As a financial planner, I believe in the efficacy of financial planning. One of the core tenets of true financial planning is modeling. Not the kind of modeling that Giselle does, but rather financial modeling. The benefits of financial modeling are plentiful; however, my favorite aspect is understanding what moves the needle.
What do I mean by “move the needle”? You see, modeling is an imperfect science, as there are infinite unknowns about the future we can’t control. What we can control and glean from modeling is the net effect of our decisions. It can reveal if paying off the home early or investing makes sense. What happens if you buy a second home, or pay for all three kids’ college tuition? I really enjoy rolling up our sleeves together and helping decipher the data to make well-informed directional decisions.
One of the most interesting things about this process I routinely find is the net impact of working one more year. Naturally, this is when people really tune in, as they are most apt to pay attention when it comes to the age at which they can retire. That said, people are absolutely shocked when they see the net difference of working one more (or each additional) year. The numbers can be staggering — the difference between dying almost broke or with millions of dollars left.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Now, every time I show this to someone and their jaw drops, I have to start describing the why behind what they are seeing, as the numbers seem faulty. I figured, why keep it a secret? So I’m sharing with you today all the things that go into the mass impact of working one more year.
1. You’ll save more.
One of the more obvious factors that impact one’s plan by working more is they get an extra year of savings. Typically, individuals are at their peak earnings, and thus savings, years at the end of their careers. Furthermore, their expenses usually have dipped, as kids are generally out of the house and off (or mostly off) the payroll.
Combining these factors means that each additional year of working affords you the ability to really squirrel away some substantial funds, which of course has a large impact on your net figures.
2. You’ll spend less.
The next sizable benefit is that you will spend less during retirement for each additional year worked. You see, we assume, rightfully, that you will expire on the same date regardless. Thus, if you are going to pass away at 90, then each additional year worked means one less year of drawing on your assets.
Simply put, if you retire at 60 and spend $100,000 a year, your net spend will be $3 million. If you retire one year later, that figure simply decreases to $2.9 million.
3. You’ll benefit from more compounding.
Ah, the beautiful world of compound interest. Now, not only do you get to save more and spend less (two great recipes for financial health), but perhaps the largest benefit for many is an extra year of compound interest on their retirement assets. By delaying retirement a year, you won’t touch your assets for an extra year. In doing so, these assets benefit greatly from more time compounding.
If we look at that same $3 million figure from above, and your assets can grow unimpeded at, let’s say, 10% for an extra year, that means you have $3.3 million as your starting retirement amount vs. $3 million.
The above three items are the largest contributors to how working one more year can benefit your retirement planning substantially. Of course, there are other factors, such as using working capital to finalize large purchases and one more year to figure out how to spend your retirement years. However, at the core, saving more, spending less and another year of compounding can have a massive effect on one’s financial health come retirement.
If you combine these things, you can see that if you are making good money and can save an extra $100,000 on that $3 million portfolio, which now compounds another 10%, thus giving your starting retirement asset number $3.4 million vs $3 million and now you only need to spend $2.9 million in retirement, you already have a $500,000 delta by waiting that one extra year. Oh, and an added benefit that is $500,000 more to compound over the next 30 years.
Grand finale
Hopefully, it all makes sense as to not only the impact of working an extra year but the validity and importance we believe financial modeling can provide in understanding one’s finances and financial decisions.
That all said, this doesn’t mean you should work that extra year at all, as sometimes enough is enough. The exercise here, as always, is to educate so you can see things from another vantage point, which ideally gives you more knowledge to understand what is right for you.
As always stay wealthy, healthy and happy.
Diversified is a registered investment adviser, and the registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC.
A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.
Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax advisor, accountant, or other professional concerning the application of tax law or an individual tax situation.
Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
Related Content
-
What’s the Difference Between a CPA and a Tax Planner?CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
-
Starbucks BOGO and New Sweet and Spicy DrinksFor a limited time, Starbucks is announcing four new "swicy" drinks that are both spicy and sweet.
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
-
Charitable Remainder Trust: The Stretch IRA AlternativeThe SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
-
Three Ways to Take Control of Your Money During Financial Literacy MonthBudgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
-
What Not to Do if an Employee or Loved One Is KidnappedBusinesses need to have a crisis plan in place so that everyone knows what to do and how to do it. Sometimes, calling the authorities isn’t recommended.
-
Why You Shouldn’t Let High Interest Rates Seduce YouWhile increased interest rates are improving the returns on high-yield savings accounts, that may not be an effective place to park your money for the long term.
-
Need to Build an Emergency Fund? Seven Steps to Get ThereHaving a safety net can mean peace of mind on top of being able to maintain your lifestyle if a financial emergency strikes.
-
Which Type of Life Insurance Is Right for You?Life insurance isn’t a one-size-fits-all option. Here are the differences between term life, whole life and indexed universal life insurance.
