Posted by Mike Smith :: January 4, 2009 @ 9:23 am

In a previous post, I discussed the effect of large, early decline in a retirement portfolio. Today, I consider if you instead delayed your retirement by a single year.

There are three major financial differences when you work through the first year of your planned retirement. First, your job (and not your nest egg) will cover your expenses. Second, you can make additional contributions to your portfolio. Third, your money will have to last one year less, assuming your lifespan is the same in either case.

Reviewing the assumptions from the previous post, consider a retirement portfolio worth $1,250,000, expenses of $50,000, 30% of the portfolio in equities, and a decline in portfolio value of 16.5%.

By working through the first year, $50,000 won’t need to be withdrawn from the portfolio for expenses. You would also be permitted to contribute an additional $20,500 to your portfolio, assuming that you were using a 401(K) and at least 50 years old. Even if you received no employer matching, your portfolio would be worth $1,064,250 at the end of the year. To get that number I reduced your starting portfolio (of $1,250,000) by 16.5% and added your $20,500 contribution. The actual number would be slightly different since contributions would be made throughout the year and may also be subject to market forces.

Plugging those numbers into the FIRECalc, we raised the success rate from 44.4% to 51.9%. Is working an extra year worth raising the probability of your money lasting through retirement by 7.5%? Also remember that this extra year worked was assumed to occur during an extraordinarily bad year for the stock market. Working one extra year during flat or positive gains of the market could have an even greater effect.

Would you consider working an extra year to significantly increase the likelihood of having enough money to last your entire retirement?