Early retirees are an interesting bunch… on the one hand, it takes a lot of audacity to leave the workforce decades early. I mean, who does that?!
On the other hand, most of us are extremely fiscally conservative. People are even competitive over who is the most risk-averse… “You go ahead and target a 3% withdrawal rate, buddy, I’m going to keep working until I can spend less than 1.76852%!”
For most people though, the debate is primarily internal and manifests itself as One More Year Syndrome. “I’ll just work one more year to cushion the portfolio a bit more, THEN I’ll quit…”
It’s a very reasonable discussion to have with yourself. But working one more year also has some costs.
The Cost of Working One More Year
There are some negative connotations to the phrase One More Year Syndrome (the acronym even sounds like, “Oh My!”) Implied is that you have already reached your original financial goals (whatever those may be), but continue to move the goalposts… and thus you have a second and third and fourth “one more year.” (Myself, I worked 3 extra years.)
The allure is strong. More working years means more money, and who doesn’t like to have more money? (Want it, yes. Will it make us happier? Probably not.)
From an already strong financial base, continued work means another year of 401k and HSA contributions and another year for the portfolio to grow without the hinderance of withdrawals. You will also (probably) increase the value of future Social Security benefits. These are all nice things we can do.
But what we can’t do is take full advantage of the tax-free Roth IRA conversion and capital gain harvesting opportunities.
What is that worth?
The Value of Tax-Free Opportunities
Every year a married couple has the potential to do a tax-free Roth conversion worth up to $24,400 (standard deduction.) Additionally, it is possible to realize long-term capital gains of up to $78,750, also tax-free. (2019 numbers. Single filers divide by 2.)
(Related: our overall tax minimization strategy.)
If these 2 actions are taken while working, common tax rates of 22% might apply to the Roth conversion and 15% to the capital gain, for a total tax burden of $17,181, or about as much as a max 401k contribution. More for higher-income earners, less for others.
Paying an extra $17k in tax isn’t something most people will do voluntarily, so one more year of work means one more year with neither Roth conversion nor capital gain harvesting.
Roth conversions
As with most things investing, compounding is a significant factor. Even small amounts of money can grow to incredible heights given enough time.
$24k in a Roth or Traditional IRA with a real CAGR of 7% will double every 10 years or so, quadruple in 20 years, octuple in 30 years, and sexdecuple (16x) in 40 years to about $400,000 (inflation-adjusted.)
A 401k with a value of only $24k at age 40 will already become a 401k that is too big to pay zero tax by age 70.5 when RMDs and full Social Security begin.
Or phrased differently, a single tax-free $24k Roth conversion at age 40 will result in zero tax paid on about $200,000 worth of assets (2019 numbers) by the time most people are eligible for full Social Security.
By contrast, the one-more-year worker will most likely have that $200,000+, along with most/all of the other 401k contributions, in a Traditional IRA. Withdrawals from this one missed Roth conversion from the past will be taxed at their highest marginal rate.
With Social Security income, investment income, RMDs, and perhaps even the real death tax, marginal tax rates will potentially be in the neighborhood of 22%+. Or the same rate that we didn’t want to pay 40 years ago.
Capital Gain Harvesting
Raising basis through capital gain harvesting does not have a profound compounding benefit, but there is still significant value. (How to prioritize: Roth conversions vs Capital Gain harvesting.)
By raising basis in our portfolio, instead of a future $10,000 stock sale resulting in a taxable gain of $7,500, maybe it is only $1,000, for example. (Full chart here.)
The tax advantage of a single harvest will be limited to just 15% of the harvested gain in most cases, or $78,750 * 15% = $11,812.
That is certainly nothing to sneeze at. But where this really shines is when we have future edge cases where just a little more taxable income can result in significantly higher taxes or expenses.
Some examples:
- a high-income year, where capital gains might be taxed at 20%+
- years when income is close to 400% FPL (the ACA subsidy cliff)
- years before events that are heavily impacted by MAGI, e.g. applying for financial aid for Jr’s college
(related: why Jr doesn’t have a 529) - before moving into a higher tax environment (e.g. moving to France, moving to California, etc…)
- Social Security tax torpedo
We can minimize the potential of having one of these negative tax experiences in the future by harvesting gains early and often. (I”ve already harvested $173,000 over 6 years.) If we need to avoid realizing a capital gain, even with higher basis, then we can tap the seasoned Roth conversion money instead.
