Summary
When to retire feels like one of the most important decisions, you’ll ever make. You’ve spent decades working hard, making sacrifices, building a nest egg. You want to retire, but you worry that if you do it now, you might be sabotaging it.
The decision to retire now or work one more year can feel a tad overwhelming. There are many implications to consider, both financially and personally. The key to making a confident decision is to understand both.
Let’s explore this through the story of Peter and Julie, a couple in the 60’s, navigating this very question. Their situation highlights the financial benefits of delaying retirement, as well as the often-overlooked personal costs.
Peter and Julie’s Retirement Goals and Challenges
Peter (64) and Julie (61) have worked hard to set themselves up financially. They have $1.3 million in super collectively, a fully paid-off home worth $1,250,000, a pending defined benefit (lifetime) pension of $48,000 annually from Peter’s work as a scientist – and they’ve done it whilst raising two kids. Their retirement dream includes spending $9,000 per month, with $7,000 for living expenses like groceries, utilities, entertainment and insurances, as well as $2,000 set aside for travel.
However, Julie is struggling at work – she’s not enjoying it and she’s stressed. There’s new management that she disapproves of, and she’s working hard to keep up. In addition, Julie has had a trouble with her health in recent years - nothing life treating but clear signs of aging and declining health.
Despite the stress of work and the health challenges, Julie was talking about the need for both to work at least one more year – because it was the responsible and safe thing to do - “we know we’re not yet in a position to retire.”
They were treating retirement as a financial decision.
From a financial perspective, delaying retirement has clear advantages. Continuing to work would allow them to get more money into super, increase Peter’s lifetime pension amount, and hopefully see their investments grow for an additional year before drawing on them. What they weren’t placing enough value on was the personal cost of delaying retirement.
Retiring Now vs. Work One More Year
To help Peter and Julie, we first examined what their finances would look like if they retired immediately. With $1.3 million in super and Peter’s defined benefit pension waiting for him, they were in a strong position.
Assuming an effective tax-rate on Peter’s defined benefit pension of 20%, it will provide $3,200 of guaranteed monthly income. That meant that they only needed to draw $5,800 from their super to meet their $9,000 per month plans.
Assuming a 6.5% annual growth rate on their super, they would likely be able to maintain their capital base throughout retirement – even, if they retired today.
Despite this, there was still some unease from Peter and Julie – “what if things don’t go to plan? Do we need a bigger margin of safety?”
So, we explored the impact of working one more year. This single year of work would provide several financial benefits:
1. Employer Super: Peter and Julie would receive a combined $32,480 in super guarantee (SG) from their employer.
2. Personal Super Contributions: Based on their savings rate and contribution caps, they could contribute an additional $21,520 to super combined, as well as claim a tax deduction for the contributions.
3. Delayed Drawing from Super: They don’t need to draw their $5,800 each month from super, which is $69,600 saved.
4. Higher Lifetime Pension: Delaying retirement by one year would result in an 4% increase to Peter’s defined benefit pension, increasing the annual pension by $1,920 to $49,920 before tax. Assuming Peter lives to 90, that’s another $48,000 over retirement.
All up, we estimated they’d be $171,600 better off by working one more year.
It sounds lucrative, and worth the sacrifice – but when you really examine it – is it?
The Overlooked Cost of Delaying Retirement
While the financial benefits of working one more year are undeniable, it’s super important to consider the personal trade-offs. Julie’s health had already suffered due to work-related stress along with a few other health issues, and continuing to delay their retirement could exacerbate these. They also shared that a couple of friends and family members had passed away either soon before, or in the early years of retirement – reminding them of the uncertainty of life.
Retirement isn’t just about financial security—it’s also about making the most of the time and health you have – for living life and creating memories. For Peter and Julie, waiting another year might mean sacrificing precious time together and missing out on experiences they had dreamed about – most importantly exploring Scotland intimately.
Finding The Right Balance
Ultimately, the decision to retire now or work longer isn’t black and white—it’s about finding a balance between financial preparedness and personal fulfillment. To address Peter and Julie’s concerns, we explored additional strategies to improve their financial security without requiring them to delay retirement.
Instead of budgeting $9,000 per month indefinitely, we modelled a plan where their $2,000 monthly travel budget would only last for the first 10 years of retirement. We assumed they would scale back their travel, reducing their total monthly spending to $8,000. This adjustment significantly improved their financial projections.
They also had fears that their two adult children will struggle to break into the housing market, so we included $100,000 gifts for each of them to help create a healthy house deposit in five years’ time.
With the above changes and inclusions, we estimated the below rough path for their super – based on Julie’s age.
- Age 71 (after 10 years): $1.16m
They would effectively preserve their capital through the first decade because the withdrawal rate is roughly in line with portfolio growth (6.5%).
- Age 80: $1.92m
This is where the lower drawdown relative to portfolio growth allows compounding to get some momentum.
- Age 90: $2.75m
As they age, the compounding just accelerates.
Closing Thoughts
Julie and Peter ultimately decided to retire immediately, armed with a solid plan to balance a sense of financial security and the freedom to spend their money to get the most out of life. They’ve been enjoying retirement for seven years now. In the first five years, they travelled far and wide, including three trips to Scotland - and they’ve got more money than we anticipated. Having said that, health has been an ever-increasing challenge for Julie – so they’re spending more time at home and less time travelling – a reminder that you need to do these things while you can. There are no guarantees in life.
For those nearing retirement, their story is a call to action: before telling yourself you can’t retire yet because you don’t have enough – get clear on what the personal cost of delaying retirement may be and examine what you’d need to do financially to retire tomorrow. It’s likely more realistic than you think - and the cost of not doing it – bigger than you think.
