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Is $850,000 Enough To Retire On?

Fidelity Investments branch
A pedestrian passes a Fidelity Investments branch in New York. Photo by Victor J. Blue/Bloomberg via Getty Images.

Paul Solman frequently answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Here is Tuesday’s query:

Name: Raymond

Question: I am 67 and was planning on working at least another two years. The company I work for is offering me a year’s worth of salary and benefits if I retire early (work until end of Dec. 2012.) I have $600,000 in a pension earning 4 percent and $250,000 in a 401(k) handled by Fidelity. Should I take them up on the offer or continue working for an additional two years?

Paul Solman: The economic perspective is to make any decision by weighing all the costs against all the benefits. Sounds easy in theory, but it’s not in practice, as my answer to your question is about to make frustratingly clear.

The benefit in your case seems straightforward: one year of salary and benefits. But what are the costs? At first blush, two years of salary and benefits. So then you should stay put, right?

But … suppose in the meantime you get riffed (from RIF: reduction in force) with no severance package at all? Trying to be a truly rational decision-maker, I might estimate the RIF odds at various times over the next two years, multiply each by the cost at that point in time, and come up with a weighted average.

But that’s not all. What is the psychic or perhaps even physical cost to you of working those two years? Adam Smith wrote of the “disutility” of work. That’s why people are paid, he claimed: because they don’t like to work. “Utility” is the value you get from doing something you enjoy. “Disutility” is the negative value — the cost.

As it happens, Adam Smith was himself a bad example of the “disutility of work” principle since he earned both pay and utility from his work as a teacher and author. And speaking for myself at exactly your age, Raymond (and entirely entre nous), I might continue to do this job for nothing, so much utility does it provide me.

But you’ve got to make the computation for yourself.

I can, however, give you some very rough sense of how far your nest egg will carry you as of the moment, assuming you don’t have any dependents. If you were to invest in an annuity protected against inflation of up to 5 percent a year and you don’t start taking payments for the two years you might continue to work, you can expect something in the vicinity of $50,000 a year in income, before taxes, according to one annuity calculator I’ve just consulted online, plugging in your total ($850,000) and my date of birth. This gives an estimate of how much money you could take out of your $850,000 to last your expected lifetime.

Suppose, by contrast, you quit work now and would start taking your annuity payments on Sept. 9, my birthday (included here not for identity thieves, but for those of you who would like to celebrate my birthday by contributing to, say, Oxfam). Birthday tributes aside, you’d gross less than $40,000 a year from an annuity that starts this September.

Now add Social Security and any other income you might be entitled to, throw in a pinch of coriander, and voilà: your expected yearly income, more or less.

I don’t know if that’s reassuring or not. Nor do I know how it might affect the decision you face. Hope this helps.

As usual, look for a second post here on Making Sen$e early this afternoon. And please don’t blame us if events or technology overtake us. This entry is cross-posted on the Rundown– NewsHour’s blog of news and insight.

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