Time
Nobody is getting any younger. A year may be only 365 days, but each day passes never to come again.
We can work another year (or so) to improve the historical failure rate of our portfolio from 2% to 1.8%, but the human body has a failure rate of 100%.
Check out the longevity failure chart in the post, You Will Die Before You Run Out of Money for a sobering visual.
Summary
For an aspiring early retiree, working an extra year or five will almost always result in a greater net worth. I worked 3 years longer than originally planned and indeed our portfolio is larger for it.
A larger portfolio means the historical failure rate of said portfolio will be lower, because of a lower withdrawal rate.
This does have a cost, however.
Working longer also eliminates or reduces the opportunity to do tax-free Roth conversions and to harvest long-term capital gains (also tax-free) during the extended working years.
It also costs time, our most limited commodity. Part of the reason the portfolio has a greater success rate is that it doesn’t need to last as long.
For the few who actually achieve a zero-tax retirement, no harm no foul. But for most of us, this won’t be the case.
Whether these costs are significant is subject to interpretation, but it is at least worth recognizing that they exist.
I often talk about how fear keeps us working past the 4% rule but weirdly we can make more money if needed but never get time back. Thanks for adding some of these tax considerations into the mix. Definitely food for thought
People should work until they feel comfortable and confident in their plan, that is the most important thing.
But historically 4% plus SS is incredibly robust (says a guy spending less than 4%.)
For the retired sub 1% spenders : ‘Just One More Year And Then You’ll Spend?’
on their heirs
Just curious – DH has a very secure defined benefit pension coming to him when he retires next year. I always wonder when I read your articles on this topic. I don’t know if any of this will apply to our situation. Are we going to pay more taxes because of his DBP? Any resources you can recommend for further study?
Probably. But personally, I would much rather have a great pension and pay lots of taxes than have no pension at all.
The Bobs have a similar arrangement.
One thing I don’t see considered here is the ACA “tax” that you pay as you harvest these gains. As your MAGI goes up, your subsidies go down by 10-15% of that gain.
I took an example family of five earning around 150% of FPL – a silver plan cost $2415 after subsidies. If you bump that up to 250% of FPL (a $30k income increase), the same plan goes to $6632, over a $4000 difference in out-of-pocket premiums, which is a 13% “tax”.
Obamacare Optimization vs Tax Minimization
Kickstart Your (Early) Retirement
Also not mentioned: State taxes
I’m confused by this statement: “Every year a married couple has the potential to do a tax-free Roth conversion worth up to $24,400 (standard deduction.)”
Are you saying that if a couple has no earned income (wages/salary) in a particular tax year, then if they do Roth conversion(s) up to $24,400 in that tax year, there will be no taxes on that conversion? Basically, you’re using up the standard deduction with Roth conversions? Have I got that right, or is there some special deduction (specifically for Roth conversions) above the standard deduction?
Thanks,
A newbie
You got it exactly right (use the standard deduction to do a tax-free Roth conversion.)
See the overall idea in the post Never Pay Taxes Again or how we’ve applied the concepts over the past 6 years. There are links to our actual tax returns in those posts for real-world examples.
I read this and wonder if I screwed up by investing too much in tax deferred accounts. Between my wife and I, we had access to a 401k, 403b, and 457b for a number of years. We maxed them out thinking that was the best thing to do for retirement. So 90% of our savings is in tax deferred accounts. Have you run into that situation before? (wife and I are both 42) I’m not sure what the best withdrawal strategy is at this point.
https://www.madfientist.com/how-to-access-retirement-funds-early/ Unclear if you’re still working or not, Justin, but check this infographic out.
It’s never a mistake to save. All these retirement accounts do is change when and how much tax we pay.
The link Lisa shared is a good start. Feel free to ask questions here or on the forum.
