This Is What I Think I Have Learned From This Community

[Ed B]

I sent this missive to a co-worker that I discuss ER and investment stuff with. It sums up what has changed about my thinking since joining this site. Tell me if I have misinterpreted the general FIRE community orthodoxy.

I have been studying post retirement investing more and I am coming around to being more aggressive with my 401K balance now and after I retire. One of the reasons is that many of the articles and discussions we read and hear assumes no pension since that is the reality for the Gen-Xers and Millennials. And the articles or discussions I have seen lately suggest mentally converting any pension benefit we will get into an equivalent lump sum and figuring in that lump sum to our Asset Allocations as part of your low risk fixed income/bond funds compared to equities. So when we read articles that talk about 50/50 or 60/40 splits being appropriate for someone in retirement, that article very well may assume assets will account for all non-SocSec revenue.

So if you have a pension that will pay $50k annually, that would correlate to $1.25m ($50K/.04) in Bonds or Fixed Income investments. That frees me up to be more aggressive with my current assets. If a person retired with $500k in 401K/IRAs and a 50K pension, and then invested that entire $500K in a S&P500 indexed fund, the Asset Allocation would be a somewhat conservative 40% equities 60% FI or Bonds. And as long as we stay the course and don’t panic, our assets would survive even tech bubble/housing bubble corrections. Now if that $500K is instead placed in very conservative, low return investments then it will struggle to keep up with inflation over time. On the other hand if we are in individual equities rather than an indexed fund then those bubbles could be crushing if we picked the wrong stocks.


If we don’t look at our 401K/IRA balances differently between now and well into retirement (they are our assets whether we are working our not) then it doesn’t make as much sense to change investment strategy too much 1 or 2 years before retirement. It certainly doesn't make sense to change investment strategy 2 years before retirement to something that is far more conservative than what we will do in retirement. For example, I don’t need a 4th annuity so I won’t use my 401K assets that way. I have my pension, SocSec and even my wife’s SocSec. I will need some for health insurance before Medicare, growth for COLAs down the road, and emergency money. Of course we have to be able to sleep at night so there is not right or wrong answer, but I haven’t been looking at things this way.

Thanks for your inputs.

 

[exnavynuke]

That's pretty much my thinking, though I'd clarify that the pension/0.04=value is a bit simplified AND (more importantly) is only "valid" for COLA'd pensions. Non-cola pensions should be valued as if they were fixed annuities imo. The other stipulation is that this is only valid for pensions that your are reasonably confident are virtually guaranteed.

 

[cnocmmz]

Nicely put, we are a similar situation at age 57 ( in July). We will have about 75k in guaranteed govt/ and mil pensions. Also have about 500k in tsp/ and DW 401k. We do have an additional annuity worth about 150k w/ a long term care rider that pays out double when used for long term care.
I will also take my Ss at age 62 just because....lol

 

[bingybear]

So if you have a pension that will pay $50k annually, that would correlate to $1.25m ($50K/.04) in Bonds or Fixed Income investments.

I guess I see this differently. I'm assuming the 50k/0.04 is effectively the 4% rule which is not assumed to be invested in fixed income, but diversified portfolio.

A 50k pension with cola does reduce the income your portfolio needs to generate. This could allow you to be more aggressive or conservative. If you are too conservative your portfolio likely will not create a 4% + cola income stream.
The 4% rule provide a high likelihood of being able to pull a 4% + cola income stream for 30 years even in averse markets. However, I don't recall this being for an income only ultra conservative allocation.

 

[Ed B]

Thanks for the responses thus far.

My pension is the non-COLA variety so any cost of living increases in retirement will have to come from my assets. The 4% of $50K is just an estimation representing an immediate fixed income annuity. I could probably get a a little better but if I understand correctly the younger I am the smaller the percentage/payout will be for an immediate, fixed income annuity. Currently 56 looking to RE at 59 or 60 depending on a few things.

 

[Golden sunsets]

I would be very leery of placing 100% of our investment portfolio in equities because we have large cola'd pensions. For one thing, if one needs to regularly withdraw any money from the true portfolio to supplement pensions then in a down year, one would have to sell equities low in order to fund the need. Secondly, once one reaches 70.5 one has to withdraw the RMD and one would not want to have to sell equities in a down year. A third issue would occur if one needed to withdraw for unexpected or lumpy expenditures, such as an emergency or big ticket item. Selling equities for those withdrawals could occur at inopportune times.

