What Happens When You Work One More Year? (or less)
What happens when you work one more year? Delaying Retirement:
The age-old question I probably run through on a weekly, if not daily basis. What happens if I retire one more year later, or earlier? This is the question du jour, as it comes up on the regular. Since our company is founded on the basis of financial planning and modeling I have the pleasure of seeing the net impact of what happens when we work that last extra year (or the converse). I can tell you this, every time I run that report for a client the results are quite astonishing. Below I will run through the areas impacted the most, financially, by that extra 365 days of waking up to an alarm.
Income Impacts
Working that extra year or not has many ripple effects. The most obvious one is you have an extra year of income coming in. This touches on many areas and benefits. For the focus of this bullet, I’ll touch on the fact that it enables one more year of spending on those big-ticket items. The last new expensive car, the bathroom remodeling, or perhaps your daughter’s wedding. Having one more year to plan and strategize how to fund those large abnormal expenses can be a huge relief to a lot of people.
Saving Scenarios
Going that extra year can have a profound impact on your savings as well. For many people, these last few years of work aren’t just their highest-earning, but also their highest ability to save. You see, kids are typically grown, maybe mortgages are paid off, and you have lots of discretional dollars. Assuming, no large expenses need to be tended to, one more year of work can have a large impact on your savings.
Let’s figure, you max out a 401(k) at $27,000, an employer match of $15,000, take that bonus sock away another potential $50,000, and the few thousand a month you might be saving monthly. We can be talking upwards of $100,000 or more of additional savings by going one more year. It is very common that I see individuals who are behind retirement schedule in their 50s, make up for it by overfunding in their last decade of working. Simply put, working one more year affords you the ability to make up for past transgressions, or simply give yourself a little more cushion on the backend for the unknown.
Drawdown
The counterpunch to saving more by working a year longer is that you are deferring your drawdown one more year. Assume you are going to expire at the same date regardless if you work one more year. Then the reality is your 30 years of living off your assets is now only 29 years. Surprisingly, this has a much larger impact than one would think on your net results. I’ve seen it be the difference between a plan working or not, or having a net benefit of hundreds of thousands of dollars at the end of the day. Combine this with the factors above the lack of needing to draw down for one more year really can have a sizeable effect on your retirement.
Compound Conundrums
The 8th wonder of the world is compound interest. Well, guess what? It also can have an enormous benefit on your retirement, especially if you go one more year. Think about it for a moment. Let’s say you have $2,000,000 saved for retirement and you need $100,000/yr to live. If you work one more year presumably you won’t have to touch that $2,000,000 for an extra year. Then you add the compounding effect of hopefully a good year in the markets that could mean, without saving another dollar, your new retirement figure could be $2.2-$2.5M. Think of how the reverberates through your potential 30–40-year retirement, could be huge.
Social Security/Medicare
I’m going to call Social Security a bonus benefit. Most people retire somewhere in their 60s, and most people take Social Security right away. That said, by working one more year there can be multiple Social Security benefits. For starters, one more year of top-level earnings can be factored into the Social Security formula. You have the fact that every year you wait your SS will be roughly 8% higher for life. This all translates to higher fixed incomes in retirement when you no longer have a paycheck. This then translates to less money, or stress, on your retirement savings as you’ll be asking less of that account in retirement by working one more year due to a higher Social Security benefit.
As for Medicare, this is clearly situational. If you are pre-65 and retire, you’ll have to go find your own health insurance through the private marketplace. This can be very expensive, especially when compared to Medicare coverage. I see this a lot and something everyone must account for if they retire pre-65.
Sooner or Later
Now, I didn’t write this blog to scare the pants off of you, or to have you never retire. As a matter of fact, this is more a public service announcement for financial modeling in general. Every situation is uniquely different, and once we put on our modeling hat, we can see what really drives your financial plan in retirement.
My hope in this blog is to open up your eyes to what are the big factors in your ability to have financial success in retirement. There are certainly many other factors to consider both financially, and personally in putting in that last two weeks’ notice. I hope this blog has opened your eyes to the impact of working one more, or less year, and what really moves the needle in your personal financial plan.
As always stay wealthy, healthy, and happy!
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