Should I Work One More Year, or Retire
Here are some key takeaways:
- Work one more year – or two – before retirement can have significant financial benefits, including increased 401(k) contributions, market growth, and delayed portfolio drawdown.
- In the example provided, the “work one more year” concept resulted in roughly $150,000 higher portfolio value, equivalent to about two years of retirement expenses.
- It’s important to consider both financial and quality of life aspects when deciding when to retire or work one more year.
- Seeing a financial planner well before your intended retirement date can give you more options and flexibility.
- Changing to a different job or reducing expenses are alternatives to consider if you want to retire earlier but need to improve your financial situation.
- The decision to work one more year longer or retire earlier involves trade-offs between financial security and quality of life considerations.
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Should I Work One More Year, or Retire- Transcript
Casey, how many people have we talked to recently who just want to quit their jobs?
A lot. You know, I think that’s why people come to us. They want either confirmation that they are able to quit their jobs and live the life they’ve always dreamed of, or they want permission. We need to be the bearer of bad news and say, “Hey, you might want to work one more year or two.” It’s not necessarily bad news, either. It may be, “Hey, you don’t have to work five more years. Work one more year.”
Right. There could be, you know, you’re in good shape now, but if you do work one more year, or two, or three, you’re going to be in great shape then. I think that’s a big reason why people come to us because they have trouble figuring out their retirement date. They don’t know what work one more year or two more years would actually look like in dollars and cents. And that’s why they come to us to answer that.
So I wanted to share some numbers to actually quantify this. This is just an example that we made up for the purposes of this video, but it’s based on an actual case. We’ve changed some of these numbers around.
To work one more year or two has twofold impacts on a retirement plan. The first is that if you’ll work for one more year, which means you’re hopefully contributing to, let’s say, a 401(k). And if you’re in your sixties or late fifties, you can do catch-up contributions, which means you can do even more than the actual contribution limit.
So you’re adding more to the plan. You’re letting it compound, which could either work in your favor or work against you depending on what the market gives us. And you’re not drawing down from the portfolio. So all of those go into the decision of whether or not you should work for another year or two.
To quantify some of these ideas that we’re talking about here, let’s say someone has $1.2 million saved in a 401(k), and they are deciding whether or not to retire at age 67 or 68. Let’s say, for one more year of market growth, in this example, I used a 9% return. On ($1.2) million dollars, that account is going to grow about $108,000 for that year.
If you save, you can contribute $31,000, so your 401(k) balance at the end of year one is going to be $1,339,000 as opposed to $1.2 million. So you’re getting market appreciation and contributions going in. That’s kind of a powder keg, if you will, of increasing your portfolio’s value.
So then we’ll go to year two. This would be when they’re starting to do their distributions. They are projecting to take out about $55,000 in their first year of retirement, which, on a pre-tax basis, they need $3,800 per month. After tax, it’s going to be a little over $4,600 per month. You bake all that in, and their year two 401(k) ending balance is going to be a little over $1.4 million.
To sum it all up here, your ending balance is going to be about $150,000 higher than if you were to retire at age 67 and start drawing on that. In this example, their expenses are $78,000 per year. So $150,000 of extra portfolio value – work one more year – could be worth about two years of retirement expenses.
Also, they waited to collect Social Security for one year. So that projects to be about an extra $200 per month. Doesn’t seem like much, $2,400 per year, but over a 20-year retirement, that’s $48,000 extra dollars just by waiting an extra year, which is about another half year of their expenses. So really, the decision to work one more year in this situation gets you an extra two and a half years of retirement income – if you want to think about it that way.
That was a lot of me talking. So now you guys share your thoughts on this scenario here.
Casey actually put us both on mute before he went into that long discourse. I’m just kidding.
But a couple of things that we should cover: you know, nothing’s guaranteed in the sense that we’re using average market returns of 9%. It could be higher, but it also could be lower as well.
But it’s maybe one of the hardest conversations we have with people because usually by the time they get to us, they’ve exhausted most of their patience, and they just don’t want to work one more year. They’re really looking for the exit door. It’s a tough conversation, but the math really, really does work in their favor if they can squeeze another year out – work one more year, or more.
Yeah, I feel like that’s the, you know, it’s got two parts there. You have the financial aspect of it and then you have the real-life aspect of it. Coming to see a planner before you retire is obviously better than seeing somebody after you’ve already made the decision to retire. But kind of giving yourself even more of a runway, like you said Tom, a lot of people come to us and say, “Hey, I’m retiring in January. Let’s look at the numbers.” And it’s like, well, you know, things… Why you…
What’s the line from Ocean’s 11 – “Where [expletive] you been?”
