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What to do with portfolio when pension covers expenses.
Old 12-29-2015, 11:29 AM   #1
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What to do with portfolio when pension covers expenses.

This thread What to do with budget surplus got me thinking about a withdrawal question for the person who has a pension that covers most or all of her retirement expenses, but also has a substantial investment portfolio. Does she withdraw 4% from the investment portfolio each year and just hold it in cash, or does she leave it invested? I would think that withdrawing the money and going to cash would be the best way to reduce risk, but I'm interested to hear others' perspectives on the issue.
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Old 12-29-2015, 11:33 AM   #2
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Interesting question - but for most retirees the responses will be like me reading science fiction or DW reading a cook book: "Yeah, like THAT's really gonna happen."
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Old 12-29-2015, 11:39 AM   #3
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The question could also be adapted to the pure portfolio retiree. Suppose you only need 1% to cover expenses -- what should you do with the other 3% every year? Go to cash or leave it invested?
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Old 12-29-2015, 11:40 AM   #4
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This was my mother's situation for the first decade of her retirement. She increased her charitable giving a bit, and left the rest in the portfolio, with a higher allocation to equities. When her spending exceeded her pension income we changed the allocation and sharply shifted the asset allocation toward fixed income.

She needs the funds now, to provide for her care in assisted living. Keeping it invested and allowing the portfolio to grow was her wish from the beginning. She understood that she might need a much higher level of spending and wanted her portfolio to keep ahead of health care inflation.
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Old 12-29-2015, 11:42 AM   #5
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If not significantly cut, SS will cover 100% of our expenses if we both are alive and take it age age 70.

One might consider then that retiring at 46 you only need to cover 24 years with your current portfolio.

Or you can pose this question then if you have been taking 3% SWR and still have a significant portfolio at age 70 when you start SS.
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Old 12-29-2015, 11:48 AM   #6
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The question could also be adapted to the pure portfolio retiree. Suppose you only need 1% to cover expenses -- what should you do with the other 3% every year? Go to cash or leave it invested?
If LTC needs are self-funded, that money should be reinvested in the portfolio. Care costs are rising faster than CPI, and there's no reason to assume that will change.
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Old 12-29-2015, 11:59 AM   #7
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if your pension is well secured and not subject to being 'revised' at some future time, I would use the extra money to do something fun and interesting, and to help others who are less fortunate. And maybe keep a little in reserve in case the your worst-case scenario happens.
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Old 12-29-2015, 12:03 PM   #8
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Even with family and charitable gifting we spend less than we withdraw each year - but we don't reinvest the excess. That's available for short term spending whenever we want. (I think we're going car shopping next year.)

On the other hand, funds for long term needs like LTC are kept invested.

I think it all depends on what you have earmarked the money for. That's what determines how you invest it. If you don't have a plan for the excess funds....... well you should!
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Old 12-29-2015, 12:04 PM   #9
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The question could also be adapted to the pure portfolio retiree. Suppose you only need 1% to cover expenses -- what should you do with the other 3% every year? Go to cash or leave it invested?
Another 'science fiction' question in my case but certainly a valid one for those who meet your criteria. I suppose one day I might reach the point where RMD requirements exceed our annual needs. Not sure what I'll do should I be fortunate enough to reach that point, but going to cash isn't all that appealing at today's interest rates.
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The case in which pension covers 100%
Old 12-29-2015, 12:04 PM   #10
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The case in which pension covers 100%

If your pension covers 100% of your expenses, then it seems to me that instead of a retirement portfolio, it's just a regular investment portfolio.

I not only would NOT withdraw from it (why?) but also I would invest it differently. With all expenses covered, I don't see any reason to lower risk. Ironically, it seems that those who need the lowest risk are those who need the money to live on and can least afford low returns. Oh well, such is life.

Anyway, since I wouldn't be needing any of the money in it, I'd probably invest 100% in equities .
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Old 12-29-2015, 12:07 PM   #11
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Another 'science fiction' question in my case but certainly a valid one for those who meet your criteria. I suppose one day I might reach the point where RMD requirements exceed our annual needs. Not sure what I'll do should I be fortunate enough to reach that point, but going to cash isn't all that appealing at today's interest rates.
I won't have that situation, but if I did then I'd invest the excess in taxable accounts.
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Old 12-29-2015, 12:15 PM   #12
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If your pension covers 100% of your expenses, then it seems to me that instead of a retirement portfolio, it's just a regular investment portfolio.

I not only would NOT withdraw from it (why?) but also I would invest it differently. With all expenses covered, I don't see any reason to lower risk. Ironically, it seems that those who need the lowest risk are those who need the money to live on and can least afford low returns. Oh well, such is life.

