Pensioners v Do-it Yourself'ers

[Rich_by_the_Bay]

I've been aware of - and interested by -- the different tone and perspective between the fortunate COLA/big pension members here, and those of us who are do-it-yourselfers.

For the record I feel that both groups made their choices and both earned all their dues completely, just in different ways, all valid. So I may at times be good-naturedly jealous of my retired military or gov't friends, but they did their time, and I could have been a military doc if I so chose. We all did good.

Anyhow, what I notice when referring to investments is a more "pat" or packaged acceptance of "the conventional wisdom" among the pensioners (SWR, 4%, Eff. Frontier, indexing etc.), maybe because they have less at stake than the others. The DIYers fret more about the what-ifs, staring at the early big bear, and other hard realities of the street. The DIY'ers game the SWR, anguish over SPIAs more.

Maybe the stability of a pension (or a SPIA?) frees the retiree to stick to the plan with more objectivity and patience since either way the rent gets paid.

Purely subjective, of course. But I must admit that when I am looking for serious advice about investment or withdrawal matters, the experienced members from my own category get my full attention. Also keeps me thinking about a nice little annuity down the road to calm me down in times of $orrow.

On all other matters, there is equal insanity across all groups.

 

[haha]

Purely subjective, of course. But I must admit that when I am looking for serious advice about investment or withdrawal matters, the experienced members from my own category get my full attention. Also keeps me thinking about a nice little annuity down the road to calm me down in times of $orrow.

Makes sense to me.

Most people who have had professional full time careers in the military or civil service could live quite well forever with nothing but their pensions and ancillary benefits. Why shouldn't they be more adventurous with their investments?

The rest of us might want to get rich and really notch living up meaningfully, but we also don't want to tumble down. Hence a degree of caution.

If I had a good cola pension I would be more risk taking with my investments, but I would walk a careful line with my spouse. Divorce settlements are where these folks can get hammered. So they have some risk too.

As to who I listen to- like you I listen mostly to them that does, and to them that have a healthy respect for the **** happens school of philosophy.

Ha

 

[jdw_fire]

...the fortunate COLA/big pension members here...

Anyhow, what I notice when referring to investments is a more "pat" or packaged acceptance of "the conventional wisdom" among the pensioners (SWR, 4%, Eff. Frontier, indexing etc.), maybe because they have less at stake than the others. The DIYers fret more about the what-ifs, staring at the early big bear, and other hard realities of the street. The DIY'ers game the SWR, anguish over SPIAs more.

Maybe the stability of a pension (or a SPIA?) frees the retiree to stick to the plan with more objectivity and patience since either way the rent gets paid.

Which is one reason I made this post http://early-retirement.org/forums/index.php?topic=7503.msg136091#msg136091

 

[W2R]

Also keeps me thinking about a nice little annuity down the road to calm me down in times of $orrow.

Exactly. Anyone who wishes they had a pension could buy an immediate lifetime annuity at the age when they would have begun drawing a pension, and then they will have one. Even if annuities aren't always a great bargain, or exactly what a person might want, at least that is something a person can do.

One evaluates benefits and their likelihood to be around later, when applying for a job in the first place. Benefits like group health insurance and pensions are part of the compensation.

What really makes me angry (though it doesn't affect me personally) is the way some companies have reduced or frozen their pensions, affecting employees who have been there for years. People responsible for that should be tossed in jail and the key thrown away. Grrr.

As a federal employee, I have a small COLA pension coming. Let's be honest - - teensy-tiny is a better adjective here, in my particular case. I am grateful but I may get an even smaller annuity to supplement it, or I may not. Haven't decided.

 

[wabmester]

I tried to popularize the term "pension envy" a couple times, but it never caught on.

There are some very rich pension benefits out there. I'm jealous. The only way to "compete" is with a larger nest egg. I suppose you could buy an annuity with your "excess" if you wanted to, but I doubt most would.

BTW, we haven't heard much about pensions imploding yet recently, so here's a nice piece on the San Diego mess:

link

 

[BarbaraAnne]

We are DIY'ers, although I will have a small non-cola'd pension at 65. I agree with Rich in Tampa's comments and since I'm not trusting enough of the insurance industry to at least at this point consider annuities, CD's have a significant place in our portfolio.

