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Old 12-10-2013, 08:12 PM   #1
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Given the recent Detroit ruling, I decided to take a look at what might happen should my pension be reduced. (There is no reason to think it will be reduced at this time.) I looked at both an elimination of the partial COLA and a reduction in the payment of 20%. Over 35 years the COLA reduction is more harmful reducing my success rate to 93%. The reduction in the payment reduces the success rate to 94%. Factoring in both a reduced pension amount and no COLA I found my success rate dropped to 91%. All percentage are rounded to a whole number. Reducing my expenses by 10% brings me back to a 100% success rate with both a reduced payment and no COLA. Modest desires certainly help to keep the expenses down and the success rate high. :-) One request: please don't turn this into another discussion of public versus private retirement plans.
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Old 12-10-2013, 09:01 PM   #2
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I was running Fidelity retirement planner today. It is amazing what relatively small percent changes in annual expenses can add up to over a long retirement horizon.

We just keep plugging away at reducing our recurring costs, like installing low flow shower heads, switching to LED bulbs, getting rid of the land line and raising insurance deductibles. All those little cuts really added up and made it possible to retire much earlier than we previously thought we would be able to.
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Old 12-11-2013, 10:32 AM   #3
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I was in the private sector and my PBGC outcome was no COLA and more than a 50% reduction. (I was not retired yet and was impacted by PBGC limits). The examples you are running sound like a pretty modest cut in comparison.
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Old 12-11-2013, 10:58 AM   #4
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I was in the private sector and my PBGC outcome was no COLA and more than a 50% reduction. (I was not retired yet and was impacted by PBGC limits). The examples you are running sound like a pretty modest cut in comparison.
Referencing the PBGC tables, it looks like you had a very generous pension if the PBGC limit cut it by over 50%. Also, it was pretty unusual for a private pension to have a COLA. Most folks under PBGC come out fine due to having less generous, unCOLA'd pensions.

Despite the PBGC working well for the vast majority of folks, 401k's with immediate vesting of employer contributions and SS are the way to go to avoid employer reneging of pension contractual promises.
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Old 12-11-2013, 11:14 AM   #5
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The 'cut's that I used are simply hypothetical. I wanted to see how well I could survive, according to FireCalc, if I faced cuts in the future due to some unexpected problems. I chose 20% and no COLA as 'reasonable' based upon nothing more than my gut. I thought it would be an interesting exercise to see how I might be affected. The 'cut's have no basis in fact.

I do hope this will not turn into another public versus private pension plan discussion. We have had many of those and rehashing the same discussion would be better done in another thread. Or perhaps not at all.

I just thought it would be interesting to see what might happen now that the dike has been breached. As we all know FireCalc does not predict the future, it just looks at the past. One reason I do not suffer to badly is that my pension only makes up about 1/3 of my retirement income, less than that if I upped my withdrawal rate to 3.5% or 4%. Obviously, if my pension was 80% of my retirement income any cut would be far more harmful. Income Diversification - don't leave work without it!
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Old 12-11-2013, 11:27 AM   #6
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Income Diversification - don't leave work without it!
We took our pensions as annuities to diversify our income streams in retirement. They are not government pensions and not over the PBGC limits. It is hard to know what the right course is for 30 years into the future.

We also plan to keep our hobby businesses going into retirement as well, even if technically we don't need the money now. If I sold out then the money would just go into our portfolio and it would be one less unique income stream.
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Old 12-11-2013, 02:03 PM   #7
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Referencing the PBGC tables, it looks like you had a very generous pension if the PBGC limit cut it by over 50%. Also, it was pretty unusual for a private pension to have a COLA. Most folks under PBGC come out fine due to having less generous, unCOLA'd pensions.

Despite the PBGC working well for the vast majority of folks, 401k's with immediate vesting of employer contributions and SS are the way to go to avoid employer reneging of pension contractual promises.

Keep in mind the PBGC maximum at age 55 is $1822.50 per month with 50% survivor benefit. (Plan terminating in 2009)
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Old 12-11-2013, 04:57 PM   #8
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Chuckanut - do you have healthcare bennies with the pension? If so i'd add reduction or elimination of them to the scenarios since they're often less protected than pensions.

I do think its smart to consider these scenarios, even if they are unlikely. Its not unlike someone like me (no pension) looking at severe market crash scenarios.
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Old 12-11-2013, 07:48 PM   #9
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Chuckanut - do you have healthcare bennies with the pension? If so i'd add reduction or elimination of them to the scenarios since they're often less protected than pensions.
I get no healthcare benefit, except that I can buy into a state group plan. I pay 100% of the premium, and I do benefit from the group rate.
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Old 12-11-2013, 09:18 PM   #10
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The 'cut's that I used are simply hypothetical. I wanted to see how well I could survive, according to FireCalc, if I faced cuts in the future due to some unexpected problems. I chose 20% and no COLA as 'reasonable' based upon nothing more than my gut. I thought it would be an interesting exercise to see how I might be affected. The 'cut's have no basis in fact.

