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55 & Counting Down to 60!
Old 04-28-2014, 10:07 AM   #1
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55 & Counting Down to 60!

Really enjoying this forum. A little about me....55 I married in Michigan hoping to make an escape at 60. I expect to have between 1.3M-1.4M given a very small increase in my investments in the market between now and 2018. I also have a small pension of $14,215 that I started taking at 55. In addition I will be further backstopped by 30K in SS benefits depending on when I decide to start SS. I will also have over 100K in home equity if and when we sell. My question is 2 fold:
How do you express the pension figure in terms of net worth? By running the numbers I am surprised to see how even a small pension backstops your overall withdraw rate options.

After running many withdraw rate calculations, I am favoring the Hebeler Autopilot Method that is an Marriage of the 4% withdrawal rule and RMD method. This seems to make the most sense given an early retirement at age 60.

Your thoughts on how I am doing and my withdraw method?
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Old 04-28-2014, 10:55 AM   #2
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Can't answer your specific WR question, but for a pension, I plan my retirement based on the pension being a simple expense reduction. With a $14k pension and, say, $40k expenses, simply subtract the 14 from the 40, and your expenses are $26k. That's what you have to fund with your SS and retirement accounts. Calculate withdrawal rate from there...

Not sure what you mean about expressing pension in terms of NW. Not sure what the utility in that number would be anyway.

Welcome to the forum!
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Old 04-28-2014, 11:06 AM   #3
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Quote:
Originally Posted by macav933 View Post
Really enjoying this forum. A little about me....55 I married in Michigan hoping to make an escape at 60. I expect to have between 1.3M-1.4M given a very small increase in my investments in the market between now and 2018. I also have a small pension of $14,215 that I started taking at 55. In addition I will be further backstopped by 30K in SS benefits depending on when I decide to start SS. I will also have over 100K in home equity if and when we sell. My question is 2 fold:
How do you express the pension figure in terms of net worth? By running the numbers I am surprised to see how even a small pension backstops your overall withdraw rate options.

After running many withdraw rate calculations, I am favoring the Hebeler Autopilot Method that is an Marriage of the 4% withdrawal rule and RMD method. This seems to make the most sense given an early retirement at age 60.

Your thoughts on how I am doing and my withdraw method?
Typically, a pension is considered an offset to living costs rather than as a retirement asset and part of net worth. That makes the question as to how to value it moot.

I think it is best to look at WR both at retirement and also once pensions and SS have kicked in and the latter number is more important.

I focus on what we need to live and what WR that results in. If the WR is much more than 3.5% I would start to get nervous. However, it would not be unusual that someone might have a higher than 4% WR before SS starts and lower than 4% after and IMO that would be fine, particularly if the living cost are of a nature that they could be reduced if needed (for example if the living costs had a lot of travel that could be cut back if needed).
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Old 04-28-2014, 11:13 AM   #4
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Not sure what you mean about expressing pension in terms of NW. Not sure what the utility in that number would be anyway.
I'm in agreement. Measuring net worth might be an interesting exercise if it gave any of us an opportunity to show up on a Forbes list, but I'm not sure what practical purpose it actually serves.

macav933, if the question you are asking is how to arrive at a lump sum value of a pension, the best way is to see what it would cost to purchase a SPIA that would provide an income equal to your pension. You can do that here Income Annuity Quote Calculator or search for other sites.
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Old 04-28-2014, 11:40 AM   #5
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You could use the PV function in excel. The present value of $14,215 for 30 years at 3% is $278,620. If it has COLA then just multiply the $14,215 by 30 or $426,450.

But I agree this has limited meaning.
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Old 04-28-2014, 01:38 PM   #6
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Typically, a pension is considered an offset to living costs rather than as a retirement asset and part of net worth. That makes the question as to how to value it moot.
That's a great way to look at it. I've tried to quantify what my pension would be worth one day, but it doesn't matter since I can't cash it out.
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Old 04-28-2014, 03:06 PM   #7
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Thanks everyone for the replies....I am thinking a 4% WR for the first 2 years prior to SS would be aceptable given I would drop down to around 3% for future years. Speaking of SS, I was surprised that the SS calculator recommends that I take SS at 62 and my wife delaying until 70. Does that make sence? I thought it was always better to delay to at least 66? See recommendations below:

You retire at 62, spouse at 70 equals $2,198,000 in benefits/gains
You retire at 70, spouse at 66 equals $2,111,000 in benefits/gains
You retire at 70, spouse at 62 equals $2,004,000 in benefits/gains
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Old 04-28-2014, 04:38 PM   #8
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Typically, a pension is considered an offset to living costs rather than as a retirement asset and part of net worth.
This doesn't seem to work very easily for a non-COLA pension, does it? If I subtract my fixed pension amount from my expenses when the pension starts, then inflate that expenses figure into the future, aren't I effectively treating the pension amount as having a COLA, giving me an artificially low expenses figure? (Maybe I'm missing something.)
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Old 04-28-2014, 04:58 PM   #9
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This doesn't seem to work very easily for a non-COLA pension, does it? If I subtract my fixed pension amount from my expenses when the pension starts, then inflate that expenses figure into the future, aren't I effectively treating the pension amount as having a COLA, giving me an artificially low expenses figure? (Maybe I'm missing something.)
In the situation of a fixed pension, the gap (the amount that needs to be funded by retirement savings) does increase because living expenses inflate and pension does not. But what would you propose doing instead?

Most retirement planning models treat pension as either an income source or a reduction of expenses. Either way, at the end of the day the effect is to reduce what needs to come from retirement accounts. I've never seen a retirement planning model that treats pension as an asset.

What you're asking about is the inverse of if you did value a pension and included it in retirement assets then a COLAed pensions would be much more valuable than a fixed pension.
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Old 04-28-2014, 05:01 PM   #10
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Originally Posted by macav933 View Post
Thanks everyone for the replies....I am thinking a 4% WR for the first 2 years prior to SS would be aceptable given I would drop down to around 3% for future years. Speaking of SS, I was surprised that the SS calculator recommends that I take SS at 62 and my wife delaying until 70. Does that make sence? I thought it was always better to delay to at least 66? See recommendations below:

You retire at 62, spouse at 70 equals $2,198,000 in benefits/gains
You retire at 70, spouse at 66 equals $2,111,000 in benefits/gains
You retire at 70, spouse at 62 equals $2,004,000 in benefits/gains
It depends on your relative ages and if you wife's PIA is significantly more than yours then it might make sense. What tool are you using to get these numbers?
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Old 04-28-2014, 05:35 PM   #11
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SS info from link below:
Social Security Calculator chart for married couple
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Old 04-28-2014, 10:18 PM   #12
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Interesting. Given the DOBs and PIAs in the link you provided, the AARP calculator suggests the following claiming strategy as optimal:
  • When your wife is 69 and 9 months (2025), she applies for Social Security benefits and then requests to have payments suspended
  • When you are 66 and 8 months (2025), apply for spousal benefit, which provides about $467 per month.
  • When your wife is 70 (2025), she resumes her own Social Security benefits, which provide about $1,221 per month.
  • When you are 70 (2028), apply for your own Social Security benefits, which provide about $3,022 per month.
I think that makes a lot more sense than SSCalc.net, whoever they are.
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Old 04-29-2014, 01:06 AM   #13
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This doesn't seem to work very easily for a non-COLA pension, does it? If I subtract my fixed pension amount from my expenses when the pension starts, then inflate that expenses figure into the future, aren't I effectively treating the pension amount as having a COLA, giving me an artificially low expenses figure? (Maybe I'm missing something.)
You're right. So to treat a non-cola pension properly you should escalate your gross expenses into the future, and then subtract off the fixed pension amount. Not vice versa.
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Old 04-29-2014, 07:06 AM   #14
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You're right. So to treat a non-cola pension properly you should escalate your gross expenses into the future, and then subtract off the fixed pension amount. Not vice versa.
Or alternatively, if you want to adjust for this, you could reduce expenses by half your fixed pension since fixed payment SPIAs seem to tend to be priced at about half of COLAed SPIAs.

The problem with either approach is - how much do you adjust?

IMO best practice is to just build a model with the cash flows (like QLP, FireCalc and others) rather than try to rely on broad rules of thumb.
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Old 04-29-2014, 05:06 PM   #15
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Or alternatively, if you want to adjust for this, you could reduce expenses by half your fixed pension since fixed payment SPIAs seem to tend to be priced at about half of COLAed SPIAs.

The problem with either approach is - how much do you adjust?

IMO best practice is to just build a model with the cash flows (like QLP, FireCalc and others) rather than try to rely on broad rules of thumb.
I have always been kind of nervous about using broad rules of thumb, so I have been using FireCalc, I-ORP, and Fido RIP for more detailed planning. They seem to support the same conclusions, at least in my case, which is reassuring.
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