Covering a gap until pension starts

[utrecht]

I have a rather detailed question. I should probably consult a financial planner, and probably will, but would like the unbaised advice given here first.

Heres the situation:

My wife and I are both police officers. I will be 42 very soon and she is 38. We will be eiligible for a pension of approx 75% of our salary at age 50. We will retire when I hit 50 but of course she will only be 46. If she starts drawing her pension early, there is a big penalty so thats not an option I want to consider, nor is working until she is 50.

We are also saving an incredibly high percentage or our income in other ways. We've been paying more than double payments on our house and it will be paid for in less than 2 years. We both max out our 457ks as well (similar to 401k but for govt employees).

So there will be more than enough money, but the question is how do I figure how much to withdraw from our investments to cover the 4 year gap until my wifes pension starts?

Once we are both drawing our pensions and drawing from our other investments, our total income will be susbstantially higher than what we are spending now.

I will need to draw more than the standard 4% during this 4 year "pension gap" which wont be a problem since its only 4 years, but I cant seem to figure out what percent should be.

We would like to have slightly more money in the first 15 years or so of retirement since we will want to travel more at that point and probably slightly less as we get older.

Is there some formula I can use to figure this out? Or do I just punch in numbers using trial and error until the number seems right? For example, if I withdraw 9% of investments the 1st 4 years and add that to my pension I will have XX amount....which will be approx the same the total income of both pensions (once she hits 50) plus 4% of our investments.

 

[REWahoo]

utrecht, welcome to the forum.

I'm a little confused by your question. Rather than focus on the % you need to draw for those four years, shouldn't you be more concerned about the $ amount you need to cover your expenses, regardless of the %? Have you plugged your numbers into FIRECalc (link located at the lower left of this page)? That program should give you a good idea of #1 whether or not your savings will last you through retirement (including drawing the amount you need to support yourself during the "pension gap") and #2 what the initial withdrawal % will be (not that it matters as long as the answer to #1 is "yes").

Give it a try and let us know what you think.

 

[utrecht]

Well I guess youre right. Its the actual dollar amount that matters and not the %. I used 9% as an example because thats about what I think it need to be.

Theres no doubt in my mind that we will have enough money to last forever. I mean the pensions alone would more than cover us if we stayed at out current standard of living, but thats not our plans. We plan to move a more expensive area and live at a higher standard of living which is why we are saving much more now than most people would think is necessary. We have other investments that i didnt mention.

Maybe Im making this harder than it has to be. I can easily calculate what the total of both pensions is and add 4% of projected total investments to figure our total income for the "post gap" years and then figure how much I need to withdraw during those 1st 4 years, but I guess what is throwing me off is that I want to have a fairly higher amount of income for the 1st 10-15 years than i do after that but Im afraid if I withdraw too much early on, I might not have as much left over as I would like after 15 years.

Maybe the question actually is this:

We all know about the 4% withdrawal rule, but is there a formula for withdrawing more money early on? In other words, is there a way to calculate how much I would be drawing down my investments over a 10 or 15 year period if I withdrew 7% or 9% or whatever...during that period?

 

[REWahoo]

Maybe the question actually is this:

We all know about the 4% withdrawal rule, but is there a formula for withdrawing more money early on? In other words, is there a way to calculate how much I would be drawing down my investments over a 10 or 15 year period if I withdrew 7% or 9% or whatever...during that period?

I don't know of any formula, and because everyone's circumstances are different, don't think I'd trust one if I found it.

Again I'll refer you to FIRECalc, and ask if you have run your numbers through it. It allows you to do some "what if" looks at various changes to your spending, exactly the kind of changes you are thinking about. Maybe when you run your numbers through it you should leave out your pension income and take a look at only what you want to withdraw/have left in your savings at the end of 15 years. This might give you the answers you are looking for.

 

[REWahoo]

Maybe the question actually is this:

We all know about the 4% withdrawal rule, but is there a formula for withdrawing more money early on? In other words, is there a way to calculate how much I would be drawing down my investments over a 10 or 15 year period if I withdrew 7% or 9% or whatever...during that period?

After some reflection, maybe I'm the one making this too complex.

What's missing in the conversation is what return are you getting on your investments during the 10 or 15 year period. If you are investing in certificates of deposit and assuming a 4.5% return, then yes you can build a simple Excel spreadsheet to allow you to look at the results of various annual withdrawal amounts. But if you are investing in equities and bonds, then you need something like FIRECalc to look at the possible consequences of various withdrawal and investment choices.

 

[Nords]

If she starts drawing her pension early, there is a big penalty so thats not an option I want to consider, nor is working until she is 50.

