how to know when working OMY is not financially worthwhile?

[FinanceGeek]

In a prior thread we discussed the difficulty high income workers face when deciding to RE. In other words, your working income is high enough that its very hard to want to give it up. But that's an emotional issue, its also important to consider when does it make financial sense to continue working? I proposed a rule of thumb of when working one more year "isn't worth it" in terms of the portfolio benefits of the additional capital you'd save with one more year.

Specifically, I suggested 20:1 as a ratio of one's NW to the amount by which the added capital saved during OMY of working would increase NW. There is an implied assumption that working OMY is "optional" in terms of meeting your retirement budget (e.g. you've passed SWR analysis), and you are contemplating working another year to build additional margin into your financial plan.

As with most rules of thumb, extreme examples can quickly be used to explore the bounds of its validity. For example, if someone had a portfolio of $10m and their job paid $100k / year, regardless of their savings rate I think we'd agree that working one more year wouldn't buy them any meaningful margin in their plan to be FI. They already are FI. But if that same person had a sufficiently high paying job that they could save an additional $1m by working OMY, this is likely "worth it" even though their anticipated retirement needs are already safely met with their existing portfolio.

Thoughts?

 

[Mo Money]

On average, for every year I w*rk, my net worth goes up $250K or about 1/15 of my current NW. I'm in my early 50s, and my health is so-so. It is a hard call for me, but I am sticking with my current plan and jumping out of my lawyer gig in the next several months. I may (may) go part time if it's mutually agreeable. But I don't want to be in a nursing home or on a deathbed wondering why I didn't have the discipline to dump my high-paying j*b sooner. I was about CSdot's age, and in very good shape, when I had a major health incident that changed my plans and my life considerably. A person should get what he or she needs to live on, then perhaps a bit of a kicker (like, say, 15:1 NW ) and then -- jump!

 

[utrecht]

Exactly what numbers are using to come up with your formula?

NW / Income?
NW / One year of additional retirement contributions?
NW / 1 yr of additional contributions plus 1 yr of additional growth?

 

[dallas27]

Exactly what numbers are using to come up with your formula?

NW / Income?
NW / One year of additional retirement contributions?
NW / 1 yr of additional contributions plus 1 yr of additional growth?

Your looking for a financial calculation. To determine your own preferences. This is about how you value your time, that's your preference. Don't overthink it.




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[RunningBum]

Your looking for a financial calculation. To determine your own preferences. This is about how you value your time, that's your preference. Don't overthink it.

I agree. If you hate your job, or have some family situation or health issue, you will probably pull the trigger a lot more quickly than if you get a lot of satisfaction out of your job, want to leave more money to heirs or charity, or other things like that. There is no exact formula, and if there was one for me, it wouldn't be the same for you.

 

[Midpack]

Your looking for a financial calculation. To determine your own preferences. This is about how you value your time, that's your preference. Don't overthink it.

+2. Whatever helps you decide, but not everything is calculable, not even for a rule of thumb. The OP mentions FI, but there's no universal measure of FI to begin with - what's an acceptable nest egg for one individual, will be unacceptable for many others. There's a lot to the retirement/OMY decision that supersedes numbers...

 

[FinanceGeek]

On average, for every year I w*rk, my net worth goes up $250K or about 1/15 of my current NW.

Unless you have a very high level of savings from your job, I'm guessing that your net worth is rising more because of internal portfolio gains then new contributions to savings.

That's kind of the point of the rule of thumb I suggested - when the portfolio is large enough that its future performance is dominated more by market growth than new contributions, there is a diminishing return to working OMY. You may already be there!

Exactly what numbers are using to come up with your formula?

NW / Income?
NW / One year of additional retirement contributions?
NW / 1 yr of additional contributions plus 1 yr of additional growth?

I was suggesting: NW / 1 yr of additional contributions

Another way to look at it is this - whenever you retire you lock in a lifestyle based on whatever your SWR analysis yields as a safe spending number. I suggest it isn't worth working another year if your withdrawal number in retirement would only go up another 5% (or less) due to the additional savings you'd gain from working OMY.

 

[Meadbh]

The proposed number is arbitrary and based on preference. Here's how my decision analysis went before RE:

1. Am I FI? In other words, will my annual retirement expenses be under 3% of my net worth? Have I set up diversified income streams linked to inflation? Am i insured against significant non controllable risks? Do all the calculators I can find suggest that I am FI? Could I handle a significant recession? Do I have contingency plans?