We will have enough in CD's for the income to cover a modest retirement. We will keep the rest invested in the market, but for us to feel comfortable we need an FDIC insured stash of money. I'm not worried about inflation since the rest of the money will be invested in the market. I know we could invest in TIPS, and probably will at some point, but for now its CD's.

If DH and I had COLA'd pensions I know I wouldn't be as cautious.

 

[CyclingInvestor]

I always felt much more "blessed" that I was offered a good 401k since 1983
rather than pension(s). With a pension I always would have felt tied to one
job, since switching penalizes pension plans heavily. With a 401k (and IRA
rollovers), when the going got tough I could always walk to another job
with virtually no penalty. I do not think I could have retired at 48 with just
a pension. I also feel alot more comfortable having myself in charge of the
money than a "team of professionals".

I have alot of respect for those able to stay at a job long enough (especially
military) to garner a substantial pension, but I am glad I had 401k's instead.

 

[Goonie]

One evaluates benefits and their likelihood to be around later, when applying for a job in the first place. Benefits like group health insurance and pensions are part of the compensation.

That's what I did many moons ago. I had a few different job options back then, some paid well...but were sparse on benefits. Some paid so-so, but had good (or really good) benefits. After alot of pondering and asking questions of those who had gone before me, I opted for the so-so pay and the really good benefits.

I have a cola'd DB pension, full health insurance, and am able to bail out at age 50 (a couple weeks away). I truly feel blessed about all that!!! It wasn't necessarily that I was so wise 30 years ago....I flipped the coin and it turned out good!

Some of my friends did the same as me...some chose the 'better pay - less benefits'. Most of us are doing pretty good by either choice. Some, however, squandered it all and don't have a pot to pee in! Some of us can ER....some will have to work until they're 103 years old to be able to live to 65! :

Anyway, with my pension and benefits I feel a little more at ease to take on a little more risk with some of my investing, because I know that I can live on just my pension...and fairly comfortably at that.

As for who I listen to the most on the boards.....EVERYONE!!! I'm certainly NOT a financial wiz-kid (or any other kind of wiz-kid for that matter ) and I can always glean a little something from both pensioners AND Do-It-Yourselfers!!! Actually probably more the DIY'ers than the pensioners!

So keep talking...I'm listening!!! 8)

 

[Peaceful_Warrior]

What really makes me angry (though it doesn't affect me personally) is the way some companies have reduced or frozen their pensions, affecting employees who have been there for years. People responsible for that should be tossed in jail and the key thrown away. Grrr.

Depends on the company. My company had a pension and 50% 401k match, but recently *eliminated the pension and switched to a 100% 401k match. Those who were switched would have no new additions to their pension, but it would still continue to accrue interest payments.

However, they also did not screw everybody on the pension. They did some math and determined that people later in their careers would keep existing system (including pension), and those who weren't at said threshold would be on the new 100% 401k match.

So basically nobody felt like they got royally screwed because the more seasoned employees still get their pension and the newer employees don't have to stick around for several decades to make a significant impact on their retirement savings.

The only people who might feel screwed are those near the threshold who planned to stick around to the end... but that group is definitely the minority.

And in the end, this move will reduce costs, ultimately increasing all of the employees company performance-based profit sharing bonuses.

As I'm early in my career, I'll take the 100% 401k match over my pension any day of the week. After all, in worst case situation if I wanted to simulate a pension I could just take the company match and stick it in bonds.

 

[SteveR]

The concept of investment caution vs pensions can be extended to 401k vs post-tax portfolios too.

A person with a large portfolio in a 401k (or other 4XXX plan) might be accept more risk with the after-tax portfolio since their long term income stream would seem to be assured (well, it all depends on what the plan is invested in but for sake of the discussion I will assume it is balanced and not all in company stock).

I suppose the reverse could also be true. One could take more risk in the pre-tax plan because it has a longer horizion prior to use than the post-tax portfolio so one might be more conservative with the more immediate portfolio since it would be needed earlier in an early retirement situation; unless one wanted to go with a 72t plan.

