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Needing perspective
Old 12-15-2012, 10:40 AM   #1
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Needing perspective

I just turned 52 and my wife is 49 and we are both looking forward to the day when we can retire. I have lurked at this site and surfed the comments from time to time and thought I'd ask the community a couple questions.

I have various options for an annuity at the time that I retire and one of my big questions is can anybody shed light on the pros and cons of each, or maybe because its such a personal decision has somebody made a similar decision that did or did not work out well.

The choices I have are:
Retiree life payments only-
100% survivor-
75% survivor-
50% survivor-
5 yr guaranteed-
10 yr guaranteed-
15 year guaranteed-

And a choice to take a lump sum.


My thoughts are that I would want to take the lump sum and combine that with 457 money I have and put it in a mutual fund to draw on (USAA mutual fund maybe) and maybe take the 75% option.

With that choice in mind in 5 years I would have a monthly annuity of $4883 and with my 457 and the lump combined about $400,000.

My expenses are a house payment (P&I/tax/insurance) of $1900 and I figure a car payment from now on of about $400 a month, and thats it, besides metered services and health insurance, whatever that will be by then.

I have tried the FIRECalc and I have had an awfully hard time plugging in some of the numbers. In the end when I'm ready to go, I'll go, and if I have to adjust my standard of living I will.

Any thoughts or glaring pitfalls?
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Old 12-15-2012, 10:56 AM   #2
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My expenses are a house payment (P&I/tax/insurance) of $1900 and I figure a car payment from now on of about $400 a month, and thats it, besides metered services and health insurance, whatever that will be by then.
This is only a partial list and gives you no bottom-line number on your expenses.

You need to track all your expenses to know how much you are spending on an annual basis. Until/unless you do this you can't really get a grip on what your income will need to be in retirement. And without that as a starting point, determining what decisions you'll need to make about your pension will be an uneducated guess.
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Old 12-15-2012, 11:20 AM   #3
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Thanks for the reply.

I guess I dont see the value of tracking every purchase I make. Who can tell me what anything will cost 5 years from now? And will those expenses be a larger part of my budget as a precentage than they are now?

So I guess let me just ask about the annuity thing because thats what I wonder about the most... which option?

This whole thing is increasingly seeming to me to be an exercise in futility. What do you spend now, what will you spend then, what is your age, what is your spouces age, how is your health, what shape is the foundation of your home in, do you believe in global warming and do you suppose that will result in higher expenses in the future, do you expect to get cancer, how often do you eat out, how often do you purchase tires, I mean it seems to me that there are so many variables that anybody could be seen as guessing about their future financial security.

I suppose this is why I lurk and not post. Thanks for taking the time though to reply, and I'm not being a smart *ss, it just all seems so overwhelming to me, so much so that I figure when the time comes if I cant make things work I'll shed whatever expenses I have to in order to make it work.
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Old 12-15-2012, 11:29 AM   #4
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..(snip)...if I have to adjust my standard of living I will.
Really? Will you be able to live less than a lifestyle than you currently have, many years/decades into the future?
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Old 12-15-2012, 11:31 AM   #5
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True, we can never know precisely what the future holds, but we can make some educated assumptions IF we have a solid basis to start.

I agree tracking where every penny is spent is a real PITA. I've never done it and never plan to. However, I do know how much in total we spend each year and what it is spent on - at least in broad categories. I started tracking this three years prior to retiring and used those numbers to project our estimated expenses in retirement, estimating what would increase (travel, health insurance, etc.) and decrease (mostly work expenses). After 7+ years of retirement I found my estimates to be surprisingly accurate - a little over in some places and a little under in others, but overall right on. I wouldn't have been able to sleep at night had I not had this information prior to retiring.

Sounds to me like you are suffering from a bad case of giveupitis. The only cure is to start with the basics and work from there.

Sorry I can't be of more help with your annuity question.
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Old 12-15-2012, 11:51 AM   #6
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Originally Posted by rocks911 View Post
I have various options for an annuity at the time that I retire and one of my big questions is can anybody shed light on the pros and cons of each, or maybe because its such a personal decision has somebody made a similar decision that did or did not work out well.

The choices I have are:
Retiree life payments only-
100% survivor-
75% survivor-
50% survivor-
5 yr guaranteed-
10 yr guaranteed-
15 year guaranteed-

And a choice to take a lump sum.