If the answers to #1 are all Yes, then

2. How much can I save every year while working?

3. What is 3% of that amount?

4. What would it mean to be able to add the answer to #3 to my retirement income?

5. If the answer to #4 is "I could do X or Y, like I have always wanted", continue working.

6. If the answer to #4 is "meh", there is little incentive to continue working. Plan early exit.

 

[EastWest Gal]

The problem with continuing to work is that you might not have either time or health to enjoy "x" or "y". In 2013 my NW increased by 2.5x my GROSS income including a HUGE bonus. This year my NW increased by an amount equal more than salary.

FI allows you to decide when it is pointless to keep working, depending on your work vs. your bucket list. For me, my bucket list is bigger than my need for a paycheck. It's time to use the money I paid myself for 30 years.


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[gauss]

One of the assumptions that would need to be addressed with the 20:1 rule would be your current rate of savings (perhaps as a percent of income).

If I am only saving 1% then achieving the 20:1 ratio would have a very different implication if I was saving over half my income.

After reading 2B's comment in the other thread I thought about it for a while and realized that I jacked my percentage saved way up after 2010 when the new Roth conversion rules went into effect and I could use large after-tax 401k contributions (~100k each year combined for DW and myself) to fund these.

If I had not increased my savings rate, then I would have passed the 20:1 ratio many years ago also as opposed to just recently.

-gauss

 

[Senator]

Here is what I am doing. Of course, I have OMY left too (actually 18 months).

I have some rental properties, so my income might be different than yours. I made sure I was saving at least the amount of net pay of my real job. Then, after analyzing it, tried to save 100% of my gross pay. One I was able to do that, I knew I did not need my FT job to pay taxes or 401Ks.

So far so good on my end. I am wondering if I should go a year earlier now, but I think I will just put in an insurance lap, just in case.

56 is still younger than some people retire, although not as early as some of the people I see here.

 

[clifp]

The proposed number is arbitrary and based on preference. Here's how my decision analysis went before RE:

1. Am I FI? In other words, will my annual retirement expenses be under 3% of my net worth? Have I set up diversified income streams linked to inflation? Am i insured against significant non controllable risks? Do all the calculators I can find suggest that I am FI? Could I handle a significant recession? Do I have contingency plans?

If the answers to #1 are all Yes, then

2. How much can I save every year while working?

3. What is 3% of that amount?

4. What would it mean to be able to add the answer to #3 to my retirement income?

5. If the answer to #4 is "I could do X or Y, like I have always wanted", continue working.

6. If the answer to #4 is "meh", there is little incentive to continue working. Plan early exit.

I quite like this flowchart. The 3% could obviously be changed and is probably closer to 4% for someone in their 60s. But question 4-6 are to me the real key factors. However, I do think it is important to pick withdrawal rate and stick to it (more in the planning stage than in actual retirement.) Otherwise people have tendency to say well if that 3.2% is better than 3.3% and few years latter saying that 2.8% is even better. I know there is value to sleeping soundly at night not worrying about running out of money, but I think it is often overvalued.

I also think the 1 in 20 as rule of them makes sense also, although I do think you need to factor in your age. The value to me of retiring at say 42 vs 43 is significantly less than retiring at 69 vs 70, because you only have so many good years left.

 

[Texas Proud]

Unless you have a very high level of savings from your job, I'm guessing that your net worth is rising more because of internal portfolio gains then new contributions to savings.

That's kind of the point of the rule of thumb I suggested - when the portfolio is large enough that its future performance is dominated more by market growth than new contributions, there is a diminishing return to working OMY. You may already be there!

I was suggesting: NW / 1 yr of additional contributions

Another way to look at it is this - whenever you retire you lock in a lifestyle based on whatever your SWR analysis yields as a safe spending number. I suggest it isn't worth working another year if your withdrawal number in retirement would only go up another 5% (or less) due to the additional savings you'd gain from working OMY.

I disagree with your number.... you say 1 yr of additional CONTRIBUTION.... heck, I have not had that much contribution since I got married... I badly miscalculated the cost of feeding, clothing etc. etc. 4 people... (DW also likes to travel a lot).... I have been contributing, but not anywhere near what I did when I was single...

