Financial Math Wizards Required

[nwsteve]

Need some help folks with sorting out options for ER funding.
DW and I are 58/57 and currently have 700K in retirement savings. Another 300k in taxable. Home not included.
I am eligible for pension payment from an employer long ago. Payment options, 60-945/mon; 62=1115/mon; and 65-1454/mon---all are NON Cola payments.
SS will pay 1348 at 62 or 1823 at 66 and it of course is COLA so waiting as long as possible seems best.
Question:
What is the best sequence to fund annual cash needs, assume retirement in next year. Obviously, taking taxable savings to bridge to 60 is the first given.
Not sure how to do the math regarding taking some IRA dollars to defer pension and ss to later years to get higher payouts or to start taking the non-cola pension dollars first and then dip in retirement dollars next.
Is there someway to determine the "internal return" rate on the employer pension? If I get a hihger return from the pension by waiting then use other funds first?
Thanks
Nwsteve

 

[Hyperborea]

What you are going to need to do to compare the pension options (SS too) is to do the present value calculations. I posted an answer on this before - http://early-retirement.org/cgi-bin...t_board;action=display;num=1090099492;start=7

Do the calculation for each of the options and use it to help in the decision. Other factors are going to be how risk averse are you (will you need a very low stock ratio to sleep well) and how stable is the pension payor.

Another alternative is to run all of the options through FIRECalc. You've six scenarios here to work out - two variants for SS times three variants for the pension. Which one gives you the highest safe withdrawal?

 

[unclemick]

If that doesn't exhaust you - then you can try the ORP calculator with various expected returns on your taxable and tax deferred accounts, SS and pension options.

 

[unclemick]

BTY - it can be made worster - heh, heh, heh

What's your current thinking? :

1. Maintain spending power in real dollars and leave an inheritance.

2. Spend principle in later years as necessary - even dipping into principle. The die broke option.

3. Spend 'relatively more' early while you are 'young and spry' and throttle back in your eighties.

Or some combination of the above.

 

[sgeeeee]

Hi nwsteve,

There's no right answer but there may be some that are wrong (ie that would get you into trouble quick).  I would do both of the things that Hyper suggests.  Both the present value calculation and FIRECALC will have limits, but at least you can get some ideas.

The present value calculations require you to assume something about earnings and inflation from now till you pass on.  We all know the downfalls of that kind of prediction.  Plus, your pension and ss administrators are taking their best guess to make that number fixed whether you choose to take the benefit early or late.  If you get radically different present value based on when you want to start taking the benefit, you are probably doing something wrong.

FIRECALC avoids the need to make specific assumptions about earnings and inflation (it makes them for you), but you have to provide your own life expectancy input.  

Neither approach tells you the affect on your tax rate. It's been awhile since I've looked at it, but I think orp can offer some help there.

If you live a very long life, pensions and ss can become very important since that income doesn't end till you do.  Unlike the rest of your nest egg, you can't outlive it. Waiting to take pensions and ss so you get higher payments works to your advantage for this case.  Of course if you die young, you risk the chance that you never collect a dime of it.  

You could spend a lifetime trying to optimise the decision. In the end, no amount of calculations can accomplish that unless you know the future of all tax laws, your health and emergency requirements, and the exact time of your death.

Good luck. :-/

 

[nwsteve]

Hi nwsteve,

There's no right answer but there may be some that are wrong

The present value calculations require you to assume something about earnings and inflation from now till you pass on.  We all know the downfalls of that kind of prediction.  

If you live a very long life, pensions and ss can become very important since that income doesn't end till you do.  Unlike the rest of your nest egg, you can't outlive it.  

Thanks Guys.
I had done a number of the PVs but see there are a couple more that I need to do. I was finding out that like any financial calculation, you could get almost any answer depending on the assumptions. Unfortunately, given the topic of life expectancy, future tax rates, target residual values, I could justify almost any answer I wanted to prove ;-)

Salaryguru's comment regarding not out living the pension and SS does provide a different "value" to that income stream. Based on that philosophical foundation, would I be correct that draw down from non-annuity assets should be a first source for funding ER?
Or is there some internal rate of return you have to believe is possible from annuity that you can beat in your non annuity assets?

Thanks again
Nwsteve

 

[sgeeeee]

. . . Salaryguru's comment regarding not out living the pension and SS does provide a different "value" to that income stream.  Based  on that philosophical foundation, would I be correct that draw down from non-annuity assets should be a first source for funding ER?
. . .

I didn't mean to imply that this is the right philosophy. Remember that if you choose to postpone annuity draw down, you run the risk of loosing it all without collecting -- or only collecting a small amount. You also run the risk that your pension fund goes broke or that social security benefits are reduced. You have to decide which risk you are most comfortable with. :-/

 

[nwsteve]

I didn't mean to imply that this is the right philosophy.......You have to decide which risk you are most comfortable with.   :-/

Salaryguru,
No problem--I did not hear you advocating only providing another element of value. Reading another thread 62 vs 65, the logical (not necessarily the analytical) answer seems to be "get" while the "gettin is good" and take your bucks while you can and enjoy them.
We are still in the "finger on the trigger" stage and just trying to better understand alternative logics for sequencing sources.
We tend to over-defer, so I was in part looking to see if there was any strong anayltical arguement for one source over another.
In another thread you mentioned your approach to spreadsheets which I liked--something along the lines of "it is not so much the answer, as the understanding" that makes working the alternatives valuable.
I was in hope (obviously in error) someone had some great study that demonstrated a clear hierarchy for funding ER.
Thanks for the help.
Nwsteve