My thoughts are that I would want to take the lump sum and combine that with 457 money I have and put it in a mutual fund to draw on (USAA mutual fund maybe) and maybe take the 75% option.

With that choice in mind in 5 years I would have a monthly annuity of $4883 and with my 457 and the lump combined about $400,000.

I am confused by what you are saying. I thought based upon your list that you had a choice of an annuity (pension?) or getting a lump sum. And if you took the annuity that you had a choice of single life or having a survivor option.

But then you talk about having both the annuity and the lump sum. So I'm confused. I know that some plans allow you to take a portion out in a lump sum and the rest as an annuity. If so, what is your percentage breakdown on that? That is can you take it all as a lump sum? Only part of it? If so, what part?

As far as survivor options, things to consider would be your spouse's age as compared to yours and your spouse's available income. For example, if your spouse is similar age to you or older and also has a pension then that might be a different situation than if the spouse was younger and had no pension.

As far as expenses, I do track all my spending and have done it for years. Yes, specific expenses do change over time but you can see a pattern. If I am spending $600 a month for groceries it might go up in 5 years but it will probably stay roughly the same percentage of my spending. It won't suddenly become $1200 a month or $300 a month.

I do actually agree with you about modifying lifestyle to make retirement work. That said, to ascertain what you have to do or can do it really helps to know expenses. It is easy to change discretionary expenses for that kind of thing. But sometimes there are expenses that are not so easily changed. When DH got ready to retire a couple of years ago we looked at all the expenses surrounding our home. It wasn't just the mortgage payment. It was a very expensive house to maintain. We had to consider the utility expenses, repair expenses, maintenance, even tree maintenance (we had over 100 trees -- after one hurricane we had tree clean up of several thousand dollars). After we looked at those expenses, we decided to sell that house and look for something less expensive to maintain.

If you don't know what you spend in at least broad general categories it is hard to know if you even need to make changes. If you use credit cards for most of your spending (we do but pay the full bill each month) you can often get an annual report at the end of the year showing your categories of spending.
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Old 12-15-2012, 12:45 PM   #7
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I agree with RE and Kat. You need to know what you spend to get a general idea of how much cushion you will have. If you have to cut down the road, you have to know what part of your budget truly is able to be cut. I track expenses about twice year, into fixed expenses and discretionary ones. I really didn't think it was that time consuming, and I do it old school, by pen and spreadsheet paper. Maybe 30 minutes total time each month. For example me. After tracking for a couple years, I knew my expenses ran around $3k a month. I would not retire until my pension had a $1500 month cushion over that. I wanted that cushion in case of unexpected expenses occurred as I want to finance these out of my monthly check, not my reserves.
By knowing your monthly expenses and amortizing yearly costs such as property taxes, etc. you will know where you are at in relation to expected monthly retirement income. I really think you will be glad you did this, as it will give you a blueprint for the future. Even just plugging in yearly 3% inflation into your yearly budget will give you some idea of what you will need 15 years down the road.
Sorry I am no help on your main concern, as I am just a dumb pensioner who was not even allowed a lump sum option to mull over.
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Old 12-15-2012, 01:22 PM   #8
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I concur with much of what others have advised and have some additional thoughts to offer.

You don't really have enough information to decide on which annuity option to take without assessing the amounts - some pension payments are attractive and others are not. For example, my former employer offered a pension option on our defined contribution plan that was attractive so I will annuitize it rather than the lump sum, but if the annuitization option wasn't so attractive I would have taken the lump sum. You really need to look at the numbers and you'll find numerous threads on these board on what to look at in making the decision. Subject to the numbers, I prefer the joint life option so DW would not have any reduction in her standard of living should I predecease her, but the 75% survivor option may do the trick since to a limited extent since I think one can live slightly cheaper than two.

While any retirement projection is assumption bound, it is far better to do some projections with reasonable assumptions than to just think you'll just adjust your lifestyle. You may be better off with something simpler and more intuitive than Firecalc. I would suggest that you try Quicken Lifetime Planner (included in Quicken Deluxe or higher). It may be less overwhelming to you and a good place to start. Once you have a base plan, you can do some what-ifs to see how your plan would change if you elect lump-sum vs 75% survivor vs joint life, etc. Once you're comfortable with that you can chose to move on to Firecalc if you wish to.