I'm confused. When you're 50 she's either quitting (at her age of 46) and drawing a reduced pension at age 46, or she's quitting at 46 to go without pay for four years and drawing a regular pension at age 50, or she's continuing to work until she's 50. Which option is she going to choose?

If she starts a reduced pension at age 46 then you add your two incomes together, subtract from your expenses, and use the result as the draw on your portfolio. If that draw is more than 4% then you might want to consider cutting back on expenses, working longer, or taking a part-time job.

If she quits work at 46 but doesn't start her pension until age 50 then figure the excess draw on your portfolio as a four-year expense in FIRECalc. Start her pension at age 50, stop the four-year excess draw at that point, and see what your annual SWR becomes from age 50 on. If it's less than 4% then your portfolio probably had enough to bridge the four-year gap.

If you're both working to 50 then it's straightforward... but I don't think that you're both planning to work until 50.

If your pension and her delayed (age 50) pension doesn't quite cover the four-year gap then you could consider a higher draw until age 62 (when you start SS) or an even higher draw while delaying SS until age 70.

 

[flipstress]

Hello, utrecht.

Long before I read the term buckets of money from Ray Lucia as posted by others on the forum, I saw some posts by board founder dory36 about his approach of dividing his budgeted expenses into three buckets and using withdrawal rates higher than 4% to meet needs that would last for a shorter period of time than 30 years.

Here is a post from him: http://early-retirement.org/forums/index.php?topic=496.msg6096#msg6096

IIRC, there's a bucket for basic needs, for play money, and for pension-substitution. He uses 4% withdrawal rate for the basic needs and a higher rates for the other two buckets or pots rate for the pension-substitution bucket and a rate that varies for the play money. In your case, the pension-substitution money needs to last for only 4 years, even shorter than the 10 7 years he assumes to get an SS (or other) pension. I haven't read the whole thread and don't know if others have answered your question but maybe dory will see your post and explain more how to use FIRECALC to determine what rate you can use for your pension-substitution bucket.

You may also want to do a search for the forum on variable withdrawal rates.

Corrected strike-out text

 

[2B]

Here's my two cents and it's intended to be very simple. Create a "self-annuity" for the bridge. If you have a COLA'd pension use something like 3%; and if you don't, use 7%. By plugging into a financial calculator you can calculate how much of your current savings will be needed to match the future pension. This also works with retiring before SS.

 

[Delawaredave]

Assuming you both make the same money today, and assuming matching your current income stream in retirement is a goal, and assuming the 75% pension is COLA'd, then I'd roughly estimate you need savings of:

3 times one salary in savings to cover 75% of wife's salary before she starts drawing (75% times 4 years). plus

12.5 times one salary in savings to cover remining 25% delta between pension and current income. 25% times 2 salaries is annual "make up amount" (50% of one salary) That amount times 25 (using 4% rule) gives you what you need in savings.

So if you have 15.5 times one of your salaries in savings, you should be in great shape to:
- Withdraw 75% of one salary for the first 4 years, and
- Withdraw 50% of one salary every year from the start of your retirement.
(So first 4 years you'd be withdrawing 125% of one salary)

So if you have 15.5x one salary sacked away, there's no change in income from where you are now, under these assumptions.

If you have less than that, then you need to do more detailed analysis:
- Wife continuing to work, or
- Do your before tax retirement expenses expect to be equivalent to current income ?

 

[utrecht]

To clear up any confusion.........She'll be retiring at age 46 but not drawing her pension until shes 50. So we'll need to draw more from our other investments during those 4 years than we will after she turns 50.

DelawareDave,

I assume that these figures are to cover the same take home income that we have now correct? I think we'll actually need quite a bit less since we currently save an astronomically high percentage of our take home pay (over 50% if you include pension contributions) and we wont be saving anymore once we retire.

 

[Delawaredave]

DelawareDave,

I assume that these figures are to cover the same take home income that we have now correct? I think we'll actually need quite a bit less since we currently save an astronomically high percentage of our take home pay (over 50% if you include pension contributions) and we wont be saving anymore once we retire.

My rough calcs assumed your retirement income needs equal your current combined salary - if you're saving 50% of that, then I would do 15.5 x (current salary - dollars of that salary saved today)

 

[utrecht]

OK, you guys have cleared up a few things. I dont think Im entering my situation correctly into FireCalc so maybe someone can help me with these numbers.

I know we'll have enough money to retire so I guess I want to do the calculations backwards and instead of trying to figure out if we'll have enough based on our expenses, I want to know approx how much we'll have so I can then figure out how much we can set our expenses at.

We will retire in 2015.