Anyway, I agree with Rich.

 

[samclem]

Rich,
Very well (and tactfully) put.
I have a pension. It wil cover most of our major expenses and could cover all our expenses with serious belt-tightening. I consider myself a relatively "conservative" investor--no options, fairly well diversified stocks MFs, etc. But, I have no bonds (except for some I-bonds we bought to pay for DD's college), and very little in cash. I would definitely invest differently if we didn't have a pension check.

 

[Rich_by_the_Bay]

I have a pension. It wil cover most of our major expenses and could cover all our expenses with serious belt-tightening. I consider myself a relatively "conservative" investor--no options, fairly well diversified stocks MFs, etc. But, I have no bonds (except for some I-bonds we bought to pay for DD's college), and very little in cash. I would definitely invest differently if we didn't have a pension check.

I think that's the ideal format for me: annuitize (self- or SPIA) for the basic expenses, COLA included so we never need to worry about staying warm, dry and at lean body weight. Anything beyond that, the usual diversified plan.

But we'll see how it plays out when the time comes. I might have trouble writing that big old check to an insurance company...

 

[donheff]

Interesting thread Rich. I have a good pension and DW and I have a substantial portfolio. So, in some respects I am set. But I worry about the portfolio because I don't want to risk the frills in ER. I even watch the COLA'd SPIA threads carefully wondering whether I should insure my travel budget I guess it would be nice to have everything covered except maybe the kids inheritance could be at risk.

But if I got all that handled I would probably get hit by a truck

 

[Empty Pockets]

Rich, I take it your self employed. So am I.

I started kicking around ER when in 1987 when I was 22. I envied how certain sectors of employees could retire in their 50's (police, firefighters, certain union jobs....) and I asked a financial planner how the world can they do it ??

Here is the part where I feel like I need to duck & run. Variable Annuities.

I don't want to side track your post, but this is how I set up my own "pension". With my current holdings and monthly contributions I'm on track to have $2,500,000 at 59 1/2. I plan on this providing my living expenses for life, along with another $800,000 or so in Roths. I have more confidence in the Variable Annuity and it's withdrawal options to provide me with a comfortable retirement stream than I do myself. I just want to turn on the income stream and worry about living instead. This might sound like blasphemy to many do it yourselfers, but I work with the public and I have seen some people begin to lose their mental edge when they get on in years and I don't want to be making investment decisions if that happens to me.

This annuity will let me invest my other savings (about the same amount) in other investments, or if I can, I'll give it to some worthy charities while I'm still alive knowing that I've got a locked in income stream for life (with a 20 year guaranty). I'm going to try to time it so I use it up the month I die since I know it's not an efficient asset to die with. I'd rather leave my heirs with other assets that pass on more efficiently.

As for relying on an insurance company. The way I understand it, if you own sub-accounts in mutual funds, they're your's - not the insurance company's. If you don't co-mingle your funds with the insurance companies you don't risk losing them if the company goes under. I do watch my company and am familiar with ratings. I have much more confidence in a highly rated insurance company meeting its annuity obligations than I do many employers meeting their pension obligations.

Wished I had a pension, so I went out and got one myself. I know there are some expenses involved with the variable annuity, but I sure like the tax deferred growth. NO 1099's. I realize that the withdrawals will be taxable but it will be my only source of taxable income at the time.

I'm not here to sell anyone on a variable annuity, and if you don't like them fine. I just ask that you give the rest of us the benefit of the doubt that they are a good option for providing accumulating & distributing retirement funds.


Good luck Rich.

 

[Sandy]

If I had a good cola pension I would be more risk taking with my investments, but I would walk a careful line with my spouse. Divorce settlements are where these folks can get hammered. So they have some risk too.

After years of alimony, my DH will fork over about 30% of his COLA'd pension to his ex, who has never done anything to help herself or her financial situation. He also delayed his efforts to dissolve an untenable situation. Since her share if his retirement is determined using a standard formula that considers years married, even if not co-habitating, the delay cost him dearly.

