Their employer matched 401(k) contributions at 5% of salary, and they took full advantage. Supplementing their existing 401(k) account balances, they have $61k in bank checking and savings and $145k in a brokerage account, money set aside while always remaining renters in Atlanta.
Informing the Mini-Retirement Choice
For many, a mini-retirement sounds irresponsible and absurd. The numbers can speak to whether that is true or not. How does a year off affect the Hobbs financially?
Katie and Benji are a young 30s couple with a long prospective lifetime (we assumed to age 95) who will retire at age 70, regardless of a mini-retirement choice. The mini-retirement is adding one year of no earnings to their preference for 25 years of no earnings at the last stage of life. Is a plan to work 36 years rather than 37 years a big deal?
Using economics-based financial planning principles, I found the following results:
Today’s cost of the Hobbs mini-retirement is $218,000. The cost is not much in percentage terms.
No mini-retirement, and the Hobbs’ lifetime living standard is $9.56 million.
With a mini-retirement, the Hobbs’ lifetime living standard is $9.34 million.
A year of not working has costs and benefits.
The costs of a mini-retirement,
A year without work earnings
A year without retirement account contributions
A reduction in Social Security retirement benefits
A loss in investment earnings
The benefits of a mini-retirement,
A reduction in Federal taxes, FICA taxes, and State taxes
Two takeaways for my subscribers. First, the categories of costs and benefits of a mini-retirement are likely the same for you. Second, a financial change needs a long-term perspective to analyze the effects of change. Your details matter.
If you took a year off and your lifetime living standard decreased to $9.34 million from $9.56 million, what would you do?
MaxiFi Planner generated the analysis. I have no ownership interest, and it is the only game in town. I use it in my classes at SMU. If you are a paid subscriber of mine and interested in the software, DM me. I bet I can get you a discount.
The full financial report is available for download.
If you step back from the story, there’s incredible absurdity in what we consider normative work behavior. Warren Buffett has joked that doing work you don’t like in the hopes it will help you find work you might later is like saving up sex for your old age. The very idea of retirement is a bit of a fraud, in part because of the difficulty of saving enough to do it (especially in lieu of defined benefit plans that no longer exist for most workers), in part because you’re trading money spent in youth for money spent in old age (airfare vs medical care, anyone?!), and because many people never benefit from the trade at all (either dying or becoming too debilitated in old age to make much use of the time, and crucially because doing nothing (the mainstream retirement dream) is pretty much guaranteed to kill the spirit and the body (and quickly). I don’t think some smoky backroom cabal enables this narrative and its concomitant aesthetic of palm trees and silver years spent holding grandchildren, but there are certainly a lot of beneficiaries of this dubious construct, among them the entire investment management industry. I’d be very curious to see what the real purchasing power of that ~$9 million is when our couple retires as well as what kind of life they can expect it to buy them then. The framing of the problem (how much money will they have) is perfect Wildean cynicism, focused on the money and not its value. And so we tend to think about retirement as an end state. What we should do is question whether we are in this earth to subsist on expensive, rushed, and often unfulfilling 1-2 week vacations that serve as distraction rather than doing everything we can to milk our time on here while we have the vitality to do it. Some people will even rationalize a year off as a chance for our couple to recharge their batteries, meaning gain the power necessary to go back to trading the best years of their lives for some sub-vital years on the backend. This is madness.
The decision to take a mini-retirement demonstrates the importance of having a good work-life and personal-life balance. Although taking some time off might seem appealing, it's important to consider how this might affect your long-term financial stability. This post does a great job at portraying the potential outcomes and provides guidance to determining if taking a mini-retirement is in your best interest.