How to financially plan for a mini-retirement

Defining retirement in 2022 means taking into consideration that the next wave of retirements will be largely non-traditional. Millennials, in particular, favor and normalize the concept of mini-retreats or sabbaticals.

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A mini-retirement means saving money to cover expenses for a year. Then, the future retiree leaves his role in the company and travels the world while still young and healthy. While the premise of a mini-retreat sounds fantastic, it also requires buy-in from company management and, to a large extent, you.

Take a moment to focus less on the negotiation and what happens once your employer says yes. Are you really financially ready for a short-term retirement? Before embarking on your big adventures, follow these financial planning tips to ensure a rich and rewarding mini-retirement.

Mini-retirement: how to prepare financially

Kelly Klingaman, financial planner and founder of Kelly Klingaman Financial Planning, originally shared with GOBankingRates the trend of increasing mini-retirements among millennials considering retirement. Klingaman personally knows two friends on a mini-retreat right now, with one calling it their “gap year for adults.”

If you’re seriously considering taking a gap year, you need to start planning. Ultimately, Klingaman said, while sabbaticals are offered by many companies these days, few, if any, employers will financially support employees who plan to take a year off to focus on other jobs. other interests. Planning a mini-retreat starts and ends with you.

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Start planning 6-12 months in advance

“If you’re serious about a gap year for adults, like traveling the world or seeing if your side hustle could become a full-time success, it’s important to start planning for it at least six to 12 months out. advance,” Klingaman said.

What you shouldn’t do in financial planning for a mini-retirement is withdraw from your retirement savings. If you access these accounts before reaching the authorized age, you will be hit with early withdrawal penalties.

Financial planning, Klingaman said, will require a disciplined approach. At the bare minimum, you will need to save money in a high yield savings account. This is intended to cover the income gap when your paycheck stops.

You will also need an emergency fund. This should contain three to six months of your living expenses, just in case something unexpected happens in the short term. If you already have these funds in place, you have created a solid layer for your future mini-retirement.

Create a separate savings account

We haven’t quite finished financial planning for a mini-retirement yet. Once you have an emergency fund and some cash savings, Klingaman recommends setting up a separate savings account specifically for mini-retirement.

“The specific amount that goes into this fund will depend on how you plan to spend your free time,” Klingaman said. “It could be as simple as saving 12 months of living expenses if you plan to continue your life the same way.”

Those who plan to spend their money in a radically different way during their mini-retirement should start visualizing what they plan to do, then develop a general itinerary. For example, those who want to spend their mini-retirement traveling the world will need to research where they want to go, the cost of flights and accommodation to those places.

Plan health care coverage

Taking a mini-retirement means a break from paychecks and health insurance. To avoid lapse, Klingaman recommends planning how to continue health insurance coverage. Some options may include COBRA, health insurance market plans, or being on a partner’s plan.

Plan your retirement, even in mini-retirement

A mini-retirement may be mini in nature, but it’s still a year of your life. Taking that year off from the workplace means a hiatus in contributions to your investment accounts like your 401(k) plan.

Ask yourself: is your investment plan on track to support you in the medium to long term despite a pause in contributions? If so, you should be able to move forward with your plans. Otherwise, you may need to find a solution to this scenario.

The value of early planning

Saving money for a mini-retirement isn’t easy. The act requires an intimate knowledge of how you are already spending and saving money. But it can still be done if you’re willing to commit to it and know the end result is a nice and comfortable mini-retreat.

“Setting tighter limits on variable spending can help improve your ability to aggressively save money to take time off work,” Klingaman said. “Setting up mechanisms to pay yourself first by direct deposit into your high-yield savings account also leads to faster success.”

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This article originally appeared on How to Financially Plan for a Mini-Retirement

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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