By Brad Thomason, CPA
In the years after the Vietnam War, the US military spent a lot of time looking into what was necessary to assure victory in warfare. What they concluded, in simple terms, was that if it was important to win, you couldn’t really be thinking about minimum requirements or efficiency or things like that. The best way to win was to throw overwhelming force at the target, force of such magnitude that the target simply couldn’t hold up under the onslaught. Obliteration was the key to sure-victory.
Which, to their chagrin, they realized is something which they already knew, but apparently forgot. In World War II, our forces attacked by land, by sea and by air. In the major battles, all three at once. If you wanted to you could view the whole thing as being similar to a demonstration in high school physics class: you just keep piling on the force until the thing collapses. Ultimately it comes down to math. When the sum of the effects gets high enough, destruction becomes inevitable.
How would you like to do that to your chances of a successful retirement? Because if you would, I have the perfect three-prong attack that you can launch at your portfolio. Unless you have extraordinary resources (or a very short time to live), it is almost certain to blow it to smithereens. Ready?
1.It will reduce the total amount of principal that you feed into the system, which will inevitably, irrespective of any other factors, lead to the balance failing to reach the height that it could have achieved.
2.It will reduce the number of years that your (already-reduced) savings get to compound and grow.
3.It will make the job that your portfolio has to do, bigger. You will have a greater number of years to have to pay for than if you retired later.
Yes, folks, that’s a complete attack package. The financial version of land, sea and air. All the branches of the military converging on that poor, single target. The perfect concerted strike. It’s brilliant, I tell you. If you wanted to bring your portfolio to its knees, it is hard to imagine any single act which stands as good a chance of such effective damage-dealing. There may be more elaborate ways to do it, but if you are looking for a simple way to get the job done. In terms of having a big ole club to swing at it, this is the ticket.
I’ll presume my point is sufficiently made, and dismiss class early. Have a good one.
By Brad Thomason, CPA
For some reason, certain topics in the retirement planning/retirement income space tend to get talked about more than others. One of the ones which I see less content about is the idea of working at another job after your formal career has come to an end. So let’s spend a minute on that today.
This is something I often discuss in continuing ed classes and other live presentations. There’s a particular nuance that’s easy to miss, and I try to make it a point of shining some light on it. It has to do with the fact that the kinds of job opportunities which may be available later in life often pay less than what you were used to during your “regular” working years. The inevitable question comes down to, “For this amount of money, is it even worth my time?”
The answer is probably, “yes.” That’s because the benefit that you receive could be much larger than the amount of the paycheck itself.
Here’s why: any money you get from working after you retire represents money that you don’t have to pull out of your savings. Think about it. The act of working a few days a week probably doesn’t have much effect on your expenses. So you were already on course to have to spend $x that year, anyway. If you have some portion of that money in your checking account as the result of getting a paycheck, of any amount, then those are dollars which necessarily don’t have to be withdrawn from savings.
Mechanically, that’s simple enough to see. But the part that really matters is less obvious. We’re aware of it because of all of the work we’ve done modeling income projections on a year-by-year basis (which is a pretty standard step we take anytime we’re doing planning work). But it’s not the kind of thing that would just be apparent at a glance.
The simplest way to explain it is like this: the dollars you don’t take out essentially go to the back of the line. They become the last dollars you will take out when at some future point you finally approach the point of depletion. And what are those dollars doing as they sit there in your account for the next 20 or 30 years? Yep, earning investment returns.
Even at a modest 6% rate, money doubles more than twice in 25 years. Which means that if you earn $10,000 next year at a part-time gig, the effect of doing so could be $40,000 to $50,000 of eventual benefit out in the future.
In other words, when you are contemplating a pay rate, you can’t just think of it in terms of its face value. Instead, you have to multiply it by some amount which is based on the number of years you expect your current savings to last. That becomes the de facto compounding period for the un-withdrawn funds.
The new money is essentially going to get tacked onto the back end. Yes, I know that you are going to spend the actual dollars about as soon as they come in. But others dollars that you would have had to take out of production get to stay there, ginning away. That’s what creates the effect.
Note that the thing which allows this to work is the portfolio that’s already in place before the new paycheck starts. If you didn’t have any savings or other means of funding your income then there would be no benefit carried into the future. You would be in the same boat as anyone else who had a lower income. But since your earnings from the post retirement job, economically speaking, are not actually funding your current income, but buying you the ability to delay withdrawals, the profit engine of your capital gets to keep on going. If there was no profit engine to begin with, then none of this would be applicable.
In some respects I guess that qualifies as extra incentive to do what’s necessary to build a sizeable nest egg. The bigger it is, the greater the multiplier effect for the eventual benefits (because the bigger it is, the longer we would expect it to last). For one retiree, a year of earning $10,000 might translate into $20,000 of benefit down the road, whereas it might be worth $30,000 to someone with a larger portfolio (or smaller annual withdrawal need).
But in both cases, in all cases where there’s a pool of earning assets out there, the benefit stands to be worth more than the nominal amount of the paycheck. So make sure you factor that in when deciding if something is worth your time. If you get caught up in the fact that the pay rate is a lot less than you were earning at the height of your career, you may inadvertently take a pass on something that is actually worth quite a bit more than it may seem to be on the surface.
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