One More Year Or Retire Now?

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Abstract

drawal rates for eight decades, from the 1920 to 2000. According to Jeske, “<a href="https://earlyretirementnow.com/2021/01/13/one-more-year-swr-series-part-42/#more-62572">the safe withdrawal rate was closer to 3.6%</a>,” but delaying retirement by just one year can raise the safe withdrawal rate to over 4%, even higher if we keep contributing to retirement accounts.The “4% rule,” based on the Trinity study of 1998, has since been regarded the accepted safe withdrawal rate in retirement. If you withdraw 4% of your portfolio every year (annually adjusted for inflation), you will not run out of money in 30 years.Financial gurus such as Mr. Money Mustache” (Pete Adeney) advise saving 25 times the annual amount needed in retirement, which comes our to the same 4%.There is increasing discussion, however, that the 4% rule is no longer appropriate and too aggressive, particularly in view of low bond yields and interest rates. Most analysts are not pessimistic as <a href="https://www.financialsamurai.com/proper-safe-withdrawal-rate/">Sam Dogen from Financial Samurai</a>, who says,<blockquote id="51be">“If we feel more risk-averse, we will lower our withdraw

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al rate below the 0.5 percent rule, save more money, or figure out ways to make more money. If we feel like sticking our heads in the sand and ignoring logic, we can stick to a 4 percent or higher withdrawal rate. We can also choose to work for life.”</blockquote>However, <a href="https://www.thebalance.com/how-much-can-you-withdraw-from-your-retirement-portfolio-453997">3% is often regarded as the new 4%</a> now to assure that we don’t run out of money in retirement. Right now we still have a bull market, which may allow higher initial withdrawals, but who know how long this strong market will continue. Since the Trinity study was only designed for a thirty-year retirement, people who retire early definitely should stick to 3% or less.Since I will have a pension that will cover my basic expenses, I only plan to withdraw 2.5% annually. Even in my situation, however, my calculations have shown that each additional year I work will substantially increase the percentage I can withdraw later. I may not need more money, but I may want to be generous to children/grandchildren and with my donations to causes I believe in.I think I will keep working for now.</article></body>

Is “OMY” a sign of procrastination or based on good analysis?

One of my colleagues has just decided that this will be his last year; another is caught in the “OMY” (one more year) conundrum — as am I. Are we procrastinating to delay a difficult decision, or does the data prove that working one more year will pay off in additional retirement funds and security?

A fellow German-American, Karsten Jeske, has a whole series of articles on the effects of working “One More Year.” He calls it the “One More Year Syndrome (OMYS).”

Jeske makes certain baseline assumptions about the expected retirement horizon, asset allocation, and portfolio value and then assesses the safe withdrawal rates for eight decades, from the 1920 to 2000. According to Jeske, “the safe withdrawal rate was closer to 3.6%,” but delaying retirement by just one year can raise the safe withdrawal rate to over 4%, even higher if we keep contributing to retirement accounts.

The “4% rule,” based on the Trinity study of 1998, has since been regarded the accepted safe withdrawal rate in retirement. If you withdraw 4% of your portfolio every year (annually adjusted for inflation), you will not run out of money in 30 years.

Financial gurus such as Mr. Money Mustache” (Pete Adeney) advise saving 25 times the annual amount needed in retirement, which comes our to the same 4%.

There is increasing discussion, however, that the 4% rule is no longer appropriate and too aggressive, particularly in view of low bond yields and interest rates. Most analysts are not pessimistic as Sam Dogen from Financial Samurai, who says,

“If we feel more risk-averse, we will lower our withdrawal rate below the 0.5 percent rule, save more money, or figure out ways to make more money. If we feel like sticking our heads in the sand and ignoring logic, we can stick to a 4 percent or higher withdrawal rate. We can also choose to work for life.”

However, 3% is often regarded as the new 4% now to assure that we don’t run out of money in retirement. Right now we still have a bull market, which may allow higher initial withdrawals, but who know how long this strong market will continue. Since the Trinity study was only designed for a thirty-year retirement, people who retire early definitely should stick to 3% or less.

Since I will have a pension that will cover my basic expenses, I only plan to withdraw 2.5% annually. Even in my situation, however, my calculations have shown that each additional year I work will substantially increase the percentage I can withdraw later. I may not need more money, but I may want to be generous to children/grandchildren and with my donations to causes I believe in.

I think I will keep working for now.