The Power of One More Year

by Kevin on November 24, 2013

Investing is all about:

  • amount invested (principal)
  • rate of return
  • length of time invested

That’s it.

You can get fancy with diversification (recommended!), tax planning (also recommended), and low expenses with index funds (absolutely recommended), but it all boils down to the three above variables.

The three work in conjunction. Over the same period of time if you earn a higher rate of return, you need less principal invested. If you invest more principal and earn a higher return, you need a lower amount of time.

I thought it would be interesting to look at the power of one more year of investing. That year might be at the tail end of your working career where you don’t touch your nest egg and keep working for just one more year. On the other hand it might mean starting to invest today rather than next year, and retiring in the same year you would have retired had you started investing next year instead.

How powerful can one year be? What kind of financial impact might that have on your retirement?

Examples of the Power of One More Year

We’ll assume the following with our two examples:

  • Investing would normally begin at age 30.
  • Investing consists of $458.33 in monthly contributions to a Roth IRA. (We’ll ignore the extra $83.33 you could invest each month after age 50 as a “catch up” contribution for simplicity.)
  • Those funds generate an average annual rate of return of 8%.
  • Investing time period if 35 years.

Under these “normal” conditions the nest egg would be worth $1,023,555. That net amount is based off of $192,499 in contributions and $831,056 in growth. Put another way that means only 18.8% of the nest egg is due to contributions. The remaining 81.2% is investment growth. Very nice.

We’ll also assume a 4% withdrawal rate from the nest egg amount. A 4% annual withdrawal from $1,023,555 comes to $40,942 per year at the beginning of retirement.

Let’s see what difference a year makes.

Investing One Year Earlier

Instead of starting your investing at age 30 you get a head start and begin at age 29. This extends your investing time period to 36 years. Assuming all other factors are the same, you end up with:

  • Contributions: $197,999 (+$5,500)
  • Growth: $913,380 (+$82,384)
  • Total: $1,111,379 (+$87,884)

Starting one year earlier nets a total difference of more than $87,000. This despite just $5,500 of that being extra contributions. One year is a huge difference — wouldn’t you like someone to give you $87,000 for kickstarting your retirement?

Our 4% withdrawal jumps from $40,492 to $44,455. That’s an increase of $3,963 (9.8%).

Waiting One More Year to Retire

With this scenario we will start at the normal age — 30 — contribute for 35 years, but simply leave the money untouched for one year after that. Our contributions last 35 years, but our total investing time is 36 years.

  • Contributions: $192,499 (+0)
  • Growth: $912,940 ($81,884)
  • Total: $1,105,439 (+$81,884)

The power of one year. You don’t even have to do anything. No extra contributions, no starting early. Just simply waiting one year nets an extra $82,000.

I’m not a very patient person, but if you offered me $82,000 to be patient for one year I think I’d be more than a little tempted.

Plus, our 4% annual withdrawal increases from $40,492 to $44,218. That’s an increase of $3,726 (9.2%). Patience pays off.

Factors Not Considered

This is a simplistic example to underline a powerful point. I didn’t consider factors such as your health or other retirement income such as Social Security. If you are in poor health waiting one more year might not be worth it to you. Likewise you may find more value in relaxing during retirement than a 9% or 10% increase in your retirement income.

It depends on your situation and view of retirement. Yet overall, getting started now and waiting as long as possible to tap your nest egg will result in a big chunk of change in your nest egg.


Simon @ Modest Money November 26, 2013 at 7:21 pm

Time looked in whichever way is more often than not a friend of the investor. From the young investor starting early, to every investor holding their portfolios for the long run and even the retirees who delay drawing on the principal in their retirement accounts.
I always try to use time to my advantage!

S. B. December 2, 2013 at 9:50 pm

In addition to the three factors you listed, there is also a very important fourth factor to any investment: risk.

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