Right. So I feel like if you…
There was something kind of explicit in the actual line in the movie there!
Right!
We’ll bleep that out, this is a family show!
I feel like if you give yourself – if you can just have a little bit of foresight there… Like your retirement, you can kind of project when you might think you want to retire even if you don’t know the numbers. It’s just like, “Okay, based on how work’s going, how you’re feeling, how everything else in your life is going, hey, I want to work one more year, or work for two, three, four more years.”
You know, if you give yourself a little bit of a runway there to make that decision, then you kind of have the freedom to make a decision as opposed to just saying, “Here’s my date. What are the numbers? What can I do to change it in a year?”
Honestly, you know, like Casey outlined, you can improve the numbers. But if you had come to us maybe three, four, five years earlier, you would have had a lot more options or, you know, just kind of… I think some people end up waiting, not to the point where it’s too late, but they do a disservice to themselves by not kind of considering getting things checked out a little bit before that.
Let me throw up a wrinkle on the math that we’re talking about here. This presumes that you’re going to stay, work one more year in the same job for another year or longer. There’s nothing that says you have to stay in that same job. Sure, would be great, because we know the numbers. We know what you make. We know what you can put into another year of 401(k) contributions. There are certain known… knowns.
But it may also mean that you take a different job, and maybe it’s less money, and maybe you don’t even contribute to a 401(k), but you do something else to help pad your numbers for another year or two before you call it quits. Yeah, and that could just delay those distributions, and it could improve your quality of life if you take a job in a field that you enjoy more or it gives you more free time to spend at home or doing hobbies, whatever you love.
So, yeah, that’s a great point. I mean, it doesn’t need to be your exact same job and work one more year because if you’ve been working somewhere for twenty, thirty years and you’ve gotten to the point where you hate going in every day, then yeah, maybe not fully retiring but just kind of shifting could definitely help you hang in a little bit longer and let your investments and other things like Social Security continue to compound.
Yeah, maybe it takes something that cuts your commute in half, and you’re not sitting in a car for two or three hours a day. I think that certainly would improve the quality of life.
I think that’s another assumption that we always talk about in retirement planning: we don’t know how long we’re going to live for. It would be a lot easier to plan for if we did. In this example, we’re assuming that this person is going to live to the same age. But that’s not to say another year, work one more year, causes some health-related stress. I don’t know. That’s just another thing to consider.
I also want to point out that, you know, I think something to consider for someone making this decision is, what would cutting your expenses by a little bit do to your quality of life versus, you know, maybe commuting into a big city and you’re stressed out at work? Would you rather have the reduced budget or the additional stress of working another year or two? Is that something to consider?
In this situation, just to put some more numbers and context around it, the withdrawal rate at age 67 for this person would be 4.9%. So that would be, you know, not working another year. Their withdrawal rate from the portfolio would be 4.9%. If they waited a year, it would be 4.2%. So let’s say you want to get that 4.2% but retire at 67, you would have to cut your expenses by $8,160 per year, which works out to about $680 per month. That’s another wrinkle in the retirement planning discussion.
Yeah, I feel like when we do projections for people, the first iteration or the first thing that we do is look at their expenses and how they’re living their life today and just pick that up and move it forward into retirement. Like you’re not changing a single thing; the only thing that’s changing is that you don’t have that income coming in anymore from your job. How do things look? Like, that’s a great point though, Case. I mean, it’s all trade-offs.
You know, if you want to not go into work, it may be something on the budget there needs to be slashed. You know, that’s a decision that could allow you to not have to go into work at a job you don’t like anymore, or if all the expenses are absolutely necessary, then maybe you hang in for another year. Have their answer? Yeah, exactly.
So yeah, I mean, it all comes down to – it’s a personal choice – depending on what you want to do. If you love your job, if you love what you do, you know, you’re probably not in this boat. You’re going to continue working until you can’t anymore or until you finally don’t want to anymore. But you know, like we said in the beginning, a lot of people do come to us and they’re like, “Alright, you know, is this something that I can actually do?” So these are the kinds of things that we’re discussing in our planning meetings with these folks. Anything else that you guys want to share before we wrap up here?
Yeah, I didn’t have anything else to add.
Alright. Cool.
