Pension or Portfolio ?

[Alan]

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Originally Posted by FIRE'd@51 I voted for the portfolio. I must say, I'm surprised by the amount of risk-aversion that is present on a forum of ERs and ER wannabes. Guess that's what 10 years of a lousy stock market can do to people. I'll bet that 10 years ago, the portfolio would have won "hands down".

You are probably correct, although my answer would probably still be the same as I was only 10 years from ER and had my fingers firmly wrapped around the pensions. My actual situation is that I have the private pensions (non COLA) that cover all the basics on "Day 1", plus a portfolio for all the pork bacon.

[Moemg]

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Originally Posted by Tigger . But here's an important question: is this person someone capable of prudent spending and investing? If he/she might overspend or invest unwisely, the pension might be the better option.

Good point ! Since it is aimed at this crowd I'd say prudent to downright cheap spending and careful investing .

[keegs]

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Originally Posted by FIRE'd@51 I voted for the portfolio. I must say, I'm surprised by the amount of risk-aversion that is present on a forum of ERs and ER wannabes. Guess that's what 10 years of a lousy stock market can do to people. I'll bet that 10 years ago, the portfolio would have won "hands down".

If you've already forgotten what happened in 2008 then maybe you should reconsider the pension. I think the S&P has been flat for 12 years.

I'm wondering if there's correlation between the numbers of portfolio advocates and the relatively high number of folks who reported earlier in another thread that they have a pension.

[Moemg]

Thanks everybody for contributing . A lot of interesting points were raised . If you had asked me after the meltdown I would have said the pension but now I am not so certain .

[NW-Bound]

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Originally Posted by harley ...I can pick up my cash (by then invested in easily transportable gold and gemstones) and head for Costa Rica or some other safer haven. If the gov't controls my pension they can always reel me back in.

Umm... You would not go through the airport with all that gold and gemstones would you, Harley? When the time comes and you need to get going, perhaps I can help arrange some transportation? I might know some of these guys...

[FIRE'd@51]

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Originally Posted by keegs If you've already forgotten what happened in 2008 then maybe you should reconsider the pension.

How does my saying the stock market has been lousy for 10 years imply that I've forgotten 2008?

[keegs]

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Originally Posted by FIRE'd@51 How does my saying the stock market has been lousy for 10 years imply that I've forgotten 2008?

Because economic events of the past two years were likely more significant than any in the past seven or eight decades.

[jdw_fire]

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Originally Posted by Tigger I'd take the pension if I'd trust the government to keep its promises (I don't, so I take the $2M, thank you). But here's an important question: is this person someone capable of prudent spending and investing? If he/she might overspend or invest unwisely, the pension might be the better option.

for this poll "this person" is u

[CyclingInvestor]

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Originally Posted by kyounge1956 Why the portfolio? I'm just curious.

Since I keep 100% in stocks (and have since 1993), I believe I can invest the money and get more than a 4%+COLA return over the long run. Not 100% certainty of course, but good enough for me.

[Hobo]

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Originally Posted by CyclingInvestor Since I keep 100% in stocks (and have since 1993), I believe I can invest the money and get more than a 4%+COLA return over the long run. Not 100% certainty of course, but good enough for me.

Interesting, but you may be the only poster that may have done the simple interest calculation. What rate of return must you earn each year on the $2,000,000 to equal $80,000 per year? Answer 4%. Can I make an investment that spins off 4% plus inflation?

So far in 2010, the average yield on investment-grade, tax free municipal mutual funds is 2.5 percent, Morningstar reports. I think 4% is pretty tough, considering you need to account for inflation too. That means you need to make 6% interest just to keep your $2million money and still get the equivalent to $80,000 per year.

On the other hand, if you want to draw down the $2 million each month (like a reverse mortgage), then you can live for 30 years for with a 2.5% interest investment. Again, you've got to account for inflation, so you need a 4.5% investment (assuming inflation is 2%)...that will give you a shade under $80,000 per year + COLA.

In short, there is no way you can beat the risk free government pension + COLA --- unless you are an investment wizard. Since this is your retirement money, I am risk adverse.

Earlier in life I would have gladly put the money into something like second mortgages (at 12% per year interest), or some other high risk investment (like starting another business). But after age 55 or so, too late to take chances. Particularly when I can live quite comfortably on $80 per year.

[CyclingInvestor]

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Originally Posted by Hobo Interesting, but you may be the only poster that may have done the simple interest calculation. What rate of return must you earn each year on the $2,000,000 to equal $80,000 per year? Answer 4%. Can I make an investment that spins off 4% plus inflation? So far in 2010, the average yield on investment-grade, tax free municipal mutual funds is 2.5 percent, Morningstar reports. I think 4% is pretty tough, considering you need to account for inflation too. That means you need to make 6% interest just to keep your $2million money and still get the equivalent to $80,000 per year. On the other hand, if you want to draw down the $2 million each month (like a reverse mortgage), then you can live for 30 years for with a 2.5% interest investment. Again, you've got to account for inflation, so you need a 4.5% investment (assuming inflation is 2%)...that will give you a shade under $80,000 per year + COLA. In short, there is no way you can beat the risk free government pension + COLA --- unless you are an investment wizard. Since this is your retirement money, I am risk adverse. Earlier in life I would have gladly put the money into something like second mortgages (at 12% per year interest), or some other high risk investment (like starting another business). But after age 55 or so, too late to take chances. Particularly when I can live quite comfortably on $80 per year.

