Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How to Fund Early Retirement With a Part-Time Business
Transcript
- Lucas: If you're aiming for early retirement, the conventional wisdom says you need a nest egg big enough to cover all your expenses forever. But what if you kept one small foot in the working world — not out of necessity, but as a strategic choice to make your portfolio last longer and even unlock tax advantages you'd otherwise lose? Luna: You're talking about semi-retirement — the idea that you don't have to go from full-time work to zero income overnight. Lucas: Exactly. And I want to look at the math behind it, because it's surprisingly powerful. Let's take a concrete case — someone who left their corporate job at 45 with a $1.2 million portfolio. Under the classic 4 percent rule, that gives them $48,000 a year before taxes. But if they pick up a part-time consulting gig that brings in, say, $18,000 a year, suddenly their withdrawal rate drops to 2.5 percent. Luna: That's a huge reduction in sequence risk. And $18,000 is not a huge amount — that's like 10 hours a week of work at $35 an hour. Lucas: Right. And the tax side is where it gets really interesting. That $18,000 of earned income opens the door to Roth IRA contributions — up to $7,000 in 2026, plus a $1,000 catch-up if you're over 50. You can contribute that amount from your consulting income, and it grows tax-free for the rest of your life. Luna: So you're effectively converting some of your pre-tax retirement savings into Roth money, without paying extra taxes, because your total income is still low. Lucas: Exactly. And there's more. If you structure your consulting as a sole proprietorship or an LLC, you can deduct health insurance premiums — a huge deal for early retirees who aren't eligible for employer plans. In our example, if that person pays $12,000 a year for an ACA plan, that deduction could save them roughly $2,500 in taxes, depending on their bracket. Luna: So the part-time work isn't just bringing in $18,000 — it's also effectively subsidizing their health coverage and letting them build Roth space. That's a triple win. Lucas: And it gets even better when you think about the sequence of returns. A 2.5 percent withdrawal rate is incredibly safe historically. Even if the market drops 30 percent in the first few years, your portfolio is much less likely to be permanently damaged because you're taking out so little. The earned income acts as a buffer. Luna: But let's be real — not everyone wants to consult in their old field. What if your skills don't translate to a part-time gig that pays that well? Lucas: Fair question. The key is to leverage something you already know. A former marketing manager can do freelance social media audits. A software engineer can mentor junior devs or do code reviews. Even teaching one online course a year can net $5,000 to $10,000. The point isn't to build a business — it's to earn just enough to unlock the tax and sequence benefits. Luna: I've seen people do this with rental properties too, but that's more capital-intensive. Consulting is almost pure labor. Lucas: Yeah, and that brings up an important nuance — this only works if you actually enjoy the work. If the part-time gig feels like a grind, you're better off just building a bigger nest egg and quitting entirely. The whole point of early retirement is freedom. Luna: Absolutely. So the ideal candidate is someone who likes their field but not the 60-hour weeks. They want to stay connected, keep their skills sharp, and earn a little money — but on their terms. Lucas: Right. And the math supports that. Let's run the numbers for a few scenarios. With a $1.2 million portfolio and no earned income, using the 4 percent rule, you have a roughly 96 percent success rate over 30 years. But if you add $18,000 of part-time income and drop your withdrawal to 2.5 percent, the success rate goes to 99-plus percent — even in the worst historical sequences. Luna: And that's assuming the income doesn't grow. If you get a raise or pick up more hours later, it only gets safer. Lucas: Exactly. And let's talk about the psychological side. A lot of early retirees struggle with the sudden loss of identity and purpose. Having a small business or consulting practice gives you structure, social interaction, and a sense of contribution — without the stress of needing the income to survive. Luna: That's actually a huge unquantifiable benefit. The peace of mind from knowing you can cover a chunk of expenses with earned income might make you comfortable with a riskier portfolio allocation, which could boost long-term returns. Lucas: Yeah, and that's a virtuous cycle. But there are pitfalls. One is that the part-time work might grow into something bigger than you want. You start out doing 10 hours a week, but then a client asks for more, and suddenly you're back to 30 hours. You have to be disciplined about boundaries. Luna: Another pitfall — tax complexity. Once you have self-employment income, you have to file Schedule C, pay self-employment tax, and maybe make estimated quarterly payments. It's doable, but it's not passive. Lucas: For sure. But for most people, the benefits outweigh the hassle. And if you really want to keep it simple, you can cap your income at the Social Security tax threshold — $176,100 in 2026 — so you stop paying Social Security tax after that point. But for our semi-retiree earning $18,000, that's not an issue. Luna: So what's the bottom line? If you're planning to retire early, should you build a side business before you quit? Lucas: I'd say it's worth exploring. You don't need a full business plan — just identify one skill you have that people will pay for, and test the waters while you're still employed. If it brings in even $5,000 a year, it can make a meaningful difference to your retirement math. Luna: And if it doesn't work out? You're no worse off — just go with a traditional withdrawal strategy and a slightly higher savings rate. Lucas: Exactly. The flexibility is the whole point. And honestly, if today's conversation helped you think about this differently, that's exactly what we're here for. The way we keep this show ad-free and focused on real, usable strategies is through listener support. If you found value in this episode, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a simple way to say 'this is worth my time' and it helps us keep doing these deep dives. Luna: Yeah, every little bit helps. And we really appreciate the listeners who do that — it means we can keep the conversation going without any corporate sponsors. Lucas: Alright, let's keep going. One more strategy I want to cover — using your part-time business to make Roth conversions even cheaper. If your earned income is low, you can convert some of your traditional IRA to Roth and pay taxes at a very low rate. Luna: Right, because the standard deduction and the 10 percent and 12 percent brackets are quite wide for a married couple. You could convert up to $94,000 or so and pay only 12 percent federal tax. Lucas: Exactly. And the earned income from your part-time business fills up those lower brackets, but you can still convert on top of that. It's a powerful combination. Let's say you earn $18,000 from consulting and you convert $30,000 from your traditional IRA. Your total income is $48,000. After the standard deduction of about $29,000 for a married couple, your taxable income is $19,000, all in the 10 percent bracket. That's a 10 percent tax on the conversion — incredibly cheap. Luna: And that money then grows tax-free forever. It's like paying 10 cents on the dollar to lock in tax-free growth for decades. Lucas: Exactly. This is one of the most underutilized strategies in early retirement. Most people think they need to stop working entirely to do Roth conversions, but a little earned income actually makes it easier to stay in a low bracket. Luna: So the key takeaway: don't think of part-time work in retirement as a failure to save enough. Think of it as a strategic tool to make your money last longer, pay less tax, and maybe even enjoy your days more. Lucas: Well said. And I think that's a great place to leave it. For anyone listening, if you're on the fence about early retirement, consider the semi-retirement path. It might give you the best of both worlds.