 

[FinanceDude]

Rich, I take it your self employed. So am I.

I started kicking around ER when in 1987 when I was 22. I envied how certain sectors of employees could retire in their 50's (police, firefighters, certain union jobs....) and I asked a financial planner how the world can they do it ??

Here is the part where I feel like I need to duck & run. Variable Annuities.

I don't want to side track your post, but this is how I set up my own "pension". With my current holdings and monthly contributions I'm on track to have $2,500,000 at 59 1/2. I plan on this providing my living expenses for life, along with another $800,000 or so in Roths. I have more confidence in the Variable Annuity and it's withdrawal options to provide me with a comfortable retirement stream than I do myself. I just want to turn on the income stream and worry about living instead. This might sound like blasphemy to many do it yourselfers, but I work with the public and I have seen some people begin to lose their mental edge when they get on in years and I don't want to be making investment decisions if that happens to me.

This annuity will let me invest my other savings (about the same amount) in other investments, or if I can, I'll give it to some worthy charities while I'm still alive knowing that I've got a locked in income stream for life (with a 20 year guaranty). I'm going to try to time it so I use it up the month I die since I know it's not an efficient asset to die with. I'd rather leave my heirs with other assets that pass on more efficiently.

As for relying on an insurance company. The way I understand it, if you own sub-accounts in mutual funds, they're your's - not the insurance company's. If you don't co-mingle your funds with the insurance companies you don't risk losing them if the company goes under. I do watch my company and am familiar with ratings. I have much more confidence in a highly rated insurance company meeting its annuity obligations than I do many employers meeting their pension obligations.

Wished I had a pension, so I went out and got one myself. I know there are some expenses involved with the variable annuity, but I sure like the tax deferred growth. NO 1099's. I realize that the withdrawals will be taxable but it will be my only source of taxable income at the time.

I'm not here to sell anyone on a variable annuity, and if you don't like them fine. I just ask that you give the rest of us the benefit of the doubt that they are a good option for providing accumulating & distributing retirement funds.
Good luck Rich.

Great post........... I think the one thing to remember is that there's more than "one way" to get to FIRE. Most of us will not get the COLA pension that teachers and others get. So, we need to find our own way to guarantee income streams many years in the future. Yours is one way to do it, there are others.

Best of luck..........

 

[kcowan]

...The only people who might feel screwed are those near the threshold who planned to stick around to the end... but that group is definitely the minority....

And in at least one case, they won an age discrimination suit against their employer.

 

[kcowan]

I have half a non-COLAd pension (Ex has the other half). I am firmly in the DIY camp. But what I have concluded is that us DIYers will take more equity risks in the market until we achieve a substantial buffer. Once we have that buffer, I think we will be comfortable taking less risks.

So my question is that:
If a COLAd pension covers your necessities does that make you more or less risk tolerant with your portfolio?

Related question (maybe the same one): Will you take more risks to leave a bigger legacy?

 

[ChrisC]

Rich,
Very well (and tactfully) put.
I have a pension. It wil cover most of our major expenses and could cover all our expenses with serious belt-tightening. I consider myself a relatively "conservative" investor--no options, fairly well diversified stocks MFs, etc. I would definitely invest differently if we didn't have a pension check.

I will have a Government pension with a COLA under the CSRS. I view this pension as my bond fund. Thus, I don't have any significant holdings of fixed income investments in my 401K or IRA retirement accounts -- and I have been very aggressive (perhaps too aggressive) over the years. My Government pension will likely be more than adequate to handle all my living expenses, especially, if I don't have a mortgage or a small one, when we eventually relocate out of the high cost area we're currently living. We're basically empty-nesters, with college expenses already paid for our two youngest children, one a senior and the other a junior in college. I also need only 3 credits for social security coverage.

Despite being very aggressive in our portoflios, as we approach 55-59 years old and when we're both likely not to work for meaningful compensation, I think I'm going to become very conservative in my investments. I'm becoming more risk adverse primarily because I've seen so many gains on paper wiped away so quickly -- I want to lock in the gains before they disappear again, and will likely gravitate to a CD laddering for a significant portion of our portfolio. I also want to leave a good chunk of money to my children and other family members.