 

[Looking4Ward]

My job paid five times what I actually needed to live on. But it consumed 100% of my life.

For me, it wasn't a financial calculation. It was a quality of life decision.

 

[dunkelblau]

I used a variation of this argument (income/NW ratio as compared to % of remaining expected lifetime) awhile back but in retrospect I think this doesn't really matter. As another extreme example someone whose employer doubles his salary every year for life would likely never be able to not justify OMY so would be a permanent wage slave whose estate will likely pay a large tax bill. I'd agree with the others who suggested that it's the net expense coverage that determines what's enough. I can't imagine explaining to people who take the time to wash ziploc bags that even a 100:1 ratio isn't worth OMY. After all in purely financial terms more is always better.

I think you also have to factor in the nature of the job you're giving up. For example some jobs are almost indistinguishable from passive income so why stop this kind of gig at 20:1? And as I recall from world history class the gladiators of yore bought their freedom once their accumulated purses met their price-- they didn't stick around for OMF to go for that fancy villa. Most of us sit in-between and so would have correspondingly different exit thresholds.

 

[mortal]

Yeah my formula is pretty simple.

(Portfolio * 3.25%) >= Expenses ?

My calculations tell me that my 'income' from my portfolio increases ~3k per year.

After I become financially independent, I'll simply increase my spending to the amount supported by my portfolio each year, until I'm content with my income and have better things to do with my time.

 

[LitGal]

My job paid five times what I actually needed to live on. But it consumed 100% of my life.

For me, it wasn't a financial calculation. It was a quality of life decision.

Our jobs didn't pay this much; but, after "running the numbers" for several years, we could see when w*rk could become optional.

Also, as 30-year devotees of Jason Robards' "You Can't Take It With You" (on Broadway in mid-80's, now available on DVD), we had never wanted w*rk to take over our lives as it did. (So we would watch the play once a year just as a reminder......... like watching "It's a Wonderful Life" each Christmas.)

So, "OMY" just kind of faded away when DH's health required that we take charge of our own days, and ENJOY LIFE.

For me, it came when I just didn't want to be at school anymore.

(A day I had never seen coming..........but burnout kicked in, big time.)

 

[Andre1969]

I'm already at the point where my additional contributions don't add much to my portfolio. In 2014, it was about 3.9% and the only reason it grew that much was because I took a buyout of a small pension, and added that to an IRA. But, growth/compounding added another ~6.7% on top of that.


So, doing OMY in 2014 put my net worth up about 10.6%.


Because the additional investments don't really add all that much to the total anymore, I've considered scaling back. But, with the tax breaks and such, I'm finding it hard to wean myself off of it. I was going to start scaling back for 2015, but when they bumped the federal 401k limit to $18K, it got me excited and I wanted to try maxing out again next year.


I guess I should start scaling back, otherwise I'll end up with too much pre-tax and not enough after-tax savings. But it's kinda hard to do, because with the tax breaks right now, it's essentially the choice of putting in X pre-tax, or 2/3X after tax.

 

[jazz4cash]

I'm already at the point where my additional contributions don't add much to my portfolio. In 2014, it was about 3.9% and the only reason it grew that much was because I took a buyout of a small pension, and added that to an IRA. But, growth/compounding added another ~6.7% on top of that.


So, doing OMY in 2014 put my net worth up about 10.6%.


Because the additional investments don't really add all that much to the total anymore, I've considered scaling back. But, with the tax breaks and such, I'm finding it hard to wean myself off of it. I was going to start scaling back for 2015, but when they bumped the federal 401k limit to $18K, it got me excited and I wanted to try maxing out again next year.


I guess I should start scaling back, otherwise I'll end up with too much pre-tax and not enough after-tax savings. But it's kinda hard to do, because with the tax breaks right now, it's essentially the choice of putting in X pre-tax, or 2/3X after tax.

I am looking at this a little differently. If I am adding 3% per year and quitting would result in 2.5% withdrawal, the diffenence is 5.5% (not 3%) so it shifts the dicision a bit towards OMY.

 

[harley]

I am looking at this a little differently. If I am adding 3% per year and quitting would result in 2.5% withdrawal, the diffenence is 5.5% (not 3%) so it shifts the dicision a bit towards OMY.