My answer of 4%+COLA included inflation, totalling maybe 7-8%. I also indicated I stay 100% in stocks. The stocks I own currently have about a 3% yield and grow about 6-10% each year (PG, JNJ, KO, ABT, SYY, ADP, etc), resulting in an average gain (in the long run) of well over the amount needed to match the pension - not much wizardry required.

[FIRE'd@51]

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Originally Posted by Hobo On the other hand, if you want to draw down the $2 million each month (like a reverse mortgage), then you can live for 30 years for with a 2.5% interest investment. Again, you've got to account for inflation, so you need a 4.5% investment (assuming inflation is 2%)...that will give you a shade under $80,000 per year + COLA. In short, there is no way you can beat the risk free government pension + COLA --- unless you are an investment wizard. Since this is your retirement money, I am risk adverse.

Actually, the required real rate of return (after inflation) to fully amortize $2 million over 30 years by withdrawing 80K (COLA'd) annually is 1.25%. This is lower than the current yield on 30-year TIPS, which are trading at historically low yields. I hardly think this requires financial wizardry.

[Hobo]

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Originally Posted by FIRE'd@51 Actually, the required real rate of return (after inflation) to fully amortize $2 million over 30 years by withdrawing 80K (COLA'd) annually is 1.25%. This is lower than the current yield on 30-year TIPS, which are trading at historically low yields. I hardly think this requires financial wizardry.

Come on, just to pay for inflation (which about equals COLA) you must earn 2% a year.

Plus, you've got to make some interest on the $2million, or it will pay out only $67k per year ($2,000,000/30). No way 1.25% is enough to cover COLA + a little extra to bring you up to $80k per year.

[FIRE'd@51]

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Originally Posted by Hobo Come on, just to pay for inflation (which about equals COLA) you must earn 2% a year. Plus, you've got to make some interest on the $2million, or it will pay out only $67k per year ($2,000,000/30). No way 1.25% is enough to cover COLA + a little extra to bring you up to $80k per year.

Please read what I wrote. I said 1.25% after inflation.

[keegs]

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Originally Posted by FIRE'd@51 Please read what I wrote. I said 1.25% after inflation.

Does this explain how to manage through a decade long, poor performing market?

[FIRE'd@51]

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Originally Posted by keegs Does this explain how to manage through a decade long, poor performing market?

No, but it significantly lowers the hurdle rate. I was responding to HOBO's claim that one needed 2.5% after inflation to fully amortize the $2 million over 30 years by withdrawing 80K (in today's $) annually.

[keegs]

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Originally Posted by FIRE'd@51 No, but it significantly lowers the hurdle rate. I was responding to HOBO's claim that one needed 2.5% after inflation to fully amortize the $2 million over 30 years by withdrawing 80K (in today's $) annually.

Sorry for commenting off topic but among the issues that concern me about this roll your own retirement are extended market downturns as we've recently experienced and like what took place in the sixties.

[chinaco]

One part that was not in the poll and could not be is age. If I were at FRA... my decision would be different than at 55. That would be a determining factor, plus current state of health, etc...

I find this poll interesting. What is not shown is whether or not the voters are actually FIRED or approaching it. That might make a difference in choice.

Most people do not understand risk [or how to frame it]... if for no other reason they do not understand all of the components that could cause adverse events. They only understand the impact after an event occurs. I include myself in this category.


With your investment you have two big risks that you have to overcome? Other investors actions (the market) and your actions. Your actions are by far the biggest risk to your individual financial well being!

I suspect some of the responses were driven by age. If I were 70 that $2MM looks more attractive than at 55 or 50.

A COLA Annuity (from a top rated insurance company) for $80k would be very expensive.

[FIRE'd@51]

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Originally Posted by keegs Sorry for commenting off topic but among the issues that concern me about this roll your own retirement are extended market downturns as we've recently experienced and like what took place in the sixties.

That's fine. Maybe for your risk appetite, the COLA'd annuity is the way to go.

For myself, if all I had was $2 million, I would not trade it for 80K a year (COLA'd) for life with a future value at my death of zero, which is another way of stating the poll question. Yes, this has been a bad decade for stocks. 1966-1982 was an even worse period for both stocks and bonds (at least bonds have performed well the past 10 years). Someone, who traded his/her portfolio for a 4% COLA'd withdrawal pension back in 1982 missed out on a compounded real return on stocks of almost 15% per year and bonds of about 7.5% per year for the next 18 years.

[Emeritus]

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Originally Posted by FIRE'd@51 That's fine. Maybe for your risk appetite, the COLA'd annuity is the way to go. For myself, if all I had was $2 million, I would not trade it for 80K a year (COLA'd) for life with a future value at my death of zero, which is another way of stating the poll question. Yes, this has been a bad decade for stocks. 1966-1982 was an even worse period for both stocks and bonds (at least bonds have performed well the past 10 years). Someone, who traded his/her portfolio for a 4% COLA'd withdrawal pension back in 1982 missed out on a compounded real return on stocks of almost 15% per year and bonds of about 7.5% per year for the next 18 years.

Why did you pick 1982

Why not 2007? (that's me)

FWIW both I And DW have both DB pensions and tax sheltered retirement funds.

I believe the actuarial value of my inflation protected pension (at 59) is worth 22 to 22 times the annual payment. However I hedged my bets and when I retired (2007) I did not use IRA money to purchase additional years. Instead it is in Vanguard and equivalent index funds. I carry term insurance to balance the pension structure with DW's pension.

I can go back the other way by consuming assets and postponing DWs SS
At this time that looks very attractive