Ok, I’m guilty of this too. Sometimes I think, why don’t I just leave a year or two early than planned. It can’t possibly make that much of a difference to my retirement plan? Unfortunately it does make a very large difference. It’s rather like missing that last step on the stairs, it can cause you to lose your balance if not out right fall. Why?
Well it’s basically a triple threat to your retirement plan that consists of the following:
- Less Savings. You are usually near your peak savings towards the end, hence it is a big deal to cut off an extra year or two early.
- Less Portfolio Growth. Again towards the end your portfolio is growth very rapidly cutting back on this can reduce your final portfolio by tens of thousands per year easily.
- More Expenses. You get another year of extra expenses on top of what you had planned for.
So for example, if you want to retire at 55 with $500,000 portfolio, expenses of $30,000 a year and savings at that time of $25,000 per year. If you stop one year short with a 5% rate of return you end up being short $25,000 in savings, you have an extra $30,000 in expenses and your portfolio would have been short ($500,000-$25000) x 5% = $23,750 in growth. So in grand total that last year is worth $78,750.
You can see how if you did that for more than a year how problematic that can be to a retirement plan. The good news of this particular issue is it also works in reverse. By working an extra year or two you can significantly increase your final savings. In our example above, working full time for an extra year is worth $81,250.
So working is good for a retirement plan, so the interesting conclusion of this is then if you semi-retire and work just enough to cover you expenses for that extra year earlier then you final portfolio would be $498,750. Also identical to the original plan. By doing even some work you help reduce two out three issues, you allow your portfolio to grow and you reduce your extra expenses.
So if you are thinking about pulling the plug a little earlier than expected, give serious consideration to even working part-time during those extra years. It will make a huge difference to your final numbers.