The Power of One More Year

insuringincome-250-250

If you’ve been reading this blog, you’ve got a pretty good idea of what it means to be financially independent, and can appreciate the power that financial independence provides.

Chief among the benefits is the ability to retire early; your investments should adequately provide for your spending needs indefinitely at a withdrawal rate less than or equal to four percent.

That’s a great thing! But what if, like me, you’re not ready to hang up the stethoscope quite yet. You know you’ll miss your patients and colleagues, and frankly, you’re too young and good looking to be retired!

 

Molly Malone Statue

sweet molly malone… soooo good lookin’

 

A frequent topic of discussion among the FIRE community members is a constellation of symptoms that describe OMY syndrome. Is it a real thing? Oh, My Yes. A real thing called One More Year syndrome.

To be afflicted with OMY syndrome is to continue working for “one more year” even though you’ve reached your financial goals, and no longer need the paycheck to make ends meet.

OMY syndrome is often looked down upon in the forums as a weakness in fortitude. If you can afford to retire early and choose not to, you are clearly guilty of some sort of moral failing. The world is your oyster, and you’re afraid to open its shell. The only prescription is to retire, and fast. Of course, not everyone feels this way, but it seems to be a common opinion.

When I read such opinions, I’m reminded of the classic film Swingers in which nice guy Mikey is being “coached” by his buddies on how to approach the pretty girl at The Derby:


Trent: And you got these $#(% claws and these fangs, man! And you’re looking at your claws and you’re looking at your fangs. And you’re thinking to yourself, you don’t know what to do, man. “I don’t know how to kill the bunny.” With *this* you don’t know how to kill the bunny, do you know what I mean?

 

 

Sue: You’re like a big bear, man.

 

Mikey appreciates the confidence boost, but he doesn’t need to go for the kill; he’s going to take his time, and do things his own way. Don’t worry; he’ll get what he’s after, playing his cards in his own way.

It’s like that with early retirement. You don’t have to do what your peers or internet strangers think you should do, or tell you to do. You do what works for you. Financial Independence can be a starting point to begin contemplating an early retirement plan, rather than an end point. Of course, retirement in any form is completely optional.

I’d like to discuss the positive aspects of OMY syndrome today. If you’re not miserable in your job, OMY syndrome can be a real boon to your financial future. Even more powerful are OMY syndrome’s cousins, FMY (five more years – a syndrome of which I am guilty) and TMY (ten more years) syndrome. Incredible wealth can be attained if other variables (namely spending) remain the same, as we learned from Dr. A when she chose to continue working after achieving FI.

If you are on the brink of an early retirement as a physician, you are in an enviable position. You’ve got a high savings rate, and you’ve paid down your mortgage. You’ve got Enough to live a comfortable life. If you can give the career one more year, you might be able to do some amazing things with that money.

How much money are we talking about? In one year, a physician with a high savings rate can not only cover living expenses for the year, but also put away anywhere from $50,000 to $250,000 depending on specialty and salary.

The net effect of working one more year is equal to after-tax pay. You have to take into account both the usual year’s savings plus the amount of spending that comes from paychecks rather than the portfolio, as it will in retirement. For full-time physicians earning $200,000 to $500,000, after-tax pay would be in the neighborhood of $140,000 to $300,000 for one more year.

What could you do with money like that? Using a 4% safe withdrawal rate as a guide, you would have an extra $5,600 to $12,000 per year to spend in retirement, or an extra $15 to $33 a day.

 

Iceland blue lagoon

you can afford Iceland. every year forever. #omy

 

That kind of money could buy one or two tremendous vacations per year, or be an entire year’s travel budget for a frugal or infrequent traveler.

What else could $5,600 to $12,000 a year buy?

  • a big chunk of your health insurance costs.
  • season tickets every year for your beloved Home Teams or the Theater.
  • tuition for your eventual Grandkids at the parochial school.
  • airfare for the extended family to vacation together annually.
  • date night at a gourmet restaurant every week.
  • beer. just a whole bunch of beer.

