How to Avoid Working One More Year
Should you quit now or work another year? This is the question that plagues many soon-to-be retirees. In fact, there's even a term for those suffering from this condition: The work one more year syndrome. Some people who have adequate resources are afraid to retire, fearing that their nest egg won't last through a 30-year retirement. Here are some suggestions for people who have enough money to retire, but feel compelled to stay in the workforce for another year:
Have a clear understanding of the 4 percent rule, and create a plan based on accurate knowledge. Retirees generally understand that a sustainable withdrawal percentage is 4 percent annually, but not everyone knows all the intricacies behind this rule of thumb. In order for you to gain more confidence that your portfolio will survive, you need to have a clear understanding of the original study by William Bengen (pdf) and how future changes will affect your assumptions. You should know the asset allocation used, the assumptions made and how the numbers are calculated so you can think for yourself whenever a new published study challenges the numbers.
Build reasonable cushions into the plan. Another year of work means a bigger nest egg, but there are also other ways to increase your chances of retirement success. You could develop a detailed budget and identify areas where you could cut spending if market performance doesn't go your way. Your personal inflation rate is also somewhat controllable, and it could be smaller than standard inflation. There are many ways to conservatively plan for retirement, and working longer is just one of them.
Consider adding income that doesn't take much work. Many people with the work-one-more-year mentality think retirement means completely stopping all active income generating activities, but retirement can also mean making a bit of income on the side. For example, perhaps you could invest in physical real estate. Being a landlord is certainly hard work, but it also gives you an additional source of retirement income that generally keeps up with inflation. You could also turn a hobby into a small income-generating venture. There are lots of ways to make more money, and the income generated doesn't have to be huge to improve your retirement finances. Even just a few thousand dollars a year will mean a sizable decrease in how much you need to draw from your nest egg each year.
Being flexible with withdrawals will greatly increase the likelihood that you can retire sooner. The 4 percent rule assumes a retiree will start off withdrawing a fixed amount and increase withdrawals by inflation even if the market tanks. In reality, I doubt anyone who actually runs the numbers will do this. You can drastically improve your chances of never depleting your nest egg just by suspending the inflation increase whenever the markets don't cooperate. The good news is that this is usually easily accomplished because you can probably cut out some parts of your budget temporarily without a noticeable sacrifice in comfort.
Be optimistic about your future. Future returns may not be as bright as they were in the past, but your portfolio will do fine unless the year you retire is during a significant financial downturn and you aren't flexible with your spending. And even if this unfortunate series of events happens, you can always just find another job.
There is no way to know for sure if your nest egg will last your lifetime. But if you take a few precautions, you won't have to spend your retirement years worrying about running out of money. Familiarize yourself with a few strategies that will help you to weather unforeseen events. And then when you hit your retirement savings goal, go ahead and quit your job if you still want to.
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