Anyway, since I wouldn't be needing any of the money in it, I'd probably invest 100% in equities .
I guess that if a pension and/or social security covered your current expenses, you would be investing for one (or more) of perhaps 4 main reasons:

1. To have something in the event that your pension or social security is stopped or reduced.

2. To build up funds for eventual long term care that would exceed your current expenses.

3. To leave something for your heirs.

4. For an occasional wild and crazy extravagance.

For the first two, and perhaps three, of these goals, I think you might well be concerned with risk and volatility, given that you have less time to ride out a big market downturn.
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Old 12-29-2015, 12:16 PM   #13
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If LTC needs are self-funded, that money should be reinvested in the portfolio. Care costs are rising faster than CPI, and there's no reason to assume that will change.
Yep. And exactly the approach I'm taking towards LTC funding. A relatively low WR and managing the FIRE portfolio for conservative growth. (55/40/5) If LTC funding is not needed, then disabled grandson's trust gets bigger.
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Old 12-29-2015, 12:18 PM   #14
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Originally Posted by REWahoo View Post
Another 'science fiction' question in my case but certainly a valid one for those who meet your criteria. I suppose one day I might reach the point where RMD requirements exceed our annual needs. Not sure what I'll do should I be fortunate enough to reach that point, but going to cash isn't all that appealing at today's interest rates.
Going to cash is fine as long as you plan to spend it soon.

If you don't plan to spend it soon then invest it according to what you do plan to do with the money taking into account the time frame.
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Old 12-29-2015, 12:37 PM   #15
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This is an interesting mental discussion that I have been having this last year.

We have been in the situation this last 6 years where pensions have covered all essential expenses, but if we relied only on the pension then we would not be able to do any travel. (ER'ed in January 2010)

Spending down the cash and some of the bond portion of our portfolio (mostly I-Bonds) has actually exceeded 4% of the 2010 starting value this past 4 years. This is okay since between us we have another 4 pensions due to come on line over the next 9 years. I did have a conservative 40/60 AA in 2010 but that is now 50/50 with most of the taxable investments being equities (ETF's). We plan to buy a house in the next year or 2 which will bring the AA closer to 60/40.

As/if our actual spending drops below 4% of withdrawals (after age 70 in 9 years time this may well be the case, but who really knows) then we'll have to think what to do with the excess. I would maybe like to start funding our 2 kids' retirement accounts so they can have the same opportunities as we have had. (By then they will be in their mid-40's, no children).
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Old 12-29-2015, 12:41 PM   #16
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I'm in this position currently, so portfolio is for COLA and Iong term care if needed. It allows me to be heavy in stocks and sleep at night.


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Old 12-29-2015, 12:45 PM   #17
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If your pension covers 100% of your expenses, then it seems to me that instead of a retirement portfolio, it's just a regular investment portfolio.

I not only would NOT withdraw from it (why?) but also I would invest it differently. With all expenses covered, I don't see any reason to lower risk. Ironically, it seems that those who need the lowest risk are those who need the money to live on and can least afford low returns. Oh well, such is life.

Anyway, since I wouldn't be needing any of the money in it, I'd probably invest 100% in equities .

Being one of the few who benefit greatly from a pension that more than covers my expenses, I view that portfolio money like you stated. I retired with a smaller amount of money I have been building it up through reinvesting the extra $1k-2k a month plus reinvesting all dividends. I live modestly but have all sorts of reasons to stay focused on increasing the stash. LTC, health insurance, house repairs, pension cuts, cola elimination. Any of these are possible as I am just 51 years old, so there is plenty of time left for all financial hell to break loose.

I would rather focus on saving/investing instead of blowing it all each month and suddenly find out I need a job 20 years from now. I have found out I enjoy considerably doing nothing and prefer to keep it that way.


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Old 12-29-2015, 01:07 PM   #18
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If LTC needs are self-funded, that money should be reinvested in the portfolio. Care costs are rising faster than CPI, and there's no reason to assume that will change.
Bingo. I am in the OP's situation: Pension covers living+a bit. My stash is just there to cover whatever the pension doesn't cover in any given year if something comes up or maybe I want to treat myself.

I keep my money in a standard 50/50 asset allocation. Planner/worry wart/obsessive compulsive that I am I figure the lion's share of that bread isn't really so I can live it up now and buy lots of things. It is there for some time down the road when I have real expensive needs and money is all I have left.
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Old 12-29-2015, 01:30 PM   #19
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This is our situation. We took no dispersal until we reached 70, then RMD kicked in. We take the RMD, and move it to a money market. It has built up enough now to cover our sinking fund items, new roof, appliances etc. I will keep that amount in cash and move any surplus into an index fund of some sort.
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Old 12-29-2015, 01:40 PM   #20
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You could simply leave the money invested if you don't need it. No reason to pull out a % and stick it in cash. Stick with your asset allocation for funds you aren't planning on spending soon (in next 1-2 years).

FYI my parents are roughly in this situation. Mom's retired, doesn't spend all of her fairly modest school teacher's pension. Dad is about to retire in next few years. They will both get pretty fat SS checks in 4 more years at age 67. I keep telling them that those three checks together will likely more than cover their living expenses (only big expense is an annual cross country train trip in sleeper cars to attend a train convention).

They also have a seven figure portfolio (possibly mid seven figures) that they probably don't need. They are mostly equities as far as I know.
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