Does working one more year make your retirement less risky?
I'm at an age that maybe retirement isn't close, but it's close enough that you better be thinking about it.
Something I've been seeing is this idea that if you're in the ballpark of "enough" (however that's determined) then working another year makes you safer. And I get it. It's kind of natural to think "Well, obviously if you work one more year, saving more money and living off your retirement savings one less year, you have to be better off." I agree, but there's a very important assumption implicit in that claim. One more year of work has to make you safer if your goal is to avoid running out of money in retirement.
But that would be a silly goal for anyone to have. If it was really your goal, the solution would be simple: work as long as you can no matter how much you've saved.
- If you have $500,000, then $520,000 would be better.
- If you have $1,000,000, then $1,100,000 would be better.
- If you have $7,000,000, then $7,300,000 would be better.
- If you have $40,328,805, then $41,212,701 would be better.
If we're going to talk about safety, there must be some underlying definition of risk. You might run out of money in the literal sense if you retire with $40,000. Working another year would probably be a good idea if you have $40,000 in savings.
If you're 67 with $700,000 in a 401k, and you've done your planning, you're not running out of money. The risk you face is the risk of having to make an adjustment to your spending.
Is there such a thing as too much safety?
Timothy was proud of his house. He lived at the top of the hill. Everyone in town could see it when they went outside. Timothy was very responsible. He was not one to take any chances, because responsible people don't leave anything to chance. Timothy bought premium flood insurance for his house. If there was a flood, he would be able to rebuild it exactly as it was. He carefully documented everything. He had pictures, receipts, and inspection certificates in case of a flood.
The best thing was that he had just finished making his vehicle payments. That would allow him to pay the $400 every month for flood insurance with no impact on his budget. The vehicle payment had been $650 per month, so his overall budget was in a better place even with the insurance. Timothy was very proud of himself.
One day Timothy's wife was very cross. At first he dismissed it because she was somewhat unhinged. Then he realized it had something to do with money, so he rushed over to see what it was. Why was he paying $400 every month to the insurance company for flood insurance when they lived on a hill? He tried to explain that you can never be too safe, and just because there had never been a flood that had reached the top of the hill before didn't rule out a Noah's ark type of event. She had postponed braces for their daughter because they didn't have room in the budget to pay for them.
I will concede that this story is lame. The lesson is valid nonetheless. The insurance premium you pay has to come from somewhere.
Should you work another year?
So here's how I think about this. You need to ditch the idea of "safety at all costs" and think in terms of benefit vs cost.
The benefit: How much extra will you have saved if you work one more year? What will you do with the extra saving that you wouldn't have done without it?
The cost: Why do you want to retire? What are you planning to do in retirement? What parts of your job do you hate? If you knew you only had two healthy years left, what wouldn't you be able to do if you spent one of those years working?
Even if you think through these carefully, it's still a hard problem. Savings are measured in dollars, enjoyment is measured in utility, and there's a lot of uncertainty around the quantities of both.
What I think is going on
My observation is that working another year is a convenient way to avoid having to think through these difficult questions. Working one more year won't buy you much in terms of safety, but it'll cover the bills while you put off making hard decisions.
I suspect most people that work one more year are increasing their risk rather than making themselves safer. They're working one more year because they haven't planned the way they should. They don't know their spending, they haven't figured out an income plan, they don't have a plan for adjustments, and they haven't figured out how they're going to spend their time. That's risky as hell, because they'll have a medical problem, they'll get laid off, they'll have a family issue they didn't expect, and while they're dealing with that they'll be doing the retirement planning that they should have been doing. While they're caring for their spouse, they'll be scrambling to figure out a Roth conversion strategy.