I’m sure you could come up with a whole bunch of ways to spend that kind of money. You may have noticed that none of my suggestions are objects; they’re experiences. Well, technically beer is an object, but I’ve come to find it can most certainly lead to experiences, and the enjoyment of a good craft beer can be an experience in and of itself. I favor experiences over things, and happiness studies do, too.

I’m not going to tell you what you should or shouldn’t do with your OMY money. You don’t have to stretch it out over the length of your retirement. If you want things, buy things. Things doesn’t even have to be plural; it’s your money and you can blow it all on a thing. Like a Bentley, if that’s what you really want.

You don’t have to spend the money.

I’ve shared some ideas of different ways you could spend the extra OMY money, but you don’t have to spend it at all. If your FI number was based on spending all that you were planning to spend, you probably accounted for the season passes and plane tickets, and at least a modicum of beer, wine, kombucha, or whatever little luxury you enjoy.

What if you let your OMY money ride? Using the PoF compound interest calculator, you can see that $200,000 left alone for 40 years can be expected to become millions.

 

Compound

 

Now you can afford a fleet of Bentleys, even after accounting for inflation, but you probably won’t want that when you’re in your eighties or nineties. But you could do something awesome, like help fund a new YMCA building or incredible community park with your name on it. Also a statue. You deserve a statue.

If you plan to do a fair amount of charitable giving in retirement, it’s best to plan for it several years before retiring. I’m an advocate of using a donor advised fund (DAF) to build up a large reserve from which you can give.

My OMY giving plan is this: use my last several years of paid employment to build up a sizable DAF, giving up to 30% of adjusted gross income (AGI) each year until the DAF is equal to 10% of my own invested assets.

Why 30% over several years? I will intelligently donate mutual funds with significant capital gains. The cost basis becomes irrelevant when received by the DAF, and nobody pays capital gains taxes. When giving appreciated assets, the IRS limits donations to 30% of AGI. When donating cash, the limit is raised to 50%, but I want to give in the most tax-efficient manner, so I’m not donating cash.

Also, I want to give now while I’m in a high tax bracket, to benefit from a larger tax deduction. Waiting until I’m retired to build up a DAF would represent a missed opportunity. It will take more than three years to stuff a year’s salary into the DAF, so I plan to ramp up my giving soon.

When giving appreciated assets, the IRS limits donations to 30% of AGI. When donating cash, the limit is raised to 50%, but I want to give in the most tax-efficient manner, so I’m not donating cash.

When you have a high salary, One More Year can make a big difference for you, your family, or for people and causes that matter to you.

Have you been blessed with the opportunity to work OMY? Is it something you’ll consider when you reach your goal retirement number? What would you do with your OMY money?

 

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14 comments

  • The Green Swan

    Setting up the DAF fund is very admirable! Good for you and smart way of doing it.

    I may be part of the FMY club… I’m just not fully comfortable with the 4% Rule especially when retiring very young do I want a lot of extra cushion.

    • Thanks, Green Swan! I opened my first DAF about 5 years ago, and I’ve been very happy with them, particularly the FidelityCharitable fund.

      If you’re not unhappy in your job, FMY can drastically alter your future. For me, FI is the more important half of FIRE. If I was completely miserable in my job, FI would be nothing more than a means to the RE escape.

  • Mike

    You got me looking into DAFs. A prior Kitces article mentions a 0.6% admin fee for funds under 500K for both Vanguard and Fidelity. Is this accurate?

    • Yes. I have DAF accounts with both companies, and they each charge the 0.6% administrative fee, plus the expense ratio of the funds you choose, which can be under 0.1%.
      The 0.6% fee is pretty close to the tax drag my taxable account sees, so I’m not at all discouraged by it.

      I’d be losing ~0.5% of that money to the state and federal government if the money remained in my possession, and I realized that there are costs associated with managing these funds and making the grants. Last year, I directed about 15 grants from our DAF to various local and national charities.