I will get apporx $50K / yr. The pension will increase $2K per year. (Its a 4% COLA increase but its 4% of the orignal amount and it doesnt compound so its $2K each year)

Starting in 2019

She wil get $50K per year with the same $2K increase per year.

I estimate that we will have slightly over $1 million in mostly taxable investments when I retire in 2015.

So the question is how much can we withdraw safely from the $1 million. I dont care about leaving a huge amount behind.
Does this sound reasonable?

Withdraw 8% the first 4 years ($80K) and add that to my $50K for a total of $130K the first 4 years. Assuming a 5% return during these 4 years, I will withdraw $2K less each of these 4 years (because of the $2K COLA increase) which should come close to covering the gap between the 8% withdrawal and the 5% return. I know these are rough estimates since the market doesnt give a steady return.

So the 1st 4 years, our incomes is around $130K
I estimate that this leaves us with about $870,000 after 4 years.

Now the wifes pension kicks ins and out total pension is $58K +$50K her 1st year for a total of $108K.

I can now withdraw 4% of the $870K for the remainder of the retirement which is about $35K the 1st year. $108K + $35K= $143K total income for the remainder of the retirement.

I know these are very rough numbers but does this sound reasonable and fairly safe?

 

[REWahoo]

OK, you guys have cleared up a few things. I dont think Im entering my situation correctly into FireCalc so maybe someone can help me with these numbers.

I know we'll have enough money to retire so I guess I want to do the calculations backwards and instead of trying to figure out if we'll have enough based on our expenses, I want to know approx how much we'll have so I can then figure out how much we can set our expenses at.

At the risk of sounding like a broken record, the 'classic' version of FIRECalc has an option that will provide you with how much you can spend. It's located at http://firecalc.com/calc-classic.php Check the "how much you spend each year" button under the "What do you want to know?" question. Don't worry about any of the withdrawal amounts, just put in all your pension, SS and savings data and it will do the rest.

The number you get will be the annual amount you can spend the first year of retirement, and then increase that amount for inflation each year thereafter and not run out of money (so history tells us) for the time period you specify. FIRECalc will include all sources of income from your pensions and SS in determining your spending number. Note that FIRECalc ignores taxes so you will have to subtract whatever taxes are due from this number, so the amount available to you to spend will be reduced accordingly.

I don't think there is any way to input the $2k/yr pension increase, but you can get somewhere in the ballpark by checking the "inflation adj." box where appropriate.

 

[utrecht]

Ive tried to use FireCalc without much success (probably because Im a moron) but after you insistance I tried again. Im still confused on a few points though.

It doesnt ask for a year of retirement so does it assume that you are retiring today? The reason I ask this is because I have to enter the year in which i want to lower my withdrawals (because of the pensions). I entered a decrease of withdrawals of $50K in 2007 for my pension (assuming I was retiring at the 1st of the year) and I entered another decrease of $50K in 2011 (4 years later) for the second pension. Are these the correct years to enter since it doesnt ask which year Im actually starting the retirement?

And when you say it doesnt account for taxes, that is the amount that I will actually draw and have to pay taxes on correct?

The final number it gave me was $129K as a safe withdrawal amount. It doesnt give a graph of where the money is coming from. is this the total amount including my pensions? So Im actually only withdrawing $29K (since I have $100K in pesnions)? This sounds pretty close to what i came up with.

 

[REWahoo]

It doesnt ask for a year of retirement so does it assume that you are retiring today? The reason I ask this is because I have to enter the year in which i want to lower my withdrawals (because of the pensions).

Yes, it assumes you are retiring now. You will probably need to "trick" the information by assuming your 2015 retire date is 2007, and then adding the number of years to the 2007 date to make the appropriate entries in the increase/decrease withdrawals area.

I entered a decrease of withdrawals of $50K in 2007 for my pension (assuming I was retiring at the 1st of the year) and I entered another decrease of $50K in 2011 (4 years later) for the second pension. Are these the correct years to enter since it doesnt ask which year Im actually starting the retirement?

That sounds correct to me.

And when you say it doesnt account for taxes, that is the amount that I will actually draw and have to pay taxes on correct?

Yes, you will have to pay taxes on whatever portion of the $129k (or whatever number you come up with) is subject to tax.

The final number it gave me was $129K as a safe withdrawal amount. It doesnt give a graph of where the money is coming from. is this the total amount including my pensions?

Yes.

And if I've given you incorrect information (and even if I haven't ), I'm confident a number of other posters will chime in and let us know.

 

[Leonidas]

utrecht,

I'm making some assumptions here about your pension and your agency's policies, but have you considered going for a promotion? You may not want to be a supervisor, but wouldn't the increase in salary increase your pension and help offset some of what you will lose while waiting for your wife's pension to kick in?