I do hope this will not turn into another public versus private pension plan discussion. We have had many of those and rehashing the same discussion would be better done in another thread. Or perhaps not at all.

I just thought it would be interesting to see what might happen now that the dike has been breached. As we all know FireCalc does not predict the future, it just looks at the past. One reason I do not suffer to badly is that my pension only makes up about 1/3 of my retirement income, less than that if I upped my withdrawal rate to 3.5% or 4%. Obviously, if my pension was 80% of my retirement income any cut would be far more harmful. Income Diversification - don't leave work without it!

I think that your cuts are in line with most peoples thinking.... I think that the projected cuts needed to get SS back in line is closer to 30%, but I have never heard anybody suggest eliminating COLA....


I agree.... I would hate to be in one of the states with financial difficulty and only have a pension for retirement.... it might have been a good idea years ago, but I think that ship has sailed... as you say, income diversification....
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Old 12-12-2013, 06:10 AM   #11
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Originally Posted by Chuckanut View Post
Given the recent Detroit ruling, I decided to take a look at what might happen should my pension be reduced. (There is no reason to think it will be reduced at this time.) I looked at both an elimination of the partial COLA and a reduction in the payment of 20%. Over 35 years the COLA reduction is more harmful reducing my success rate to 93%. The reduction in the payment reduces the success rate to 94%. Factoring in both a reduced pension amount and no COLA I found my success rate dropped to 91%. All percentage are rounded to a whole number. Reducing my expenses by 10% brings me back to a 100% success rate with both a reduced payment and no COLA. Modest desires certainly help to keep the expenses down and the success rate high. :-) One request: please don't turn this into another discussion of public versus private retirement plans.
Pension math shows there are two ways underfunded pensions can bring future assets and liabilities back into balance. One is reduce the number of retirees. The other is to slow (or even stop) the growth of the liability. This second option is much easier to implement because it doesn't reduce the current benefit, and many people have a hard time understanding how much damage can be done by inflation, even in small amounts, over a long period of time.

Running a "what if" scenario by freezing the COLA is a good idea, because it is realistic. FIRECalc @ 90% for that possibility means the plan is pretty solid IMHO.
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Old 12-12-2013, 08:37 AM   #12
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Pension math shows there are two ways underfunded pensions can bring future assets and liabilities back into balance. One is reduce the number of retirees. The other is to slow (or even stop) the growth of the liability. This second option is much easier to implement because it doesn't reduce the current benefit, and many people have a hard time understanding how much damage can be done by inflation, even in small amounts, over a long period of time. Running a "what if" scenario by freezing the COLA is a good idea, because it is realistic. FIRECalc @ 90% for that possibility means the plan is pretty solid IMHO.
My next step is to run FireCalc with pension cuts while varying my social security start years from age 62 to 70. My decision to delay SS to 70 was made assuming my pension benefits remain intact. Am I having fun yet?
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Old 12-12-2013, 09:20 AM   #13
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The changes just passed into law in Illinois affect the COLA of current (and future) retirees (basically, the amount of pension eligible for COLA is capped at $1,000 per year of service). In a way, I think this is kind of 'sneaky', as I don't think the average person understands just how important that COLA is over time.

They might have been able to preserve more for the 'little guys' by capping (or scaling back) the actual pension amount at some higher level. I don't know enough about the distribution of pension amounts to know if this was feasible. It might be a little like the 'tax the rich' argument, that there mathematically aren't enough rich to tax?

But I think caps might have had more outrage than COLA limits - probably more visible to the average pensioner?

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Old 12-12-2013, 11:42 AM   #14
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I have rerun FireCalc using the same pension cut figures (20% cut in pension amount and no COLA) and taking SS at 62, 66 and 70 years of age. (Note: I adjusted for a 25% decrease in SS payments starting in 2033.)

Here are the success rates:

Age 62 - 81%
Age 66 - 87%
Age 70 - 91%

Reduce expenditures by 10% per year immediately and the success rates change to:
Age 62 - 96%
Age 66 - 99%
Age 70 - 100%
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Old 12-12-2013, 12:27 PM   #15
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I think that your cuts are in line with most peoples thinking.... I think that the projected cuts needed to get SS back in line is closer to 30%, but I have never heard anybody suggest eliminating COLA....


I agree.... I would hate to be in one of the states with financial difficulty and only have a pension for retirement.... it might have been a good idea years ago, but I think that ship has sailed... as you say, income diversification....
Texas has many municipalities with underfunded pensions and future problems.

City Under funding Employee Pensions - Houston weather, traffic, news | FOX 26 | MyFoxHouston
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Old 12-12-2013, 12:32 PM   #16
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Texas has many municipalities with underfunded pensions and future problems.
Add this to the ever-growing list of reasons you shouldn't move here.
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