Rule of Thumb: Non-COLA Pension and SWR

[perez99]

Hello All,
Lurking for several years here. Learned a lot from all of you.

I'm about 2-3 years away from retirement (56-57 age). I have used Firecalc and some other calculators to get a sense of my financial readiness.
I do always struggle with applying the 3% or 4% SWR as a guidance due to having a non-cola pension. In other words, i want to also have 33X expenses in investable assets. Just don't know how to account for the diminishing value of the non-cola pension.
I think some compute the NPV value of the pension payments. Not sure if this is a "good" way or if there is another method.
I'm not going to be able to get to 33X expenses in top of the pension and SS. However I think I will be on a equivalent scenario.
Should i just forget about it and rely on Firecalc?

Thanks,
Edgar

 

[SecondCor521]

There is another method. Firecalc has the ability to handle non-COLA pensions.

On the "Other income/spending" tab, just unclick the "Inflation adj" tab. And enter your pension amount and start date, of course.

Doing the calculations this way, you can calculate success rates over history, including your non-COLA pension.

I, as well as others here, ran our situations through a number of different online calculators. Personally I think FIREcalc is one of the best out there.

 

[perez99]

There is another method. Firecalc has the ability to handle non-COLA pensions.

Indeed I have entered my non-cola pension and SS in firecalc. I'm getting what seems reasonable results from it.

When i read that someone has 33X (or 25X) expenses in savings, the collective feedback is that person have reached its number. For some reason it does not fell the same if you can't claim that.

 

[pb4uski]

While I wouldn't get so hung up on 33x/3% WR or 25x/4% WR.... if you must, you could look up the value of the pension on immediateannuities.com, add it to your retirement assets and then divide the sum by your annual expenses.

 

[SecondCor521]

Indeed I have entered my non-cola pension and SS in firecalc. I'm getting what seems reasonable results from it.

When i read that someone has 33X (or 25X) expenses in savings, the collective feedback is that person have reached its number. For some reason it does not fell the same if you can't claim that.

Ah. Well if a person gets to 100% historically safe in FIREcalc with their AA, non-COLA pension, and SS, personally I think they have reached their number, regardless of how they feel about it and regardless of any multiplier. In fact, the 33x and 25x are really just moderately simplified shorthand for 100% historically safe, which is closer to what we should be aiming for rather than some arbitrary percentage or multiplier.

If you want to wait until your feelings are there, that's your business. But I will point out that FIRE is such a strange concept that even people who know a great deal about it can find that their feelings of reaching FIRE follow actually achieving FIRE and choosing to take the leap. I reached 25X sometime in 2014, FIREd in 2016, and am just starting to get in the groove of FIRE feeling-wise this year.

 

[aida2003]

While I wouldn't get so hung up on 33x/3% WR or 25x/4% WR....

I think I'm missing on some subliminal note here... Doesn't the length of retirement play into 33x/3% or 25x/4%? I'd think that the former would be safer if you retire in your 30-40's, however, lots of personal bloggers choose to go with 25x/4% because it would take an additional 5-10 years to get to 33x expenses.
Wouldn't it be better 33x/4% and 25x/3% or is the income the ultimate goal in this exercise?

 

[pb4uski]

Yes, what you are missing is that 1/33 = 3% and 1/25 = 4%.

So 33x and 3% are synonymous as are 25x and 4%. In each case two different ways of saying the same thing.

 

[Dtail]

If one is using 25x/33x, in the end doesn't the NET not gross WR being 3/4% all that matters?
Otherwise many people would never retire.

 

[pb4uski]

I think you mean 4%/3% rather than 3%/4% but I agree. It is six of one or a half-dozen of the other.

 

[Chuckanut]

As mentioned above, run it through FireCalc and see how safe history says your retirement its. If it is in the 90-100% area, I think you can sleep well at night. If you are like me, run a few other calculators that work on other concepts like Monte-Carlo. FireCalc can tell you what you will have available to spend each year. Is that enough?

Whatever happens you will still be better off than many people I know who go down the SS office in their mid-60's and walk out saying "Is that all I have to live on for the rest of my life?!?!?!?"

 

[Dtail]

I think you mean 4%/3% rather than 3%/4% but I agree. It is six of one or a half-dozen of the other.

Yes. Lol.
You are of the few posters who consistently refers to the effective net WR, when advising posters.
If one feels solid about their income sources, it works.

 

[pb4uski]

Yes, I think that one's "ultimate" WR... once pensions and SS start... is the most relevant... being the "gap" between spending and retirement income sources divided by your nestegg.

For those that retire befor those income streams start, I advocate reducing the denominator for the missing income.... so if SS is $35k a year and won't start for 10 years, reduce the denominator by $350k.

I agree that you need to believe that the income sources are solid.

 

[Dtail]

Yes, I think that one's "ultimate" WR... once pensions and SS start... is the most relevant... being the "gap" between spending and retirement income sources divided by your nestegg.

For those that retire befor those income streams start, I advocate reducing the denominator for the missing income.... so if SS is $35k a year and won't start for 10 years, reduce the denominator by $350k.

I agree that you need to believe that the income sources are solid.

Yes agree from a WR% reference and effectively Firecalc and other calcs are computing the same.

 

[perez99]

Thanks guys. I think I'm over-thinking it

 

[jollystomper]

Ah. Well if a person gets to 100% historically safe in FIREcalc with their AA, non-COLA pension, and SS, personally I think they have reached their number, regardless of how they feel about it and regardless of any multiplier. In fact, the 33x and 25x are really just moderately simplified shorthand for 100% historically safe, which is closer to what we should be aiming for rather than some arbitrary percentage or multiplier.