The required minimum distribution can really push up your tax bracket in retirement. It can increase the level of taxation on social security, bump you into a high tax bracket and double or triple your medicare premiums. Add to that, the 401k plans are sitting ducks for the feds to effectively confiscate through regulations and means testing withdrawal taxes. Your young enough to start doing something about this. You might try to arrange your financial/work affairs so that you reduce your income sooner than later–maybe by 50 or 55–and start converting to Roth or simply withdrawing and investing in a tax advantaged way (real estate, land banking, buy and hold but not the mindless passive “investing” that’s all the rage now, or whatever you can research). Go look at Josh Scandlen’s book on this and his vids. He’s not polished in his presentation, but has some good thoughts. Good luck
PS. The feds have no intention of adjusting the social security taxes for inflation. That’s how they will keep social security “solvent.” This is stated in their reports.
Another way to say this is that the thresholds that determine what percentage of SS income is subject to tax is not indexed to inflation. For we young’uns we should just assume 85% of SS income will be taxable, which is better than other income where 100% of it is subject to tax.
Also don’t forget to stock up on ammunition and gold bars.
Shortly after I retired last year, a former work colleague and good friend reached out to me hinting at needing an M&A executive to cover the SE for a fledging VC funded healthcare firm. I told him that he would have to pay me a lot more than the market would bear for the position because of the Roth conversion and capital gains strategies I was deploying. During the course of a nice meal, I explained it to him. We parted ways. Never heard back from him except for the occasional test salutations and jokes. Aah to have choices when one saves and watches costs.
Yeah, the pay it would require to once again put on the yolk of schedules and office politics is not low.
A few years ago a recruiter sent me a job description and asked what kind of salary I would need for something like that. I said $500k.
Them: “Oh, we were thinking something more around half of that.”
Me: “You are looking for somebody just part-time then?”
You’d go back to work full time for 500k/year? Have you learned nothing from your blog!? ;)
Unlikely, but being a smart ass is free entertainment
This all makes perfect sense of course. However, we are still waiting one more year (literally the plan is to start our travels next October). It has less to do with the finances and more to do with preparations at this point. We just have a lot of crap to sell, including a house. It needs a little sprucing up which, of course, I’m doing myself. But I’ve decided to take my time with it and keep the stress levels low. Besides, I’m kind of enjoying the feeling of this building up period before we go. A strange sense of calm has come over me, even at work. I think I’ll savor the feeling of “I don’t have to do this if I don’t feel like it” a bit longer.
BTW… We are starting off in SE Asia. The wife is all about the stinky tofu. If you are still in Taipei when we head out, I’m buying.
I’m always up for a coffee.
Waiting one more year also makes sense. It has pros/cons like anything else. Sounds like you found a good balance.
You haven’t been through a nasty bear market while withdrawing from your assets. Talk to people who retired in 1999 or 2005 and had no income except selling their assets while the market was crashing every day, and I doubt the phrase “incredibly robust” will pass their lips.
Me: Dear 1999 and 2005 retirees, how is your portfolio doing today?
Them: We are doing great, thanks for asking!
“incredibly robust”, “Them: We are doing great, thanks for asking!”:
Having been alarmed by the clamour for free money, had they deposited their money in banks, particularly Australian banks, they would have ‘done gooder’.
‘The rich expect a recession next year — and are hoarding cash’ CBS News.
If only we had a time machine
Hi Mary, please see blog link: https://retireearlyhomepage.com/chronidx.html
It is by John P. Greaney. He retired in 1996 (sort of using 4% rule) and kept a detailed blog of his experiences. It is a very enlightening read though not as flashy or interactive as GCC or other modern FIREds.
The only thing I noticed that he did differently when the bears/recessions came out was to bulk up on travels as it got a lot cheaper.
Your posts always put things in great perspective for me.
I think what’s so tough about the one more year syndrome is a couple things like stated above:
1.) FIRE people are so so conservative.
2.) If you’re in a high paying field, the golden handcuffs near retirement (even in early 30s) can become massive
3.) After doing a job for a number of years, it can become easy and automatic and sometimes have a lot of flexibility.
Unfortunately, working in your 30s and 40s can waste some of the best days of your life.
