Delaying Retirement – (Q & A)

Dec 2016


Dear Rick:
I would like your opinion as to my plan for retirement. I am divorced and I no longer have any obligations to my ex. Currently, I make more than enough to cover my living expenses and I’m very secure in my job. However, I want to retire next year. I will turn 62 in May when I will be eligible for a pension and Social Security. I figure I need about $65,000 to cover all my expenses. My pension and Social Security will provide me about $45,000. I plan to make up the other $20,000 by withdrawing from my investments. I have about $100,000 in investments. In addition, I plan to turn my hobby into a business. I think I can make about $15,000 a year on my hobby. You should know I do not own a home, I rent and I have no debt. My question is should I plan to retire next year?

Dear E.N.:
I hate to be bearer of bad news but I think it would be a mistake for you to retire. I see a number of pitfalls with your strategy that can cause you severe economic problems down the road. The first is turning a hobby into a business.

I have no idea what your hobby is and I have no idea if it’s lucrative or not. However, what I do know is that there is a big difference between a hobby and a business. Particularly in your situation where you have to generate income, it is totally different than generating the enjoyment you get from your hobby. Many people have attempted to turn their hobby into a business and they unfortunately find out that there are major differences. What would be tragic for you is to give up your job and to then find out you can’t be profitable in your hobby and as a result you could have a severe financial crisis.

What I would recommend from the hobby standpoint is to try it for a period of time to see if it can be profitable. Unfortunately, I think to be fair to yourself and to make an informed decision, you have to at least go through a business cycle and I would recommend that you give it at least a two-year period. In that way you at least have a record to determine if the business can be profitable and if you enjoy it.

I also potentially see another issue and that is with the return you’re expecting on your investments. If you do net $15,000 a year from your business that would mean that you would need about $5,000 a year from your investments. Particularly, for someone who is retiring at a young age such as yourself, a five percent withdrawal rate is aggressive. In your situation I would think a 3.5 percent withdrawal rate would be more appropriate.

There is another problem that I see in your strategy and that is you’re not factoring in that you will need a rising income the rest of your life, not a fixed income. We all know the cost of living is always going up, and as your cost of living increases you may be forced to withdraw larger amounts from your investments thus, leaving you in a precarious situation.

My advice is that you should not retire. By delaying retirement you will increase your Social Security and your pension and that will give you the appropriate time to determine whether your hobby can be profitable or not.

One of the toughest parts of my job is to tell someone who wants to retire that they cannot afford to. My belief is that in order to retire comfortably, you have to provide for a rising income throughout your lifetime. In the old days, the older you got the less you needed. Fortunately, or unfortunately, those days are well behind us. Just look at our own situation and look what it costs to live 20 years ago versus today. I have no doubt that 20 years from now it will cost us substantially more to live than it does today. I have said this many times and I truly believe that we live in the greatest country in the history of the world; however, there’s nothing worse in this country than to be old and poor. Therefore, to prevent you from becoming old and not having resources, sometimes the best course of action is to delay retirement.

Good luck!