    • It’s a great way to give, and much, much easier to set up compared to a foundation. A foundation has more control, but even higher costs.

      To answer your question, Yes, that is accurate. I have DAF accounts with both companies, and they each charge the 0.6% administrative fee, plus the expense ratio of the funds you choose, which can be under 0.1%. The 0.6% fee is pretty close to the tax drag my taxable account sees, so I’m not at all discouraged by it.

      I’d be losing ~0.5% of that money to the state and federal government if the money remained in my possession, and I realized that there are costs associated with managing these funds and making the grants. Last year, I directed about 15 grants from our DAF to various local and national charities.

  • I’m still 7 to 10 years away from FIRE so I haven’t given too much thought to it. If I stay in my current profession, my income would most likely be well over $200k a year by the time I call it quits in 7 to 10 years. I guess once I get there, I could easily see how OMY could take over for sure. Pocketing another $100k or so for working one year might be enticing to say the least. DAFs do sound interesting, I’ll probably research them more once my income starts creeping up.

  • Anonymous

    Another DAF question. Was thinking of setting one up and separately have been planning to make a sizable donation/gift to a local family with a sick child. It doesn’t not appear to me that a DAF would be the right vehicle for this donation since they do not have a charity set up. I could create a separate DAF under the child’s name but wold prefer not. Is my thinking correct on this?

    • It is wonderful that you want to help a local family with a sick child. Most of our dollars stay local as well.

      If you give directly to the family, there will be no tax deduction. Grants from a donor advised fund must go to established charitable organizations with 501(c)(3) status. Setting up a DAF in the child’s name would not help, unfortunately. A Google search found me an article from 2005 that speaks to what you are wanting to do.

      Your best bet might be to partner with a local charity whose mission is to provide support to children and families dealing with serious illnesses, if one exists. You could donate to them and request that the money be used to support the family you have in mind. The other option is to write the family a check. I always like to give via charity, simply because your dollars go further that way. If you have a 40% marginal tax rate, it costs you $1000 to give $1800. Sometimes cash is the only option, like with GoFundMe campaigns.

      Best
      -PoF

  • We completely agree. We sometimes say we “procrastinate our retirement” by upping the savings target once we reach a target set in the past. For us it’s not so much about consuming more, but about a safety cushion to lower the 4% “safe” withdrawal rate (a lot less safe than people think!!!) to something less than 4%.

  • Our motivation for TMY (two more years) are safety cushion related to 4% rule (we are with Mr. ERN on that one) and a consideration related to timing of our eldest kid finishing elementary school and an “easier” transition for him to our new location in a different state.

    Note: We don’t believe in TMMY – too many more years……!!!

  • This is exactly the post we DON’T need right now! 😉 I have always fallen on the more financially conservative and risk-averse end of things, which has meant working longer to avoid screwing our future selves. But I have finally accepted that we’ll have enough very soon and that we’ll never regret not working longer. You make an awfully good case for working one more year, though…

    • Sorry, ONL. I had to present a different take on “OMY syndrome”. Knowing how thorough you guys are in preparing for your early retirement, I’m guessing you’re either in the midst of OMY, or started your first one a year or two ago. 🙂

      At higher salaries, the paycheck can act like a pair of golden handcuffs. But that will always be true no matter how many OMYs you decide to work. It’s good to keep in mind the concept of Enough.

  • I can understand how it would be easy to fall into the OMY trap. We are currently around 10 years out from hitting FI but I would expect it would be hard to walk away from the security of the extra year of paychecks. Especially given what an extra year of savings can do for you in the long run!

    • I hear you. I set my goals much higher than 25x expenses. When those goals have been achieved (40x to 50x expenses invested, two six-figure 529s, and 4x to 5x in the DAF), I will have no financial reason to work OMY. Of course, I will have already done a handful of OMYs by then.

      Cheers and have a great weekend!
      -PoF

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