Step 2 – Assessing Your Financial Readiness

jed foster
3 days ago
5 min read

12 Steps to Semi-Retirement – How to Live Your Life on Your Own Terms

We’ve put together an overview of the 12 steps and processes involved in transitioning to a semi-retired lifestyle. These steps are based on our own experiences—both in the years leading up to quitting our full-time careers and throughout the last four years of living semi-retired by age 40.

This is Step 2, and its purpose is straightforward: to understand your current financial situation and what’s needed to support a semi-retired lifestyle.

“Semi-retirement isn’t about quitting work — it’s about having enough freedom and funds to live life your way.”

Our Step 2 Video - Assessing Your Financial Readiness

1. Know Your Current Numbers

Before you can plan for semi-retirement, you need a clear picture of your finances. That includes:

Income sources: wages, investments, side hustles
Regular expenses and debt
Savings, superannuation, and investments

This step is crucial—being honest with yourself (and your partner, if applicable) is key. Knowing your current numbers gives you a solid foundation to make adjustments and align your finances with the life you want. Skipping this step is almost a guaranteed recipe for failure.

Income Sources: During Kel’s treatment, we started a monthly Expenses & Income Tracker Spreadsheet. At first, I wasn’t sure if it would help us understand our financial readiness for semi-retirement. But after a few months, it became clear that tracking our finances revealed trends and data we had previously only guessed at. This is something everyone should do, whether or not early semi-retirement is on the horizon.

Regular Expenses and Debt: Tracking your income and expenses over a few months will reveal your true costs and spending patterns. You’ll see your biggest expenses, surprise costs you didn’t realise were draining money, and the total cost of living per month. This information is invaluable for making adjustments that produce real results.

Savings, Super, and Investments: A Net Worth Spreadsheet helps visualize your financial situation by calculating the difference between your total assets and liabilities.

You can find a free Net Worth Spreadsheet on the Aussie Firebug website:

Click on “Net Worth”
Scroll to any of the Net Worth updates
Find the tab that says Download My Net Worth Sheet

2. Calculate Your Semi-Retirement Income Needs

Estimate how much you actually need per month to live comfortably (housing, travel, lifestyle, etc.)
Include a safety buffer for emergencies or cost-of-living increases

The big question is: how do you know what you actually need? Everyone’s lifestyle, spending habits, and debt levels are different. By tracking your current spending, you can create realistic predictions for your semi-retired life. During Kel’s treatment, this became a forced reality—we dropped to a single full-time wage and had to quickly adjust. It was a test of our plan that revealed what we really needed to live on.

3. Understand Your Cash Flow

Working income vs. passive income

Working income (active income): money you earn by directly trading time, skills, or labour for payment. Examples include wages, salaries, shift work, contracting, or running a business that requires your daily involvement. This income stops when you stop working.
Passive income: money that continues to flow with minimal effort after the initial setup or investment. Examples include rental returns, dividends, royalties, or automated business systems.

In simple terms, working income is when you work for money; passive income is when your money works for you.

Examples:

Working income: wages, salaries, contracting, hands-on business work
Passive income: rental returns, dividends, royalties, automated or low-touch business income

How much can you reduce work hours?

Understanding your baseline expenses versus reliable income makes it easier to see how far you can scale back work without financial stress.

Step-by-step approach:

Add up essential monthly expenses: housing, food, fuel, insurance, utilities, debt repayments, and a buffer for unexpected costs.
Look at reliable income: wages, part-time work, government payments, rental income, dividends, or other passive income sources.
Find the gap: if your essential expenses are $X per month and guaranteed income is $Y per month, you only need to work enough hours to cover the difference.

This gives a clear picture of how few hours you actually need to work, which is invaluable when planning semi-retirement or a more flexible lifestyle.

4. Plan for Taxes and Superannuation Access

When you can access super or retirement accounts
How taxes might change with part-time income or self-employment

There’s no set “retirement age.” While we’re often taught a fixed path, your journey can look different. Understanding your superannuation and tax implications can help you maximise your income when you reduce work hours.

Hot tip: By reducing hours, your taxable income may drop, potentially giving you a larger tax return. We time our tax returns to cover large annual bills like rates, insurance, and vehicle registration—it’s a small but helpful financial boost.

5. Test Your Plan

Try living on your semi-retirement budget for 3–6 months before fully committing
Notice what feels comfortable and what needs adjusting

Test your budget in real-time while still working full-time. This trial run shows how realistic your numbers are, and whether your spending habits align with your expectations.

Focus on:

Living on your proposed budget
Observing what feels comfortable or tight
Adjusting expenses, boosting passive income, or fine-tuning work hours based on insights

During Kel’s treatment, reducing to a single full-time wage became an unplanned test. Thanks to our emergency fund and careful planning, we were able to adapt and stay in the green.

A few extra things to consider...

Look at Your Debt and Commitments

High-interest debt is one of the biggest obstacles to financial freedom—it quietly eats away at your income and limits your choices. Reducing or eliminating it before semi-retirement clears the runway for a smoother journey.

Build Your Emergency Fund

Aim to have at least three to six months’ worth of living expenses saved. This buffer acts as a safety net, giving you stability and confidence to handle unexpected costs without being forced back into full-time work.

Consider the Long-Term Horizon

Semi-retirement isn’t just about the next year—it’s about the next 20–30 years. Superannuation, future medical costs, inflation, and lifestyle changes all matter. Planning for the long term gives you the confidence to enjoy your semi-retired life without worry.

We hope you found Step 2 useful! There are 10 more steps to go, and while there’s homework involved, taking the time to plan properly now will pay off in freedom and peace of mind.

Note: This is not financial advice—just our story and guide. We strongly recommend consulting a qualified financial advisor before making decisions.

Quotes to Inspire You:

“Ask yourself: If you had a few slow months or unexpected expenses popped up, would your plan survive? Semi-retirement needs a buffer. That’s the difference between confidence and disaster.”
“Semi-retirement isn’t a dream, it’s a decision. A financially informed decision. Once you understand your numbers, you take back control of your time, your stress, and your lifestyle.”
“The best time to plant a tree was 20 years ago. The second best time is now.”
“Freedom isn’t found in how much you earn—it’s in how well you live with what you’ve got.”

✅ Recommended Books

Making Money Made Simple by Noel Whittaker – An Australian classic on debt, investing, and superannuation
The Barefoot Investor by Scott Pape – Simplifies planning and steps toward financial freedom
Motivated Money by Peter Thornhill – Covers investing in the ASX and the mental game behind wealth

🎧 Recommended Podcasts

Aussie Firebug Podcast – Australian context, financial independence, early retirement
Early Retirement - Financial Freedom Podcast with Ari Taublieb – Covers “how much is enough” and planning considerations
Financial Independence Podcast (by The Mad Fientist) – Great for semi-retirement mindset, investing, and readiness