That's an argument for working the rest of your life. If you are going to retire, especially ER, you have to accept that you will be drawing down your net worth. Often the draw down will be negated by investment growth, but if you need to get to the point where you are never drawing against your portfolio you'll never stop working. Which is fine, but wasn't for me.

 

[daylatedollarshort]

We had a lot of fat in our budget and realized that optimizing our expenses had a higher ROI in our fifties than OMY. Every $1K cut meant needing $50K less in total retirement funding over 50 years, and we had a lot of relatively painless $1K cuts we could make, or small cuts that added up to $1K, especially with more free time to review the budget and price shop goods and services.

We've made most of our 80/20 on cuts so this year I am going to go back to upping my hours at our hobby businesses. I have to do something to keep my brain active and keep busy so why not have a hobby that also makes extra money. I would not do something where I had to have a long commute, be on call 24/7, manage teams in the US and countries in opposite time zones, and be inside an office all weekdays during daylight hours. I'd live in a yurt before I'd go back to that.

Well, actually I probably would go back to that kind of job for $2M a year, like a recent poster. So I can see his dilemma. But I never made that kind of money, so it is not such a hard decision for me.

 

[Andre1969]

That's an argument for working the rest of your life. If you are going to retire, especially ER, you have to accept that you will be drawing down your net worth. Often the draw down will be negated by investment growth, but if you need to get to the point where you are never drawing against your portfolio you'll never stop working. Which is fine, but wasn't for me.

When I get closer, I think that's going to be the part that might take awhile to get used to. While I know, rationally, that it's okay for the portfolio to draw down over time, it's going to be hard to switch from decades of investing, sacrificing, and watching the balance go up, to drawing it down. I'm sure it's something you get used to in time, but the initial adjustment might be a bit difficult.

 

[jazz4cash]

That's an argument for working the rest of your life. If you are going to retire, especially ER, you have to accept that you will be drawing down your net worth. Often the draw down will be negated by investment growth, but if you need to get to the point where you are never drawing against your portfolio you'll never stop working. Which is fine, but wasn't for me.

I guess you could look at it that way if you wish, but taken in the limited context of "what is the impact of OMY on my savings?", it makes sense to for me to include the both additional and retained savings in the analysis. I certainly did not mean to imply that one needed to get to a point of never drawing against a portfolio. As I stated, it only shifts things a bit towards OMY.

 

[Andre1969]

I guess you could look at it that way if you wish, but taken in the limited context of "what is the impact of OMY on my savings?", it makes sense to for me to include the both additional and retained savings in the analysis. I certainly did not mean to imply that one needed to get to a point of never drawing against a portfolio. As I stated, it only shifts things a bit towards OMY.

Your way of looking it is it definitely something to take into consideration. And, it's why I'm OMY'ing for a bit longer. If I had retired at the beginning of 2014, it definitely would have reduced the gain of my portfolio. I still would have gotten my pension buyout, but wouldn't have added anything to my 401k. I also wouldn't have been able to contribute to my Roth either, but this year, to do that, I just moved money from an after tax account to the Roth, rather than adding money, so it was a lateral move, rather than additional investing.

I just ran my numbers, and if I had retired on, say, 1/1/14, my portfolio would have only gone up about 3.9%, instead of the 10.6 that it has so far. So, I guess that's good, that it would still have gone up. But I want a little more padding.

 

[FUEGO]

20:1 seems pretty arbitrary. For us, it would suggest working for quite a while longer to go from about $1.4 million to $2.8 million portfolio given our final salaries were a combined $140,000.

I think it really comes down to reaching a sufficiently small SWR. At $1.4 million in the portfolio, we set aside about $200k for a couple of big one time expenses and we still have $1.2 million. We have budgeted around $32,000/yr so our withdrawal rate is 2.66%. We could go lower if times got tough (trim out the vacation budget) and we'll probably spend more when times are good.

Should we really keep working until we get to 20:1 ratio of NW to final income? At that point we'll have a WR of 1.2%.

Interestingly enough, DW did work "one more year" this last year but mostly because she gets many months paid time off and will do the same in 2015 when she will exhaust all the leave time and probably quit. OMY was a pretty easy choice when one can get paid for a full year and only work 8-9 months. But if you have "enough"? Working a full year is for chumps!