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View Poll Results: Assuming the NPV of all options are equal, how would you prefer to start retirement?
Social Security, Pension, Personal Savings 67 61.47%
Social Security, Pension 4 3.67%
Social Security, Personal Savings 13 11.93%
Personal Savings 25 22.94%
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Poll:Prefer One, Two, or Three Legs?
Old 01-04-2014, 07:44 AM   #1
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Poll:Prefer One, Two, or Three Legs?

Financial gurus talk about the three-legged stool for retirement.

1. Social Security.
2. Employer's Retirement Plan (pension of some sort.)
3. Personal Savings.

Many of us never worked at mega corp so option 2 didn't exist, or at best is a 401k with some level of matching. I don't view that any different than personal savings because at the end of the day, there are no guarantees and the owner is responsible for managing it.

At the end of the day though, your compensation package is your compensation package and if the employer isn't providing #2, hopefully you're compensated more in your salary. I know I was.

Assuming the Net Present Value of a, b, c, and d are equal at the beginning of your retirement, which would you rather have?

a) Social Security, Pension, Personal Savings
b) Social Security, Pension
c) Social Security, Personal Savings
d) Personal Savings

Our situation is such that we will survive mostly on Personal Savings with a modest Social Security covering perhaps 1/4 of our expenses.

I was discussing this with my wife this morning. She is not very financially literate so I had to explain some things to her. But in her logic she saw that (assuming we do things correctly) if we can't make our personal savings last and we're in the same markets as everyone else, then everyone else is going to be in trouble too. Then I had to explain how we could use some of our savings to buy a pension with an SPIA and that takes some of the longevity risk away if we live a very, very long time.

Which would you prefer and what's your rationale?
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Old 01-04-2014, 07:49 AM   #2
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There has been a lot of discussion about those of us without an employer pension creating that third leg on the stool by purchasing a SPIA. It is something I'm considering at some point in the future.
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Old 01-04-2014, 07:56 AM   #3
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Originally Posted by REWahoo View Post
There has been a lot of discussion about those of us without an employer pension creating that third leg on the stool by purchasing a SPIA. It is something I'm considering at some point in the future.
My original thinking is that if the markets crash everyone with an SPIA will be in just as much trouble as I am because the insurance companies will go bankrupt.

The other way they could go bankrupt is if there's a miracle pill and everyone on the books is able to live well past their actuarial calculations.

However, if the market returns are mediocre at best and I outlive my savings - the SPIA may be a worthwhile hedge by giving a return from all those participants who didn't outlive their savings.

It's definitely something I'm thinking about, even with planning on retiring with 40x by 50 and being able to cut x by 50% if absolutely necessary.
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Old 01-04-2014, 08:03 AM   #4
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One other thought I just had is that my wife does have some family longevity going for her. Her grandfather was a centenarian. I'm fairly average, however both of us take good care of ourselves and are in much better physical health than the typical 48-50 year old American. So that tilts the odds of an SPIA being worthwhile in our favor.
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Old 01-04-2014, 08:28 AM   #5
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It is good to have some sort of annuity to mitigate your longevity risk. Otherwise you will tend to leave too much on the table when you die because you will be afraid of running out. Either an annuity or pension will serve this purpose. I am lucky that I have a generous pension with survivor benefits to spouse. The present value of this pension is about 70% of my investment portfolio. Even so I may still consider a SPIA when I get into my 70's. Fear of insurance co going broke seems a little paranoid. Pick a highly rated one. There are regulatory controls over annuities that make them very low risk. Think of annuities as negative life insurance. You are basically insuring for living a long time rather than dieing early.
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Old 01-04-2014, 08:45 AM   #6
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I would prefer a. Diversification is good.

Pensions have some risk depending on the financial worthiness of the pension plan and the sponsor, but many also have PBGC protection, so my answer assumes that the pension plan is on good financial footing (well funded, financial worthy sponsor, etc).


We have all three but our personal savings are greater, then SS and then pensions (I have a small non-COLA pension that will be about half of my SS). I expect that my SS will provide a bit more than half of our annual living expenses, the pension about 12% (at age 70) and the rest from personal savings.

If you are worried about longevity risk, then my view is that delaying SS to age 70 is the most affordable way of buying a COLAed SPIA.
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Old 01-04-2014, 08:55 AM   #7
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I would prefer to have SS, a pension, and a large portfolio. Similar options is open to most of us, as REW points out, using an annuity. The costs and other trade-offs of these options makes a difference that's not part of the discussion.
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Old 01-04-2014, 08:56 AM   #8
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Recently Kitces and Pfau showed that having an SPIA early in retirement was not superior in terms of portfolio survival (or rather, inferior) to starting with a large fixed income component in retirement and then following a glide path that spent down fixed income and let the equity allocation gradually rise over time.

I no longer really consider the SPIA approach. I guess I don't write it off entirely for later years for simplifying things. But it would also be reasonably simple to dump it all into a high payout fund. At age 80 - does it really make sense to buy an SPIA?

I'm pretty happy with my current situation which is A. I haven't "counted" my SS yet. It's modest anyway.
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Old 01-04-2014, 09:11 AM   #9
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I picked Door #3 as I have no pension, only SS and savings. However, a pension would be nice to have too!

I'll take my chances without an annuity, unless there is some real compelling reason to purchase one at some point in time.
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Old 01-04-2014, 09:16 AM   #10
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When I retired, I had a choice of a flat sum or pension. I decided on the pension. I liked the idea of a reliable income (although as you know it comes with a risk that the pension is not funded). I also remember reading, although I can't remember where, that people with pensions/annuities are healthier in retirement. I am fortunate that my pension covers a high percentage of my annual expenses so for me, my stock market anxiety is reduced. At the same time, I lost a great deal of upside in the last couple of years. So far, I am happy with my original, perhaps more conservative,, decision.
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Old 01-04-2014, 09:18 AM   #11
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I would prefer all three, but since my pension was frozen 20 years ago I have about a 2 1/8th leg stool. However I sure had enough time to adjust and now I'm responsible for my own financial fate. Being a control freak this probably best for me and my family.
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Old 01-04-2014, 09:23 AM   #12
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Given the same amount of money, I would prefer just SS and personal savings.