For most people, it is fairly easy to estimate what they will spend in retirement by looking to what they spend now and adjusting it for likely changes. That's what i did and it has proven to be quite close. You can get a good idea of what you spend now in two different ways, 1) look at your take home pay less what you save/invest out of your take-home pay (presumably the rest is what you spend) or 2) adding up for a year the checks/payments you make, ATM withdrawals (which is presumably spent), etc. If you put a lot of your spending on a credit card as many of us do, some of the the major credit card companies have websites where you can run reports showing what you spent. Those approaches will give you an idea for now of what you spend and you can make a New Year's resolution to track your expenses in 2013.
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Old 12-15-2012, 01:33 PM   #9
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For most people, it is fairly easy to estimate what they will spend in retirement by looking to what they spend now and adjusting it for likely changes. That's what i did and it has proven to be quite close. You can get a good idea of what you spend now in two different ways, 1) look at your take home pay less what you save/invest out of your take-home pay (presumably the rest is what you spend) or 2) adding up for a year the checks/payments you make, ATM withdrawals (which is presumably spent), etc. If you put a lot of your spending on a credit card as many of us do, some of the the major credit card companies have websites where you can run reports showing what you spent. Those approaches will give you an idea for now of what you spend and you can make a New Year's resolution to track your expenses in 2013.
See if you can download monthly bank statements from your checking account to Excel. That way you can combine them into one worksheet for the year, and sort by type of expenditure. If there were debit entries for "transfer to savings", delete those. The sum of the remaining debits represents your total annual expenses, provided that you use one checking account and pay your credit card bills from it.
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Old 12-15-2012, 02:41 PM   #10
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Really? Will you be able to live less than a lifestyle than you currently have, many years/decades into the future?
If I have to I will.
I was talking with a Continental airline pilot the other day who is currently a salesman. He explained that he was on his way to FIRE when vulture capitalists bought out the company and looted the companies retirement. He said he has less than half what he anticipated to retire on.

So yeah, I'll do what I have to if the numbers dont work.

Thanks for the replies everybody, I dont think this is for me.
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Old 12-15-2012, 04:06 PM   #11
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....I suppose this is why I lurk and not post. Thanks for taking the time though to reply, and I'm not being a smart *ss, it just all seems so overwhelming to me, so much so that I figure when the time comes if I cant make things work I'll shed whatever expenses I have to in order to make it work.
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....Thanks for the replies everybody, I dont think this is for me.
rocks, as you probably know from lurking here, there are a lot of no-nonsense, straight-shooters in this group. We do sometimes question, prod and push and it can be a bit daunting to newcomers, but I believe the intention is to help you and share our experiences (and mistakes).
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Old 12-15-2012, 04:43 PM   #12
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rocks911,

To your specific question of the lump sum vs various annuity options, I can offer my opinion only. Whether you can RE or not is a far more complicated study you'll need to work on.

I had to make a similar decision on a company pension, non-COLA'd sadly. I first looked at the lump sum and compared it to the annuity by shopping the Lump Sum as if I were going to buy an immediate annuity. A purchased annuity with the lump sum amount was about 15% lower in income than the pension as I recall. Since I had other funds to invest, both taxed and taxed-deferred, I felt that an annuity income would be sort of a diversification for us. So I threw out the lump-sum option. But don't forget that the lump-sum is guaranteed once it's in your account, but the pension or annuity has a slight risk of company default. The government guarantee reduces this up to a certain level assuming no government default of its plan. Lump-sum, bird in the hand and all that.

But back to the pension options. As previously mentioned, the decision of what percentage plan to choose depends on your personal situation. My DW is seven years younger and has no pension options since she didn't go to work until later in life. I felt we could make it financially with the 100% option easily, and the income stream would continue if I go first, actuarially probable. I carry some life insurance to help also. So once I decided to maximize DW's income prospects instead of mine, the decision was easier. Unfortunately, there is no perfect answer, just the answer you can live with. Good luck.
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Old 12-15-2012, 08:28 PM   #13
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I guess I dont see the value of tracking every purchase I make. Who can tell me what anything will cost 5 years from now? And will those expenses be a larger part of my budget as a precentage than they are now?
This whole thing is increasingly seeming to me to be an exercise in futility.
I suppose this is why I lurk and not post. Thanks for taking the time though to reply, and I'm not being a smart *ss, it just all seems so overwhelming to me, so much so that I figure when the time comes if I cant make things work I'll shed whatever expenses I have to in order to make it work.
Yeah, you're right, tracking expenses is a waste of time. You can't put precise numbers on the future, so you might as well not even try. In fact, we're all just winging it here and we really don't have a clue how this retirement stuff works. We might even be back at Wal-Mart next week, putting on our vests and getting ready to restock the shelves.

