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Inflation: CPI vs Flat - Pension w/ Portfolio Withdrawals
Old 07-13-2013, 03:12 PM   #1
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Inflation: CPI vs Flat - Pension w/ Portfolio Withdrawals

Just wondering how everyone who has pensions and or SS, but also draws down on a portfolios handles this...

Since your pension and or SS inflates at CPI (some pensions are not inflated), but you want a flat rate (let's say 3%) - do you withdraw from your portfolio to make up the difference or do you only inflate your withdrawals from your portfolio and let your other income just be what it is and adjust your budget to that?

My plans are to make up the difference, but when I calculated what the difference would be - I could not believe how many years it added - so wondering just what is the norm
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Old 07-13-2013, 04:01 PM   #2
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I withdraw what I need - it is a set amount per month from my nestegg - my ER "paycheck". I haven't given myself a raise since the amounts I'm withdrawing are sufficient for my needs. IOW, I'm not as near as scientific about it as you are.
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Old 07-13-2013, 04:28 PM   #3
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I continually see discussions about 95% or 100% and inflation rates that are common, but I have never seen a discussion about inflating portfolio withdrawals without or with covering the shortages in pensions or SS.

I also am not sure how Firecalc or Fidelity handles it with their tools, but it can make several years difference to an outcome and adds a level of flexibility to a plan.

And yes I probably do put to much thought into this, but it is just my way. If I get 10 or 20 years down the road I want to know what my options are if the need arises...
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Old 07-13-2013, 04:32 PM   #4
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Originally Posted by Semiretired2008 View Post
I continually see discussions about 95% or 100% and inflation rates that are common, but I have never seen a discussion about inflating portfolio withdrawals without or with covering the shortages in pensions or SS.

I also am not sure how Firecalc or Fidelity handles it with their tools, but it can make several years difference to an outcome and adds a level of flexibility to a plan.

And yes I probably do put to much thought into this, but it is just my way. If I get 10 or 20 years down the road I want to know what my options are if the need arises...
Whatever you figure out now will have almost nothing to do with any options 10 years in the future. Except that if you have more money, and live more cheaply, you will have more options at any point.

Ha
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Old 07-13-2013, 04:55 PM   #5
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I don't understand the question. What do you mean 'you want a flat rate'?

You plug your pension/SS into FIRECALC, check whether inflation adjusted or not, enter your spending and it will take any WD in excess of your SS/pension from the portfolio. If your spending is less than SS/pens, it will add to your portfolio.

Are you saying you just want to increase your spending by a straight 3% each year, regardless of what actual inflation is? Well, you can do what you want, but any FIRECALC output based on that will be twisted. I doubt that many held their spending increases down to 3% back in the 80's when CPI was double-digits.

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Old 07-13-2013, 04:59 PM   #6
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I'm fortunate enough that I force myself to pull ~2.3% out and still am accumulating cash in my credit union savings account.

I think what works best for you would be what makes you most comfortable. I personally would not want to retire at 60 and NEED to take 4% out. That's not to say it may not be a reasonable WR for someone who's comfortable with that. I happen to use FIDO calculator as my touchstone and have to remind myself that its basic result is 90% safe. Instead of obsessing about the 10% possibility of failure (hey, I'm WAY below what they say I can take) I marvel at what could happen if the future is brighter (which it has been for the last several years). Since I retired 2 years ago FIDO says my SWR has increased about $1200 a month. So what? Comfort varies for us all, but I'd guess there aren't too many on this board that are 50 pulling 6% out. Just a matter of studying the way these models and statistics behave and reconciling it with your personal comfort levels.

Inflation (and health care if you're a far ways from Medicare) are wild cards. It affects your SWR, your strategy, all sorts of stuff. Ha's right. You can't know what's going to happen, just be comfortable that you are reasonably prepared for the most likely. Frankly, I'm a bit concerned with my pension, ostensibly with limited COLA. It's based on NC system, and the way our legislature is behaving I'm doubtful it will keep up with inflation or even close to it. Hence my conservative stance.

For whatever that was worth.
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Old 07-13-2013, 05:05 PM   #7
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Originally Posted by pb4uski View Post
I withdraw what I need - it is a set amount per month from my nestegg - my ER "paycheck". I haven't given myself a raise since the amounts I'm withdrawing are sufficient for my needs.
My situation is very similar.

When we first retired withdrawals funded 100% of our annual expenses. When Social Security kicked in, first mine then DW's, the monthly 'paycheck' amount withdrawn has declined along with our spending - thanks mostly to Medicare. So no raise for us, just the opposite.
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Old 07-13-2013, 05:17 PM   #8
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Originally Posted by Semiretired2008 View Post
Just wondering how everyone who has pensions and or SS, but also draws down on a portfolios handles this...

Since your pension and or SS inflates at CPI (some pensions are not inflated), but you want a flat rate (let's say 3%) - do you withdraw from your portfolio to make up the difference or do you only inflate your withdrawals from your portfolio and let your other income just be what it is and adjust your budget to that?

My plans are to make up the difference, but when I calculated what the difference would be - I could not believe how many years it added - so wondering just what is the norm
ERD50 has a good response.

I have a non-COLA'd pension. My plan is to increase my portfolio withdrawals faster than inflation to make up the difference. Because of that, I wouldn't feel comfortable with a "4% of initial balance" first year withdrawal.

FireCalc takes all of this into account when it gives me the dollar amount of spending. If you're using FireCalc, try checking and then unchecking the box on COLA pension. You should get different results.
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Old 07-13-2013, 05:56 PM   #9
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Our SS is semi-indexed to inflation.
My pension is fixed.

We withdraw 4% from our IRA's each year, that fluctuates with the markets but not too badly because we are ~50% CD's/MM.

In theory, our real income will decline due to the poor inflation protection on the SS/pension, but as we get older we will start to use the IRS MRD numbers for the IRA's, even though a lot of them are Roth. That will boost the withdrawals.

Nothing is guaranteed.
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Old 07-13-2013, 06:39 PM   #10
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With the introduction of the use of Chained / Limited CPI in at least Government paid benefits, whether paid through pensions, SS, disability, etc. - the shortfall in these incomes will become greater and greater with time and it will put an ever increasing demand on your portfolio - this is why I asked my question...

I doubt any calculator takes this into consideration...
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Old 07-13-2013, 09:47 PM   #11
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Firecalc has an option to set inflation at fixed percentage (default 3%) and several other spending modes.

In your situation assuming that pension +SS are significant portion of your income I'd break the problem into two parts.

Lets assume you pension +SS is $36,000 when you retire in today's dollar. Your desired spending level is 60,000 so your portfolio has to support $24,000.

Let assume you think chained CPI/higher health care understates inflation by .25% a year. This reduces your SS/pension by $90 a year. You can model this fairly closely in FIRECalc by adding an off the chart spending increase after say 7 years of being retired of 7 * $90= $630 a year, after 14 years add another $630 reduction and finally after 21 years add a 3rd $630. Now this is missing some compounding inflation rates but close enough for retirement planning and you can check the add inflation box on the increased spending.

You can then experiment with different spending models like say the 95% rule.
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