The reason is that of the 3 only SS and personal savings are tax advantaged. The pension even interferes with the other two and make them more taxable.

To be more explicit, 15% of SS income is tax-free for everybody. It could be more if one was lower income. Of personal savings, return of capital is tax-free, Long-term capital gains may be tax-free, and qualified dividends may be tax-free. One can juggle all these to reduce one's income tax burden to essentially zero. However, if you throw in a pension, then it mucks up everything.
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Old 01-04-2014, 09:26 AM   #13
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Quote:
Originally Posted by aim-high View Post
Assuming the Net Present Value of a, b, c, and d are equal at the beginning of your retirement, which would you rather have?

a) Social Security, Pension, Personal Savings
b) Social Security, Pension
c) Social Security, Personal Savings
d) Personal Savings

Which would you prefer and what's your rationale?
I know that different people have different perspectives, but for me option a) seems so obviously superior that I almost consider it borderline irrational to pick one of the alternatives. Net present value of a pension or SS would be calculated based on average life expectancy. That means if you happen to have a long life, you are better off with both the pension and SS rather than personal savings. If you happen to die early, personal savings would be better. Since your future life span is unknown, it's clearly best to cover all the bases and have all three stools.

The only exception that I can think of is if you know something about your future life expectancy that would dramatically alter it from average. Somebody just diagnosed with malignant melanoma, for example, is hardly likely to go out and invest their life savings in a SPIA. In such cases you hope for the best, but know that the odds of a long life are probably not in your favor.
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Old 01-04-2014, 09:27 AM   #14
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I did not vote as I'm considering the 4 legged stool for myself.

1. Real Estate - rentals/landlording (covers most of current expenses now)
2. Personal Savings (covers barebone budget now with 3.5% WR)
3. Pension (kicks in at age 55 but more if I wait until 62)
4. Social Security (planning to wait until age 70)

Thinking of SER (landlording only) in about 5 years, but mostly FI now. Just saving more for travel, young kids, and asteroids ;-)
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Old 01-04-2014, 09:30 AM   #15
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I'm living choice A, more through luck than planning. It definitely adds a feeling of security, even though my pension is not COLAed.
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Old 01-04-2014, 09:53 AM   #16
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It goes against the grain with me to say what I would prefer, as my personality type is such that I look at things as they are and deal with the situation as it exists. In that sense, I suppose I am rather pragmatic.

My situation is personal savings and Social Security (when it comes along). No pension in my life at all - not even a whiff (or the merest hint) of one. This is the way it is for me, and I'll make it work. I'm sorry if that's not quite the answer that was wanted, but as my working career is largely over, it would not be in my nature to look back and say how I would have preferred things. I don't do that.

So I picked c) - not because I would prefer that, but because it's what I've got.
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Old 01-04-2014, 09:59 AM   #17
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I'm a young dreamer who is on track to have all three, but I've always said that I'd rather receive cash to save and invest on my own today (discounted appropriately, of course) than vague promises of cash decades from now.

When people say, "I wish I had a pension," they really mean to say, "I wish I got paid more and/or saved more money for retirement." There is nothing to envy about a pension. It involves "golden handcuffs," hoping that you don't get laid off before vesting, hoping that the organization doesn't renege on its promises, etc. Just a couple weeks ago, congress and the president suddenly reduced the value of our pension without any grandfather clause or protest from the general public. That made me feel awesome about the future. The only upside to a pension - protection from longevity risk - can be achieved through buying a SPIA with your savings, as others have pointed out.

That said, I do realize that I'm an outlier (like everybody else on this forum) with my propensity to save and invest. I know that most folks would be destitute in old age without the forced savings of things like SS, pensions, and home equity.

Tim
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Old 01-04-2014, 10:11 AM   #18
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Quote:
Originally Posted by pb4uski View Post
I would prefer a. Diversification is good.

Pensions have some risk depending on the financial worthiness of the pension plan and the sponsor, but many also have PBGC protection, so my answer assumes that the pension plan is on good financial footing (well funded, financial worthy sponsor, etc).


We have all three but our personal savings are greater, then SS and then pensions (I have a small non-COLA pension that will be about half of my SS). I expect that my SS will provide a bit more than half of our annual living expenses, the pension about 12% (at age 70) and the rest from personal savings.

If you are worried about longevity risk, then my view is that delaying SS to age 70 is the most affordable way of buying a COLAed SPIA.
+1

What pb4uski said.
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Old 01-04-2014, 10:17 AM   #19
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My plan includes 1.SS. I thought to take it out but at 50 yrs old my planner tells me I will get it but I am concerned that it will be phased out so I mentally leave it in as a kicker. 2. Taxed advantaged savings like differed salary and bonus, 401k and IRA. 3. Pension, plus an additional ability to add to my pension via a VPA. 4. After taxed savings. If I could convince my wife that wine was an investment veichal I will love adding that to the list.

I concerned that I am missing out on pieces like the annuities and insurance aspect and RE, any ideas on those perspectives. I looked up the SPIA while I was reading this thread and I will do more home work on that
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Old 01-04-2014, 10:28 AM   #20
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In my case, preference went by the wayside long ago. I have what I have.

SS will be the bulk of our subsistence until and unless our tIRA/RothIRAs grow faster than my conservative estimate.

I also plan to do some consulting after we pack it in. Or mow lawns.
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