+1


To the OP, I am in the same situation, with a non-COLA pension, investments, and SS. When FIRECALC started showing 100% safe based on our planned retirement expenses, I stopped worrying and started thinking more about not if I could RE, but when.

 

[aida2003]

Yes, what you are missing is that 1/33 = 3% and 1/25 = 4%.

So 33x and 3% are synonymous as are 25x and 4%. In each case two different ways of saying the same thing.

Well, I understand this part.

I was thinking in terms of a portfolio size. It's said that one should have saved a certain multiple of yearly expenses before considering retirement. If annual expense is $50k, then you need $1,650,000 if you wish to have 33x or $1,250,000 if you feel 25x is sufficient.
So, my question/confusion is that I'd feel 'safer' taking 4% from the $1.7M than from the $1.3M if retiring in the 30-40's, but I'd probably be OK drawing 4% from $1.3M if I retired in my fifties. Perhaps it just depends on a person (optimistic it'll be all good or very conservative and seeking a nice cushion), and human characteristics are not accounted for in mathematical equations.

 

[Red Badger]

Thanks guys. I think I'm over-thinking it

Yup.

I obsessed over my numbers for a few years (because retiring can be fairly irreversible). However, as I approached year X, FIRECalc, a few other tools, and the sage guidance on this forum convinced me to put the gremlins to rest.

June 30 will mark my first year.... and my best year so far.

You've performed your due diligence. Come on over. the Free Zone is awesome.

 

[SecondCor521]

Well, I understand this part.

I was thinking in terms of a portfolio size. It's said that one should have saved a certain multiple of yearly expenses before considering retirement. If annual expense is $50k, then you need $1,650,000 if you wish to have 33x or $1,250,000 if you feel 25x is sufficient.
So, my question/confusion is that I'd feel 'safer' taking 4% from the $1.7M than from the $1.3M if retiring in the 30-40's, but I'd probably be OK drawing 4% from $1.3M if I retired in my fifties. Perhaps it just depends on a person (optimistic it'll be all good or very conservative and seeking a nice cushion), and human characteristics are not accounted for in mathematical equations.

It does depend on one's personality a bit - optimism vs. pessimism, flexibility vs. rigidness.

It also depends on one's backup plans. Some people don't mind going back to work or hitting up a rich relative, or they have a pension that they can start any time or a money-making hobby. Others don't.

Sometimes debates ensue on this forum because people tend to assume that other's backup plans or risk tolerance are similar to their own, but frequently they aren't.

What the media usually glosses over is that duration - how long one plans to be retired - does come into play as well. Most popular media isn't written for people retiring before 50, so they often generalize and assume a 30 year retirement. Roughly speaking, 4% over 30 years is 95% historically safe.

If you're retiring in your 30s or 40s, you might plan on 40 years or more. Historically the safe WR for a 40 year retirement drops, but not as much as you might think. It's about 3.66% per FIREcalc (using the default values except changing the duration to 40 years, then going to the Investigate tab and putting in 95% success rate).

 

[pb4uski]

Thanks guys. I think I'm over-thinking it

Yup.. not unusual... its a BIG decision.

 

[pb4uski]

Well, I understand this part.

I was thinking in terms of a portfolio size. It's said that one should have saved a certain multiple of yearly expenses before considering retirement. If annual expense is $50k, then you need $1,650,000 if you wish to have 33x or $1,250,000 if you feel 25x is sufficient.
So, my question/confusion is that I'd feel 'safer' taking 4% from the $1.7M than from the $1.3M if retiring in the 30-40's, but I'd probably be OK drawing 4% from $1.3M if I retired in my fifties. Perhaps it just depends on a person (optimistic it'll be all good or very conservative and seeking a nice cushion), and human characteristics are not accounted for in mathematical equations.

Agree... the younger you are when you retire then a lower WR is preferable... the Trinity Study that the so-called 4% rule was based on was a 30 year time horizon, so if one is retiring early, then sub-4% is preferable.

 

[brucethebroker]

Thanks guys. I think I'm over-thinking it

You aren't alone. As you hang out here, you will read about this same situation many times. IMO, the problem is that we are trained to think one way while working towards retirement, but acutual retirement requires a whole other way of thinking.

Pre-retirement is focused on asset accumulation and net worth. We chart our progress, and get excited about growth. Retirement is all about cash flow, period. Your "rule of thumb" is totally dependent upon where your cash flow comes from and how stable it is.

For example: Social Security, pension and rental income are all different than cash flow from asset draw down/liquidation. How many years I think I will live does not come into the equation in this example. The same way with continued income from a PT or hobby job.

My particular situation is different than many here, based upon the nature of my assets-and much of the advice I read did not really apply. But once I figured out the cash flow vs. accumulation aspect, I stopped worrying.

 

[pb4uski]

and then you get the folks who view any dipping into principal, even of only occasionally, as the equivalent of a cardinal sin.

 

[omni550]

and then you get the folks who view any dipping into principal, even of only occasionally, as the equivalent of a cardinal sin.

Agree.

And I wonder what it is that makes them think this^. Would love to hear their "why".

omni

 

[Chuckanut]

Agree.

And I wonder what it is that makes them think this^. Would love to hear their "why".

omni

My guesses:

1. Fear of running out of money and living the life of a poverty stricken old person.

2. Either through ignorance or stubbornness, they cannot admit that their years left on this planet are down to the last few dozen.

 

[Huston55]

My guesses:

1. Fear of running out of money and living the life of a poverty stricken old person.

2. Either through ignorance or stubbornness, they cannot admit that their years left on this planet are down to the last few dozen.

Although I’m not in this group, other causes could be:

3. Planning for LTC needs.

4. Expecting a very long retirement.

5. Legacy goals.