Working in Retirement? Here’s Why That’s Great… and Why It’s Really Not | Smart Change: Personal Finance

(Sam Swenson, CFA, CPA)

Few people would argue against having more money in retirement. But perhaps even fewer would run to make more money if it meant giving up time with family, hobbies, or other pursuits, especially in the later stages of life.

The financial benefits of working in retirement, and especially early retirement, are quantifiable and often significant. On the flip side, some of the non-financial costs might be too high for some retirees to bear.

Let’s take a look at the debate in greater detail.

Why you might want to think about working

Let’s imagine, after a 40-year working career, that you’ve saved up a $1 million nest egg. This is no easy feat, and you should be congratulated for attaining it!

According to the 4% rule, a retiree should be able to withdraw 4% of their starting portfolio balance every year, with annual adjustments for inflation. In other words, after withdrawing $40,000 the first year and an assumed inflation rate of 3%, you’d be able to withdraw $41,320 the second year.

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Unfortunately, the 4% rule has recently come under fire due to the set of assumptions used in the research study. First, an asset allocation of 60% stocks and 40% bonds was used as the model portfolio, which may not be appropriate for today’s economic landscape. At the time of the study, bond yields were far higher than they are now and stock valuations were more reasonable.

Further, rampant inflation and rapidly rising interest rates characterize our current economic environment, two attributes that have spelled trouble for financial assets in the past. Having an extra side income of even $20,000 annually could help supplement portfolio withdrawals, which could help your savings last much longer.

The reality is, between the many bleak economic indicators and the uncertainty of the next several years, having more income is going to be a real benefit for those who choose to continue working in some capacity. The good news is that extra income can go a very long way in prolonging the life of your portfolio, but this, of course, comes with costs.

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Why working in retirement isn’t so great

First, I’ll state the obvious: After working for four decades, it’s understandable that one wouldn’t be particularly excited about the prospect of more work. Retirement should be a time to actually retire.

As time goes on, the opportunity costs of working increase, and perhaps rapidly so. Life expectancy falls, health may or may not begin to deteriorate, and the idea of ​​losing time with family might be too unappealing to justify more work, even if it means more money.

Assuming you can sustain yourself through a combination of personal savings, Social Security, and pension income, working might create more stress in your life than it’s really worth. In the end, money is meant to be cultivated and ultimately used for your benefit, so there’s no better time to spend it than in retirement.

Working can be especially deleterious if you’re in a job you don’t like or find unpleasant. You’ll have more money by staying employed, but you’ll lose in virtually every other aspect of your life. Keeping a job that’s especially stressful can be mentally difficult and perhaps even hazardous to your health unless you truly need the money to cover your living expenses.

A complex decision

The decision to work in retirement encompasses both financial and non-financial considerations, and includes a careful weighing of what’s really important to you. This is not a decision to be made lightly or by yourself, particularly if you’re married or have dependents.

In the end, working has its benefits and drawbacks, while choosing not to work comes with its own set of trade-offs. Whatever you choose, make sure you’ve given it a fair amount of thought and be careful not to overweight any one factor.

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