Rather we look at the fact that we have substantial pensions as a factor in determining what our AA should be (without mentally converting the pensions to dollars). It enables us to keep our equity allocation rather high and not reduce it yearly as we age in retirement. As the OP pointed out SWAN is a very important component of our financial planning.

 

[bingybear]

I would count the pension as an income stream plain and simple. It reduces the income stream required from your portfolio. Say you need $100k/yr income and your pension provides $50k/yr. So your portfolio needs to generate $50k/yr income which can come from income distributions or selling assets.
Having a non-cola pension means you need to assume a higher inflation rate on your portfolio withdraws or a higher starting withdraw rate to account for the increase withdraw to make up for the pension not adjusting for inflation.
There is not a right asset allocation in retirement. It is often more conservative than during the accumulation phase. But is still based on the investors risk tolerance and how the numbers work out. Personally I would not go to 100% equity in general. But that is me. I think I'm running about 65% equity... or so. That may be too much for some and too little for others. We have no pensions other than social security.
Will I stay at this allocation? Likely not. It will change over time.
If my pension covered virtual all my income needs may make it a different story as your needed WR from your investments would likely be near 0%.
As I noted, pick your allocation based on risk tolerance which involves your personal psychology and needs from the portfolio.

 

[Ed B]

Thanks for the response. I used 100% of assets in equities as an illustration. In practice I would have an emergency fund to cover medical expenses, and break/fixes like a new well pump, central heat/air, car repairs, etc. and another liquid account with whatever I planned to spend that year from assets. If I did this today I would have those two liquid funds plus part of my investments in an S&P 500 indexed fund and some in dividend or income stocks with the hope that the dividends can fund the liquid funds each year, at least for a while. I am three years out so my "plan" will no doubt change multiple times between now and then.

I would be very leery of placing 100% of our investment portfolio in equities because we have large cola'd pensions. For one thing, if one needs to regularly withdraw any money from the true portfolio to supplement pensions then in a down year, one would have to sell equities low in order to fund the need. Secondly, once one reaches 70.5 one has to withdraw the RMD and one would not want to have to sell equities in a down year. A third issue would occur if one needed to withdraw for unexpected or lumpy expenditures, such as an emergency or big ticket item. Selling equities for those withdrawals could occur at inopportune times.

Rather we look at the fact that we have substantial pensions as a factor in determining what our AA should be (without mentally converting the pensions to dollars). It enables us to keep our equity allocation rather high and not reduce it yearly as we age in retirement. As the OP pointed out SWAN is a very important component of our financial planning.

 

[samclem]

Secondly, once one reaches 70.5 one has to withdraw the RMD and one would not want to have to sell equities in a down year.

If one doesn't actually need the money for spending purposes, selling beaten-down shares due to the RMD requirement is not an issue. You can sell the required amount in your IRA or 401K (as required to meet the RMD), take the distribution, then just buy back the same number of shares in the same fund/company in an after-tax account at the same low price.

 

[wandering]

"So if you have a pension that will pay $50k annually, that would correlate to $1.25m ($50K/.04) in Bonds or Fixed Income investments. That frees me up to be more aggressive with my current assets."

This does make things simple. So this perspective would apply to SS, correct? Since it is COLA?

 

[Accidental Retiree]

If one doesn't actually need the money for spending purposes, selling beaten-down shares due to the RMD requirement is not an issue. You can sell the required amount in your IRA or 401K (as required to meet the RMD), take the distribution, then just buy back the same number of shares in the same fund/company in an after-tax account at the same low price.

We're planning to do transfers in kind at RMD time so that we don't have to sell and then repurchase.

Currently we tell Schwab on their distribution paperwork that we want to move funds from an IRA to our brokerage account and they just do a journal entry and move the equities over.

We'll just continue that process when the time comes.

 

[Fedup]

I'm slowly thinking your way. But it's ok to slowly warm up. But I wonder what is the probability of have 2 BLACK SWAN events in 50 years, assume the 2008-2009 was one and the Depression era of 1929-1939 was another one.