 

[deserat]

I'd say we are a mix - my husband will have a military pension - I will have several small pensions, 403bs and after-tax savings - we are combining it all for our retire early plans. We've been married almost three years, hence the mixed approach - I had planned on retiring early all along and knew I needed to supplement the small pensions (which come at 60 and 65 respectively) if I wanted to retire early. We met, he was in debt but liked the idea of retiring early and wha-la, we have a more mixed approach - what's interesting is he's much more risky than I with investing - plus he watched the market every day....not me - I've lived through several of those market downturns and have learned to diversify and then rebalance or calculate yearly or so.

Sandy, as for divorces and assets - yup, we have that, too. His ex will get a big chunk of his retirement unless we somehow buy that off - he's in the process of looking at that-running the NPV's.....those pensions are worth some serious change as you look at it over time. That's why saving early and letting compounding work for you makes such a difference.......when I think of the dollars I wasted early on (sigh).

Deserat

 

[grumpy]

So my question is that:
If a COLAd pension covers your necessities does that make you more or less risk tolerant with your portfolio?

kcowan,

For me the answer to this question is that I tolerate more risk in my portfolio. As I have posted elsewhere, I treat my COLA'd pension as the income stream from a very substantial allocation to Treasury Bonds. My actual portfolio is 77% equities, which many would consider high risk. But calculated with those "phantom bonds" included it is only 38% equities. Volitility of the equity portion of the portfolio is easy to ignore when I know that all non-discretionary expenses are covered by the pension.

Grumpy

 

[donheff]

So my question is that:
If a COLAd pension covers your necessities does that make you more or less risk tolerant with your portfolio?

It definitely made me more risk tolerant up until now. For many years DW and I were in the Nords camp (100% equities). I have lately moved over into about a 80/20 mix as I have moved multiple years to a cash bucket with some aditional in bonds (per recommendations here). I also paid off the primary mortgage and have a cash equivalent earmarked for the remaining mortgage on the weekend place. And as DW approaches ER in a year or two I am toying with heading toward a more traditional 60/40 split. My outlook has switched more to preservation than growth now that we are clearly "there." Also, the whole issue of planning on a withdrawal strategy changes your perspective. You don't want to be pulling a years worth of expenses from equities right after a 20% drop. A decent sized bucket of cash equivalents helps with that. For me the cash cushion is more important than bonds.

 

[Moemg]

I have a survivor annuity with a cola .Plus I was able to start social security at 60.These two items cover most of my expenses so my investments are used for extras including a pretty big travel budget. This hasn't realy affected my 80 stocks /20 bonds mix.I've found over years that is the mix I can sleep well with.

 

[kcowan]

My actual portfolio is 77% equities, which many would consider high risk. But calculated with those "phantom bonds" included it is only 38% equities.

I am the same generally. My split is 60% equities 4 years into retirement (because my Ex got half the pension) but if I exclude pensions from the mix then equities is 78%. I am on the high risk side but after 4 years I have gained a measure of comfort and so I am considering keeping at it and maybe creating a charitable trust to pass along to my two sons.

OTOH it would be easier to just go with high fixed and relax. I am undecided. My altruism is working against that.

You don't want to be pulling a years worth of expenses from equities right after a 20% drop.

But my rebalancing always seems to leave some cash around in money market funds. There is plenty of opportunity to draw living expenses out of the 40% as long as I stay away from slavish adherence to the split.

 

[youbet]

It seems like that for the majority of posters on this thread, pensions are an important part of RE plans. And having a significant pension certainly should impact portfolio management and RE decisions.

I've been reading this board for quite a while now and frequently know the circumstances of many of the posters based on information they've given previously. That is, whether they are predominantly DIY types, have working spouses, have generous pensions, etc., etc. But I wonder how many newbies read our posts not knowing our personal circumstances and walk away misunderstanding the logic behind various points of view?

I guess the concept of knowing who you're listening to before you accept the advise would certainly apply!

My other comment would be that if this board still exists in a decade, I'm betting the number of DIY types increase and the number of big pension types decreases as seems to be the trend.