I’m hoping to retire early and spend smaller percentage early like you did. I’m sure I’ll get trapped in the one more year syndrome but I’m going to save this post to remind myself not to let one more year turn into 10 more years.
“working in your 30s and 40s can waste some of the best days of your life”:
Retiring in your 30s and 40s can waste some of the best earnings of your life – especially considering the time they have to compound.
Take a year off once in while – come back recreated, perhaps with mission or a patent.
More is more. Sometimes better, sometimes not.
“Sometimes better, sometimes not.”:
Risk Preferences & Utility Functions: https://www.youtube.com/watch?v=tCreeXzCNRc
Risk averse ~= happy enough with current outlook, seeks certainty.
Risk seeking ~= unhappy with current outlook, seeks gamble.
My income likely would have more than doubled if I was still working the old gig. More than that if including the unvested stock I walked away from.
Retirement Has Already Cost Us At Least $5 million – this was written a couple years ago so the cost is higher now.
But then: What Would We Do If We Had $10 million?
Nice post. I struggle with this all the time, especially now that my work travel is ramping up. Have done several international trips this year alone!
One option we are exploring is me leaving my job right after our annual bonuses are distributed early next year, and then living on my wife’s teaching salary for awhile as I potentially go into local consulting (or maybe even switching careers to a job that doesn’t involve as much travel). It’s very tough to leave the family for 2+ weeks at a time, which is basically what each international trip involves (tough to make it worthwhile if I only go for a week – it takes a few days just to get over the jet lag!). Would love to just not do that…
That said – it’s hard for me to walk away from a 6-figure job, when many others would give anything to get that kind of salary. That’s why I’ve been doing OMY for the last few years…but at some point enough becomes enough. It’s just easier to say it that to actually do it I guess :-)
It is easier said than done. Momentum is real.
A mental exercise you could try: picture yourself in the middle of the next phase of life (local consulting, puttering, spending time with the kids, not feeling tired all the time.) Now the old boss calls and asks if you would like to trade that for a 6-figure-job with lots of international travel.
There is no right answer, but what do you do? It doesn’t matter if other people would give anything for the opportunity, nobody else lives your life.
“it takes a few days just to get over the jet lag!”:
It need not.
Sleep and exercise at calculated times, perhaps using a minimum of low side effect sleeping pills such as Zopiclone, low carbohydrate, high nutrient food can eliminate jet lag.
Airport lounges can reduce the discomfort of noisy crowds.
Modern tele-communications can eliminate the need to travel for business.
“It’s hard for me to walk away from a 6-figure job, when many others would give anything to get that kind of salary.” Um,
so how bout quit and free up the position so one of the others can do it? They need the salary more than you, and you can spend more time with the family. Win, win.
Your great article resonates with me and I am currently in the A Few More Year Syndrome.
Having lived abroad for the past 15 years, I am unsure how much I need to retire in Canada.
When I left, I was a bachelor and now I am married with kids.
Visiting on vacation, I am not sure if I need 60 or 90 K a year (after tax) and I prefer to be on the safe side.
In the past year, my organisation moved us to Geneva and my wife has happily found a job (after nine years following me) and the kids are well integrated. I can’t be bothered to move again considering we lived in six countries in the past 15 years and Geneva is the best destination with a great public school system and amazing places to visit within 500 km.
I find it less challenging to stay here a few more years, visiting European destinations on long weekend and holidays before we FIRE back in Canada with a bigger cushion. I am concerned to be bored staying in Canada not moving to a new country every few years. As my salary is not a taxable income in Canada, I have been harvesting capital gains for over a decade after I harvested my RRSP (equivalent to 401k) paying minimal taxes over the years.
I would be hard-pressed to leave Geneva. It’s a beautiful place
Great perspective. Most of the folks can trade in a job which sucks your time, but you can live with, for more ‘things’, social approval, and a sense of belonging that job gives. I am in a position where I can probably FIRE but am pushing OMY so that I can be sure I can take at least one or two vacations in retirement, live in a nicer home in a good neighborhood .
