Money Hacks to Achieve Mini-Retirement Dreams Sooner
When you want to kick in to savings overdrive or need to come up with some extra cash to extend your mini-retirement, there are some money hacks that can pay off in spades.
There are no get rich quick schemes or simply massaging the numbers to make this alternative retirement plan work. Taking regular mini-retirements is an unconventional lifestyle that balances calculated saving and planned periods of reduced income (when you’re not working) to achieve greater freedom in choosing how you spend your time.
These popular and proven strategies help save money and cover your monthly burn rate so you can work less and experience more.
Geoarbitrage is a powerful tool to get more bang for your buck in quality of life and achieve retirement earlier. Short for geographic arbitrage, it refers to the life hack that takes advantage of different costs of living and currency values between countries. The concept has been popularized by Tim Ferriss (The 4-Hour Work Week: Escape 9-5, Live Anywhere, and Join the New Rich) and other travelers and entrepreneurs who have based themselves abroad.
While geoarbitrage is often touted in lists of personal finance tips, it’s really a tactic in lifestyle design that can rejuvenate your passion for work or provide greater opportunity to explore a career change. Basing yourself in a “geoarbitrage location” means deliberately choosing somewhere that is less expensive AND aligns with your interests and values.
Finding the best places for geoarbitrage is a process of personal financial freedom goals and choice in lifestyle preference. Start by figuring out where you can boost your purchasing power- consider places where you can leverage beneficial currency exchange rates and/or capitalize on lower cost of living. Finally, narrow down and prioritize your geoarbitrage location list based on those cities, villages, cabins in the woods, remote islands (etc.) that offer you a rich quality of life at a fraction of the cost.
Adopting domestic and international geoarbitrage at different phases of your life will help you take a rejuvenating mini-retirement sooner, live without active income for longer, and enjoy experiences that you otherwise might not have been able to afford.
Case Study: geoarbitrage Livin’
When beginning our own mini-retirement, the value of the US Dollar to the Mexican Peso was near its multi-decade peak; we saw the opportunity for an extra geoarbitrage boost. Before taking the plunge, it was comforting to gain a greater sense of how the lower costs would make paying for our day-to-day living expenses feasible without washing away all of our savings.
Visions of a luxurious month of stressless zen on white sand beaches and turquoise water shores went from unaffordable to easily achievable. And 6-weeks of learning Spanish in a UNESCO heritage colonial Mexican town became the perfect way to start our first mini-retirement.
Online geoarbitrage calculators are helpful tools for an initial gauge of the numbers. While there are a myriad to choose from, they aren’t personalized to your spending patterns or lifestyle. After dozens of trips to different geoarbitrage locations, we’ve translated our worldwide travel planning and cheap living experiences into a functional, dynamic geoarbitrage analysis tool that builds on our 80/20 budget to satisfy our wanderlust in a practical way—you can download it for FREE here! —>
Taking a pay cut is an inevitable part of enjoying extended time off work. But, there are some tax benefits to reduced income. These three key “tax-tics” are based on distilling the best tax advice and honing it through experience to establish a reliable method that maximizes legal tax avoidance so you can enjoy your career break for longer.
Tactic 1: Hold On To Your Standard Deduction
Based on the latest (2018) tax rules, the first $24,000 of a married couple’s (joint-filing) income is tax-free through a standard deduction. That means, for the first $24k you earn in the year, there is no monetary benefit to diverting income to your tax advantaged accounts (unless you are receiving an employer match). Instead, keep that chunk of change in a checking or savings account so it’s accessible for day-to-day expenses.
Tactic 2: Earn Tax-Free Profits
When the stocks that you own gain value because the selling price exceeds the purchase price, you pay tax on that profit that you earn. Long-term capital gains, however, are only taxed when you exceed a certain annual income. Hold your stock purchases for at least 12-months so that increases in value qualify as long-term gains. Then, by earning less than $77,200 income in the tax-year (as of 2018 rules for joint filers), you can collect tax-free profits on them*.
Tactic 3: Live Off Dividends
Harvesting dividends from taxable investment accounts is another (often overlooked) source of tax-free money during mini-retirement. Similar to long-term capital gains, if you make less than $77,200 annually, you do not owe taxes* on earnings distributed through dividends. One catch to be aware of here is to make sure dividends are qualified if you earn more than $24k in the year.
Tactic 4: Access Tax-Free Retirement Savings Sooner
During very low to zero income mini-retirement years, the Roth IRA conversion ladder is a secret weapon for tax-free access to 401k funds—even if you aren’t technically of the age to avoid the early withdrawal penalty. Any dollars converted to a Roth are considered income, but remember, you can earn up to $24,000 a year (in 2018) without paying tax.
*Note that most states still tax investment income, so check the regulations for your state of residence. Or, if you are really serious about tax minimization, move to a no-income-tax state. During years when you are earning above the threshold and have the financial flexibility, it’s better to hang on to your gains for those low-income periods.