If you can't be bothered to track your expenses, even at the 95% level, then you're just not ready to handle this.

You haven't found something you want to do in retirement, or you haven't suffered enough in your workplace. You're not motivated enough to carry out the analysis and thoughtful decisions, so you might as well save yourself the time & effort. Don't even bother. Go back to work and try to save as much as you can while deciding what you want to do with your time and your life.

One day you'll find something you'd really like to do with your free time, or you'll get totally frustrated with work, or you'll have a serious health scare. Something will motivate you to figure these things out, and then you'll be ready.

We'll be here.
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Old 12-15-2012, 08:33 PM   #14
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Tough love and all.
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Old 12-15-2012, 08:44 PM   #15
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"I don't think this is for me". Darn right it isn't. RE ain't for sissies, kid.

"Overwhelming"?? A little push-back from a few posters here and you're 'overwhelmed'?

If you can't even muster the gumption (did I just say 'gumption'?!) to figure out your expenses, even broadly, get your butt back to work and keep paying toward my SS benefits.
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Old 12-15-2012, 09:40 PM   #16
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Tough crowd here, but I have to agree. If you don't have at least some idea about how much you are spending now, it's pretty hard to retire early with confidence that your money will go the distance.

And it's not much work at all. About 30 minutes each month tells us how much we are spending and how much we are saving. Another half hour to add it all up at year end and a bit of time thinking about how our expenses might change once we FIRE. It's a very small investment of my time to know that we can afford to retire early without having to compromise on our desired standard of living once we do.
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Old 12-16-2012, 12:14 AM   #17
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Tracking expenses was pretty simple when I began doing that in a summary form in 1989 (years before I bought my first PC). On a simple paged of college-ruled lined paper (33 lines), I wrote some columns of the primary expenses I had at the time. most of them monthly. Those included my mortgage, co-op maintenance, electric, phone, auto and homeowners insurance, credit card bills, and ATM cash withdrawals. I included a total column and a column for wage income and taked on a surplus/deficit column after that. With only 12 months, a total line, an average line and a change-from-last-year line, I could fit 4 years on a single page using both sides. Even though I have spreadsheets which do this and other calculations and record keeping, I still do this on paper as it is a handy item to keep around.

I rarely use my credit card or debit card, as most of my small, everyday purchases are in cash. I don't sweat the small stuff much, as I have been making 2 cash withdrawals per month (of $140-$160 each) since 1989, most of which goes to food. It is a lot easier to keep track of my cash withdrawals than to keep track of every little supermarket trip, gas station trip, and a trip to Target to buy some oddball item.

When I ERed 4 years ago, my ER budget was nearly the same as it is today with the following changes - my commutation expenses went to zero (YAY!) along with my FICA payroll taxes (another YAY!) while my health insurance expenses rose by about the same amount, roughly offsetting each other. My income taxes dropped slightly, too. I had stopped contributing to my 401(k) already (I had become ineligible for company match) but that would be another source of reduced expenses.

As others have posted here, you do need to have at least a rough idea of your expenses and not use some silly rule of thumb percentage of work income to figure out how you manage your retirement, early or otherwise.
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Old 12-16-2012, 07:31 AM   #18
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rocks911,

As to your question regarding the pros and cons of investing a lump sum or taking the annuity, there are two schools of thought on that. Wade Pfau, a researcher on retirement planning strategies, has a good website. Here is a link to a table that he constructed that compares the two schools of thought:

Retirement Researcher Blog: Two Schools of Thought on Retirement Income
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Old 12-16-2012, 09:14 AM   #19
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...(snip)...get your butt back to work and keep paying toward my SS benefits.
And stay off my lawn!
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Old 12-16-2012, 09:38 AM   #20
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I guess I dont see the value of tracking every purchase I make. Who can tell me what anything will cost 5 years from now? And will those expenses be a larger part of my budget as a precentage than they are now?
In a matter of 30 minutes or less, you could figure out to within 1%-2% of what you spend each year. Just total up your monthly credit card statements (some even make a handy year-end summary for you), and look at your monthly checking account bank statements to see your total ATM cash withdrawals and total checks/bill pay checks written. Total 'em up, and you'll know pretty damn quickly what you spend each year, and have an easy gauge of what you will probably need each year in income for your basic needs with some fun money thrown in.
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