What you give up when you quit a job (regular paycheck) is explicit but what you gain is not. Many people ask, what would you do if you quit the job all day as that is is burnt into our brain through culture. That is the sad truth.
It is mostly a psychological battle as you can never be 100% sure that you are safe, so why not put up with one more year.
As someone else put this, as I look around seeing people struggling and living paycheck to paycheck, it is very hard to throw away a good paying job with decent benefits. (I think this is psychological and group think but can be overcome)
It would be great if you could write this from a psychological perspective.
Thanks for the post. I need a bigger push like this – 4% failure seems so high, but 30 years is a lot of time to make rudder changes. I was thinking one more year to retire in spring 2021. But we are doing a pilgrimage in May 2020 and now I’m thinking we should just add 2 to 6 weeks to the end of it for extended slow travel in southern Europe. I don’t have vacation days to even cover the pilgrimage! At 58, time seems shorter than money. Selling the San Diego house and most stuff then renting for a couple months in neighborhoods of parents (OR, WA) may be a better fit in many ways.
Just need to wait until January (after annual bonus) to tell the boss….
The world is grand, but passes by the window on my daily commute.
I also timed my exit with bonus season
I agree one more year isn’t great once you have enough. But one more year is pretty nice to lift you from some sort of lean FIRE to less lean FIRE.
I like spending some money, travel, learning (and paying for cleaners at my house :P). That was worth saving up for. Past that, yeah screw it. The time sounds more valuable. :)
The difficult part for most people is internalizing the concept of “enough.”
A common thought about FIRE in general from people who don’t get it is, “I don’t want to live like I am poor forever.” So work 16 years instead of 15 and use the extra savings to live large. No need to work 46 years though.
Thanks for this post. The perspective is super valuable. I’ve learned tremendously from your blog.
One thing I’d love to get your thoughts on is the intangible value of… let’s say job satisfaction. Some people out there (from mega-rich entrepreneurs to hawker vendors) pride their work so much that they insist on working till death. Most of us are not like that, but still enjoy the good feelings of saving lives, coaching the next generation, solving complex problems, building things, or putting smile on people’s faces. While we may not be cheerful to wake up every Monday morning, there’s often a sense of fulfillment on Friday night that we’ve accomplished something and added value. Econ 101 teaches us (I get that it’s not always true) that a person’s paycheck size is tied to his/her value in the market. Presumably people like you who can retire really early had a respected career and an above-average salary – along with the ability to proclaim a unique set of skills to help wealthy entities with their problems.
I totally respect that you and many others find different sorts of fulfillment in retirement. My question to you is, do you ever miss work? Not the paycheck or benefits, but the idea that you put your brain, education, and training into helping someone in some way that adds a lot of value. The idea that few people in the world can do what you do (presumably). The idea that you work with and learn from other intelligent people, sharpening yourself everyday, and bonding over your professional interests. The idea that you are making the world better in some way.
On the “one more year” topic, I believe people’s sense of self value often trumps financial considerations. It may not be quantifiable, and part of it may even be people fooling themselves, but it’s a real sentiment that carries a real value. So, my second question is, did this ever cross your mind as you worked toward this early retirement? Did you dislike your job more than the average worker, or did you see “job satisfaction” as a mere illusion?
Hi Peter,
I could say many things, but perhaps it can all be summed up with more people need to let themselves die.
Contrary to popular opinion, I enjoyed my work. But I would have enjoyed it more if I could have done it only 6 months per year – job satisfaction is not life satisfaction.
There are a lot of ways to make the world a better place – the idea that a job is an essential part of global improvement is definitely an illusion.
Best
Jeremy
This is good in so many ways, but this all hinges on good health. I was one of the “one more year” voters. But when my husband’s Parkinson’s Disease began to progress faster than anticipated, I somewhat reluctantly decided to retire and take care of my husband. Sometimes I miss the extra money, the good feelings of taking care of my patients and enjoying the work relationships, but I don’t regret my decision. More money isn’t always the best way to go. So, I recommend that you continue to work on earning more, saving more and planning retirement dates, but know that sometimes those plans are derailed. I hope not.
Wishing you good luck and good health to you all.