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account as the result of getting a paycheck, of any amount, then those are dollars which necessarily don’t have to be withdrawn from savings.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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