In Defense of Working One More Year (OMY)

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In early retirement discussion forums, you’ll often see the term OMY, which refers to people who have reached their calculated retirement savings target, but decide to keep working “One More Year”. Sometimes that one more year becomes two more years, three more years, and so on. This leads to OMY being seen as an irrational behavioral quirk like hedonic adaptation. However, are the potential benefits of working one more year being under-appreciated?

In the Medium article How important is asset allocation versus withdrawal rates in retirement?, EREVN (he lives in Vietnam) compares the power of picking the optimal asset allocation vs. saving more money. Investors often worry about whether they own the right mix of stocks and bonds. Do you own enough stocks, as to get a high enough return? Do you own enough bonds, so you don’t freak out during a market drop?

EREVN points out that historically, the optimal asset allocation in terms of having your portfolio last the longest is almost always 100% stocks. (98% of the time.) Even including the other 2%, how much of a benefit is it to hold the optimal asset allocation?

Read the entire article for full understanding of the assumptions taken, but here is the summary of his experiments. We usually optimize asset allocation based on highest return, but that’s not exactly the same as withdrawal rate. Note: Whenever you see “4% withdrawal rate”, that’s the same as having 25 times your annual expenses. 3% withdrawal rate = 33.3x expenses, 2% withdrawal rate = 50x expenses, etc. I added the stuff in the brackets [].

Even with perfect hindsight, choosing the best possible asset allocation is only equivalent to going from a 4% withdrawal rate to a 3.7% or 3.8% withdrawal rate. [25x expenses to 26x or 27x expenses.] In other words, saving 1 or 2 extra years of expenses dominates getting the asset allocation decision perfectly correct. In reality, we don’t have perfect hindsight and our asset allocation will be sub-optimal.

The powerful conclusion:

Instead of stressing about trying to pick “the right” asset allocation, you’re better off picking anything reasonable and ignoring every other asset allocation internet discussion for the rest of your life… and then working an extra six or twelve months to pad out your retirement fund before retiring.

I like the paring of working one more year and being able to drop the worry about asset allocation now and forever! You don’t want to work forever, but this does make OMY have multiple benefits (existing portfolio can grow another year, might even save more, stop worrying about asset allocation).

Here are a few related posts on “Saving More vs. XXX” from the archives:

Image via GIPHY.

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  1. You are totally focused on the mechanic of finances. The OMY is far more complex in my opinion, The reason for OMY is more often than not due to fear of the unknown. In other cases I have known people who would be lost for lack of hobbies or their job became their identity, gives them a feeling of power ect. There is also a component of getting up and going to work being a 35 or 40 year habit and habits can be hard to break. Emotion is far and away more responsible for an OMY decision in the people I know very well who are in wonderful positions to retire if they wanted to.

  2. I tell my pre retirement friends OMY all the time. The criteria is usually people think they have enough money but not sure. I understand there are pros and cons and most of all “It depends”. I worked OMY but it looks like I didn’t need to but I have a nice cushion and I sleep better at night.

  3. In considering OMY, I knew I would NEVER again obtain the salary and benefits I currently had, so IF I left and opted to rejoin the workforce I knew I would not reach the same level of work benefits again. So OMY meant rack up some more cash while you can and still enjoyed working. NOT having to work

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