Top 10 reasons for targeting more than 25 times annual spending

We started writing this blog post a while ago and were happy to see that right around the same time, other bloggers we like and follow published nice pieces around the topic of reasons to delay early retirement:

• Mr. and Mrs. PIE about how one might still chicken out of Early Retirement
• Physician on FIRE on the benefit of working one more year, and earlier post on Top 5 reason not to retire early
• Smelling Freedom, though, offers a cautionary tale about not getting too fixated on money. Good point!

So, why might someone delay pulling the trigger for a while? You have saved diligently for ten years or more and finally reached the magic number: a Net Worth of 25 times your current spending. That’s an impressive amount, probably somewhere in the seven figures. Now what? Quit your job and enjoy retirement! Not so fast, here are the top 10 reasons for delaying retirement and accumulate more net worth than 25 times spending:

1: You’re on a gravy train with biscuit wheels

Translation: you like your job. I never thought I could use a quote from the movie Kingpin in a blog post (check out the movie, Bill Murray is brilliant), but there you are: Ride that gravy train with biscuit wheels a little bit longer. Why give up your job if you like it? If you still enjoy the intellectual challenge and like to hang out with your colleagues, why not cash in on the gravy train of salaries, bonuses, and benefits for a little bit longer? If you travel a lot for work, scoop up some more frequent flyer miles to help with cheap travel during retirement. Get more contacts just in case you look for employment again while in retirement, either out of boredom or necessity. As for our own experience, Mr. ERN (Big ERN) works in finance and after reaching FI suddenly found a previously high-pressure and stressful job much more enjoyable. Coincidence? No! There is definitely something to the “screw you money” referenced a lot elsewhere. Suddenly you feel a lot more relaxed when another round of layoffs is announced. What seems like a bit of a rat race a few years ago is now a much more relaxing job.

2: Low expected asset returns

As we detailed in our series on the shortcomings of the 4% rule, currently expected returns for both equities and bonds are far below their long-term averages used in the Trinity Study or on cFIREsim. Having a larger cash stash and thus lower withdrawal rate will increase the probability of never running out of money.

3: It will take a lot less time than you think

As they say, the first million is the hardest. Subsequent net worth growth now benefits greatly from capital gains and dividends not just from your regular monthly savings. Even with relatively modest return assumptions, your net worth should grow by about 2.5 times spending per year (assume 4% real return and 60% savings rate). In just two more years you should be at 30 times spending. If you can lower your eventual withdrawal rate from 4.0% to 3.3%, that’s a huge cushion in case the stock market disappoints early during your retirement.

3: Calendar year and tax issues

Suppose you retire mid-year and now live off your passive income. You did your homework and planned out the retirement budget to minimize or even eliminate income taxes (see GoCurryCracker). Not so fast! Your first six months of earnings might put you into a higher tax bracket for withdrawing money to fund your retirement. Instead of paying 0% taxes on your long-term capital gains your taxable income earned that year might push you into tax bracket #3 with a 15% marginal rate, even for long-term gains. If you wait until the end of the year you will get a fresh start for your withdrawals and all those long-term capital gains are likely going to be tax-free. Likewise, if you worked until the end of the year, why not put in the extra month of January? You might qualify for a deductible or Roth IRA that year. Make enough money to fund that IRA or Roth IRA ($5,500 for a single, $11,000 married couple).

4: Higher Social Security benefits

First of all, you have to make sure that you have enough credits during your work years that you actually qualify for receiving Social Security and Medicare later in life. Even assuming the young early retiree has the necessary 40 credits over then years, the extra income and social security earnings will increase your Social Security benefits (provided you believe there will still be Social Security when you retire).

Of course, nobody in their right mind would work longer just for higher social security benefits. But at the margin, it might sweeten the deal for an extra year or two in the workforce. According to the Social Security benefits formula, the marginal benefits for each additional dollar of average (COLA-adjusted) earnings is $0.90, $0.32, or $0.15 depending on the cumulative earnings in your 35 highest contribution years. Most early retirees should fall into the 0.32 bracket. So, an additional year of earning $118,500 or above (the 2016 maximum income subject to OASDI taxes) increases the average annual OASDI income by $118,500/35=$3,386 and your projected benefits at age 67 by 0.32*$3,386=$1,083. If your spouse had much lower income and will use the option to collect 50% of spousal benefits that would be $1,625 in extra annual Social Security benefits. That’s income that will be automatically inflation-adjusted and only up to 85% is subject to federal income taxes (and exempt in many states from state income tax). Not too bad!

5: It’s a natural hedge

Think about it, what can go wrong delaying the retirement date by, say, two years?

• The stock market crashes and even with your new contributions, you are now below 25x consumption. Well, aren’t you happy that you didn’t retire two years ago? Because now you would be digging into your principal and you have the option to either lower your withdrawals and cut your consumption or keep your consumption level and cross your fingers you won’t run out of money 10, 20 or 30 years down the road. What’s more, your new contributions during the equity drawdown benefit from dollar cost averaging once the market recovers again.
• The stock market moves sideways for another two years. Same as above, you have substantially reduced the risk of running out of money.
• The stock market rallies. Well, you worried for nothing, but you now have a much larger nest egg and a bigger cushion for future potential drawdowns. Kick back and enjoy a worry-free retirement.

6: An option value: You might get a better deal from your employer

Over a one or two-year horizon lots can happen. Businesses cut employees and offer separation packages all the time. What’s more, if you are let go, you will be eligible for unemployment benefits, while if you leave on your own you aren’t. Unemployment benefits would definitely sweeten the transition into retirement. Another option play: Say, you had planned to sell your primary residence and move to a cheaper location upon retirement. You’d have to pay 4, 5, even 7% brokerage fees when selling your home. If during your additional time on the job your employer offers you a transfer to a different city, move to that city, and get the relocation package so the employer eats the realtor fee, rent at the new location for a while and then retire.

7: You might leave benefits on the table if you leave early

Some companies have vesting schedules for certain benefits they pay or have paid in the past. For example pensions and 401k plans sometimes have rules whereby you could work there for 4 years and 11 months and you get nothing, but after 5 years you get the benefits. This doesn’t apply to us personally anymore, we are fully vested with everything, but might be a consideration for others.

8: Lining up your ducks

Of course, you have planned for this day for years, but reaching the threshold can happen faster than you thought. 2013 saw the stock market rally by 30+%, so anybody who was at 20x spending at the beginning of the year with a 100% stock portfolio, reached 26x by December 31, 2013. If we want to buy a house in a cheaper location and get a mortgage, we probably want to apply for that mortgage while we still have a regular paycheck from a well-known large corporation. Or even if we pay with cash for the house, having a home equity line of credit as a cash cushion is not a bad idea. And you get better rates if you still have a job.

9: You might like part-time work for a while

If not sure about the early retirement lifestyle, maybe try part-time work first and see if that extra time is really what you are looking for. Meanwhile, enjoy the steady income and benefits, as well as retirement plan contributions.

10: More options 

More net worth and more income mean more options. For example for certain lucrative investments, such as private equity, Peerstreet.com (recently endorsed by Mr. Money Mustache), or FundRise.com, you have to be an “accredited investor,” which carries certain minimum income and/or financial net worth thresholds. Make it over the threshold and become eligible for lucrative investments normally reserved for wealthy households only.