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Planning to FIRE - interested in advice
Old 04-02-2018, 07:26 AM   #1
Confused about dryer sheets
 
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Planning to FIRE - interested in advice

Hi folks. Yet another lurker who's finally joining the board. You all are an incredible source of information and wisdom. I enjoy the lifestyle threads as much, if not more, than the financial planning threads. DW and I plan on FIRE-ing within the the next year. Here 's our situation.

Ages: Him 57. Her 56.

Our current investable assets (60/40 allocation):

401k/403b - $1.4M
Roths - $250K
Taxable - $150K

We are fortunate enough that each of us has a pension.

Him: $65000 immediately, life only.
$60000 50% joint survivor

Her: $63000 at age 62 life only
$59000 50% joint survivor

We expect to take the survivor options. So once either of us passes, the other receives ~$30000/yr, plus their own pension. I've read about the pension max strategies (buy life insurance in lieu of pension survivor option) and have convinced myself that we don't want to go that route.

I have an idea that I haven't seen discussed on this board, or any retirement finance sites (which probably means there's a fatal flaw, haha). Suppose we took out a joint immediate SPIA that would provide $30000/yr. Then each take the life only pension. The theory being that the SPIA covers any survivor pension we would get. Some preliminary research seems to indicate such a SPIA would require a $600K investment. We essentially get $35K/year for the first 5 years (SPIA + his increased pension). After 5 years, we get $39K/year (SPIA + 2 increased pensions).

I plan to bang this into the various calculators online. Only FIRECalc so far. FIRECalc says 95% spending level is $10K higher for 40 years with SPIA and lower portfolio.

Some Pros:
- Ability to take life-only pensions makes "effective" return on SPIA that much higher.
- More of our retirement income on auto-pilot.
- Firecalc and my own less sophisticated spreadsheets indicate we'd be better off.

Some Cons:
- Tieing up 1/3 of our investable assets in the SPIA gives me pause. I find comfort in having the "bigger pot".
- Reduced opportunity for Roth conversions in the coming years. We'd have additional taxable income of $35-39K/year.
- Seems like we'd be worse off if high inflation returned, though I have difficulty quantifying that risk.
- Reading the Kitces report on flaws in converting part of portfolio into SPIA. Need to reread a couple of more times to fully grasp his conclusions.

What else should we be thinking about? Thanks in advance for advice.
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Old 04-02-2018, 07:38 AM   #2
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Welcome. Your numbers look great IF your pension income meets your expenses. You didn't mention expenses, which is a huge factor in retirement as you well know. If you haven't answered these questions, now is the time to do so: Some Important Questions to Answer Before Asking - Can I Retire?

You also don't mention healthcare prior to Medicare. How will you cover that?

Finally, as to your SIPA strategy. No way would I want any more of my retirement income tied up in instruments that offered no protection from inflation. Keep your investable assets invested and available to meet the unexpected that life throws at all of us.
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Old 04-02-2018, 04:20 PM   #3
Confused about dryer sheets
 
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Quote:
Originally Posted by REWahoo View Post
Welcome. Your numbers look great IF your pension income meets your expenses. You didn't mention expenses, which is a huge factor in retirement as you well know. If you haven't answered these questions, now is the time to do so: Some Important Questions to Answer Before Asking - Can I Retire?



You also don't mention healthcare prior to Medicare. How will you cover that?



Finally, as to your SIPA strategy. No way would I want any more of my retirement income tied up in instruments that offered no protection from inflation. Keep your investable assets invested and available to meet the unexpected that life throws at all of us.


Thanks. We’ve been tracking our expenses pretty tightly and have reasonable, conservative estimates going forward. My inclination regarding the SPIA is consistent with yours. Just interested in getting some other opinions either way. Thanks again.
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Old 04-02-2018, 04:44 PM   #4
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The problem with the SPIA approach is that the $30k a year of benefits is not adjusted for inflation... in 10 years that $30k has the spending per of $23k at 2.75% per annum inflation... in 20 years that $30k has the spending power of $18k.

Assuming that your pensions are non-COLA, then you are increasing your inflation risk by buying the SPIA wriskhile reducing your sequence of returns.... but your sequence of returns risk is low to begin with IF your combined pensions cover a high percentage of your spending.

I would look at it this way. You have $1.8m in retirment assets. Let's say that you carve out $378k to "replace" your pension for those first 6 years and put that $378k in FDIC insured savings, leaving $1,422k that is 60/40. At a reasonable 3.5% WR, that $1,422k would provide $50k a year of inflation adjusted income.

The $50k plus your two pensions would provide ~$170k/year of income initially and $140k once one or the other of you passes on. That would be plenty for most on this forum so unless you are high spenders, you're golden.

What about SS?
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Old 04-02-2018, 04:56 PM   #5
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Welcome to the forum. I agree with the others. I did not see your expenses but it appears you have a substantial amount of secure income (pensions). If it were me, in your situation I would not put any investment funds in a SPIA. The pensions should provide sufficient safety and the investments can provide an inflation hedge. While I doubt you need it, the life insurance option might be worth a second look if you still think you need 10 to 20 year gap coverage for the pensions.
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Old 04-02-2018, 07:53 PM   #6
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Originally Posted by lifeisgreat View Post
We expect to take the survivor options. So once either of us passes, the other receives ~$30000/yr, plus their own pension.
Makes sense to me.

Quote:
Suppose we took out a joint immediate SPIA that would provide $30000/yr. Then each take the life only pension.
I don't see the benefit to this.

Are the pensions COLAed?
What about your plan for Social Security and expected benefits?

Quote:
What else should we be thinking about?
Debt?
Goals?
Expenses in retirement?
Long Term Care Insurance?
Leaving a legacy?
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Old 04-03-2018, 02:36 PM   #7
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Your situation is very similar to ours. But you didn’t mention if you’ll also get SS? We will, so we opted to get a $300k life insurance policy on my DW, as her survivor benefit would’ve cost her 10% of her pension. We plan to keep the life insurance until one or both of us get SS to fill the gap that I would experience if DW is gone before my SS.
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Old 04-03-2018, 08:05 PM   #8
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The following is not a recommendation just thoughts...

There are risks to waiting, e.g. the 600,000 you have today may be reduced due to market fluctuations etc...Mortality tables can change, interest rates can drop, inflation, Life happens etc....(as there are non right or wrong answers) This is a decision you both need to be comfortable with regardless of what the FIRE board states of course

A few options/thoughts:

1. Ladder your SPIA purchase: 30,000 (5,000 every 1 or 2 or even 5 years mix and match inflation adjusted with non inflation adjusted to capture price differences better overall picture etc..)

2. Take the 50% survivorship and buy 9K SPIA to make up the difference in payout (60 vs 65 and 63 vs 59) if it will make you more comfortable to have the extra 9K guaranteed by a A+ rated insurance company

3. Create a Bond Pool ($600,000) in something like TIPS and wait to buy the SPIA as the TIPS will keep up with inflation and when ready to purchase you will have the cash to do it when things are a little clearer
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