Case Study: maximizing tax-free cash flow (legally)
Alright then. That’s a lot of technical tactics summarized very quickly. So, let’s look at our real-life example to help make it more clear. Here is what this personal financial freedom model looked like for us when we went on mini-retirement after working part of the year:
|Annual Expenses||Paid Work||Long-Term Capital Gains||Qualified Dividends|
|$50,000||$40,000||+ $16,000||+ $10,000|
Based on these figures, over the course of a year, we allocate money to maximize tax-free income and maintain our cash flow to pay for everyday expenses:
|1. Keep Standard Deduction for Spending||Put the first $24,000 of tax-free work related income directly into checking account.|
|2. Distribute Pre-Tax Earnings||Divert the remaining $16,000 of pre-tax work income into tax advantaged HSAs and 401Ks.|
|3. Harvest Tax-Free Investment Income||Harvest $16,000 of long-term capital gains from taxable investment account and transfer it to checking account for spending.|
|Transfer $10,000 from qualified dividends—divided and distributed over 4 quarters—into checking account for spending.|
All of this works together to make $50,000 available for current expenses, $16k saved for future retirement goals, and $0 paid in income taxes!
Plus, since we’re working less and nearly all of our financial chores are systematized, that means more than 50% of our year is freed-up to enjoy a fulfilling mini-retirement! This diagram illustrates exactly what our automated cash management system looks like during mini-retirement periods.
During our first mini-retirement year, we didn’t take advantage of the tax-free 401k to Roth IRA conversion because our incomes were too high—life’s tough sometimes. But, since we’re set to sustain our mini-retirement for 18 months, we’ll be able to convert almost $24,000 tax-free in the next year—life is good.
Stock market investment as a source of passive income
Running out of money is one of the biggest fears when it comes to taking a mini-retirement. But, if you have cash flowing into your spending and savings account while you’re enjoying doing what you want during your retirements, then financial anxiety is liquidated.
Investment income is an essential source of retirement funds that allays concerns about a paycheck or having to trade your time for money. Since you already have a good understanding of your burn rate, you can use that knowledge again to calculate a return on investment that has the earning potential to offset your monthly expenses.
Aligning your investment strategy with your burn rate provides smart financial freedom goals that are efficiently achieved with the help of passive income.
As a simple example in the context of real life, the table below illustrates how someone who spends an average of $2,500 per month would need a 20% return on investment (ROI) to fund a month of a mini-retirement.
|Montlhy Burn Rate||Amount Invested||Securities Sale Event||Capital Gain Profit*||ROI = profit / investment cost||Time Added to Mini-Retirement|
Maintaining a 20% ROI (like the example above) may seem daunting. Double digit returns are indeed an exceptionally positive outcome that often takes multiple years to achieve. But, the more principal you invest, the less return you need to cover your burn rate.
To gain a clearer sense of this impact on residual income, consider the same burn rate supplemented with $100,000 in principal invested instead of $10,000:
|Monthly Burn Rate||Amount Invested||Securities Sale Event||Capital Gain Profit*||ROI = profit / investment cost||Time Added to Mini-Retirement|
So, in this case, you would need a 2.43% return on investment for each additional month of mini-retirement. That makes mini-retirements more sustainable and total financial freedom achievable a lot sooner!
While building investment principal takes some deliberate savings effort, it pays off as your investable capital becomes a source for funding your work-life balanced lifestyle.
Engineering your layoff
There are lots of resources that talk about how get the perfect job and increase your salary- both great goals. Most people don’t realize that employers are often happy to pay their employees to leave too. With a little forward thinking, you could receive severance of cash, health insurance, unemployment compensation, and more, smoothing your pathway to a rejuvenating mini-retirement. For a mid-level valued employee, severance can easily amount to $50k or more.
Unless you’re one of the lucky few whose employer has a sabbatical program, your mini-retirement will likely require that you part ways with your current job. If you quit, you’ll usually get nothing more than a going away party. Your employer’s not obligated to offer you anything and the state deems that you quit your job because you didn’t need the money, so you can’t receive unemployment benefits either.
The reality is, nobody likes seeing good employees go – not HR, not your manager or company owners. The cost alone to replace an employee can be tens of thousand of dollars (plus intangibles), and the situation is made that much more difficult if a company can’t count on employees to help with the transition. You can use this to your advantage, and take some of the stress off your company’s shoulders at the same time.
In order to successfully negotiate your layoff, you need to understand what’s at stake for the company. And, by knowing what you want before leaving your job to take a mini-retirement, you’ll give yourself the upper hand in negotiating the appropriate severance with management. Learn the ins and outs of engineering your layoff to profitably quit your job, and create a financial freedom tailwind for you and your family as you transition to pursuing your mini-retirement dreams.
If you plan to travel during your mini-retirement and aren’t travel hacking, then you’re missing out on free money. Taking advantage of credit card travel hacking can help you to save thousands of dollars on flights, hotels, car rentals and more.
There’s one caveat -- travel hacking is only worthwhile if you don’t have challenges with debt and can pay off your credit cards in full every month. Carrying a balance on your credit cards just to receive bonus rewards is a losing proposition.
Credit card bonuses range from cash back, to points that can be applied to various purchases travel and non-travel related purchases, to airline frequent flier miles. If you sign-up for the right card, or groups of cards, you can easily build enough rewards to take your family on trips to almost anywhere in the world. Even better if you currently travel for work and have an opportunity to collect miles from reimbursable travel.
Chase Sapphire cards have offered some of the best rewards programs over the past few years. Offers are constantly changing, and you’ll have to spend a little effort analyzing the details about requirements to receive the rewards in order to make sure it matches up with your spending and lifestyle. Or, there some great services that sort through all of the fine print for you, and can help to expedite your rewards accumulation in time for your mini-retirement.