If you read enough personal finance blogs you’ll come across a post about Working One More Year. These are usually written by someone who is near their financial independence number and contemplating whether to pull the plug. For years I have discounted these feelings as someone who didn’t have a concrete plan. So how do I feel about this topic now that I’m near my retirement number?
Why No Recent Posts?
Before we dig in, allow me to address the elephant in the room. It’s been nearly 7 months since my last post. My apologies for the gap to our regular readers, but life happens. It’s been a busy year, something I will update everyone on in an upcoming post. But things are starting to settle down, plus I just renewed our hosting for another 3 years (we just passed 6 years of Full Time Finance), so I will attempt to get back into the writing habit from here.
I was Debating a Change in My Number Due to Inflation
So for those who remember last year I was debating if inflation was going to change my financial independence goal. I was already well beyond the 4 percent rule, nearing 3 percent. However, my goal was slightly more aggressive given I expected our expenditures to change in retirement. I had not reached my target.
Not Hitting My Number
And I still have not…. As we all know by now the stock market and most investments have been in a downward slide for all of 2022. My own assets were not immune, with a drop as of this writing somewhere near 10%. Now 10% may not sound like much, but when you are near retirement it can be a large number. So the obvious question is whether the drop in my portfolio value is making me consider working one more year?
Mike Tyson once said, “Everyone has a plan until they get punched in the face”. And it’s true, dropping a significant amount from your portfolio can scare people. That fear can change people’s plans. But that did not change mine.
The Market is Declining and I Don’t Care
I wrote way back in 2018 about a bear market we experienced. The stock market decline 20 percent, but I indicated that impact did not bother me that much. The reason at the time was the stock market had just increased dramatically. IE the decline was a form of recency bias. As a result the 20 percent decline still felt like an increase from where the market was just a year before.
Well that is still the situation here. The market increased nearly 27 percent in 2021. Even at the deepest part of the current draw down my net worth exceeds what it did in early 2021. I’m less psychologically attached to the highs of 2021 then the numbers from 2019-2020. So in my mind I haven’t been punched in the face by the market draw down. I’ve returned to near the trajectory I planned for when I predicted what my net worth would be going forward in 2019.
So Why Am I Considering Working One More Year? One Word, Inflation
So why am I raising the question of working one more year now? Well it comes back to that inflation question I asked last year. At the time I wasn’t experiencing much inflationary impact. In late 2021 the inflation was focused on housing, computer chips, and durable goods. But here is the thing. I own my home. We buy laptops on a ten-year cycle which turned over in early 2020. And I don’t buy a lot of physical goods in general. So inflation at that time was not really impacting our household.
Initially Inflation Resistant
Even with the run up in gasoline prices I was largely immune. We do drive quite a bit, we just received confirmation that our one car did 18,000 miles in the last year. Many of those are towing miles. So the gas run up wasn’t an insignificant budgetary change. But other things dropped off creating an offset. In fact we decreased our expenditures in 2020 and 2021.
For example, I am still not flying for vacation. Instead we use the travel trailer we bought in 2020 and driving. While I’d be lying if I told you an RV is a way to save money over motels, it does shift significant travel expenses from reoccurring to sunk costs. The cost of the RV is a lot. But staying at a campground is 20-50 dollars a month. The cost of airfare somewhere internationally for a family of 5 is way more than the cost for us to drive somewhere within 12-15 hours of home. These tweaks have offset the gas price, so for most of the early part of the year we remained immune from inflation.
Now Experiencing Inflation and Adding One More Year for It
But then food and services began to rise. We finally began to feel the impacts of inflation. I still wouldn’t say I’ve been punched in the face, but we have felt the impact of the change. Enough so that it got me thinking about what would happen to our withdrawal rate if extended periods of inflation are encountered now or in the future. As I’ve noted in the past there is no way to predict what inflation will do going forward. There is also no way to predict if such a situation will actually happen. But am I prepared for it?
A Movement Closer to the Original Retirement Plan
After some thinking and some math, I decided I’d like a little more buffer in our end number. Essentially adding a few more years to our retirement plan. Now before we get too much hate mail I’ll point out my original plan was to retire based on a date not a number. The extension of my number by my math still puts us well earlier than that date. As such that means in some ways this is a return towards our original plan.
How Much Did I Increase My Number, What Does One More Year Mean For Me?
So what did I set things too? Well I increased our target number by 20%. With the current drawdown that means instead of 75% to our number, we are nearer 60%. Why 20%?
The Arbitrary Aspect of Our Added Year
Well I admit it is partially arbitrary. Over the years I have surveyed a number of mentor’s contemplating retirement. Many of them respond with a number within a rounding error of this new target.
The Math’s Of Our Added Year
Less arbitrary, a 3 percent withdrawal rate for this new target puts us at a point where our expenditures could grow another 20 percent and still be met. Why 3 percent? Early Retirement Now’s series made a great argument for 3.25% here. I largely agree with his findings. 3% is just easier to use for someone who is lazy with math.
Why 20 percent? The current inflation rate is 8.5 percent but there are signs it is falling. If I do some quick math 2 years of continued current inflation would be around 18 percent. If it subsides a little but remains up it should be right around 20 percent over the next 2-3 years. My math has me reaching my target within this 2-3 year window with moderately conservative market and bond return estimates. (We’ll talk about our current investment situation in a future post). So the target makes math sense in a fuzzy, “It’s the Future”, type of way.
Do I Now Believe One More Year is Not Caused By Poor Planning?
So this mix of arbitrary and math has led to me increasing our new target financial independence number. Essentially committing ourselves to additional years of working. Has this changed my view that this is ultimately a psychological response to a poor plan?
Maybe? After all, many that have come before didn’t have creeping inflation as a backdrop to their situation. Then again there is always a financial crisis looming. Some folks never stop predicting a recession.. So maybe, this is just my turn for one more year?
What are your thoughts, am I logical or is this just a normal psychological response to approaching an impending number/a major life change?