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-   -   The Disappearing COLA Question (http://www.early-retirement.org/forums/f28/the-disappearing-cola-question-58925.html)

Tekward 11-26-2011 07:50 AM

The Disappearing COLA Question
 
Two factors are impacting my planning (54 with a target of 2-4.5 years): low returns with inflation present (which hopefully is a temporary phenomena) and the disappearing COLA (as seen in the Rhode Island adjustment and can be predicted for other for other near bankrupt retirement plans). The second factor has a significant impact long term.

In the past I have forecast a comfortable retirement assuming that inflation is offset by conservative returns and COLA adjustments (Navy Reserve 34 year retirement starting at 60, SocSec). Now if I assume that instead of zero portfolio growth, I see a net loss to inflation of say -3%, then the worth of my portfolio will be cut in half in 24 years without considering a single withdrawal.

Is anyone else forecasting long term losses due to the removal of COLA and how are you factoring it into your plans? Thanks.

Midpack 11-26-2011 08:53 AM

Not so much 'removal of COLA,' but for about 20 years I have always built our (me and DW) plan on receiving at most 50% of our 'projected' Soc Sec benefit. If we receive more, great. Along with several other government spending programs, Soc Sec is not sustainable as is, something has to give. We can't simply make up the difference with increased taxes either IMO.

I'm confident that many here have planned on reduced Soc Sec benefits in some form. YMMV

Mulligan 11-26-2011 09:25 AM

My cola got changed to a flat 2% instead of CPI which was 3.6%. If this continued long term it certainly would be noticeable. For me, I started with a $1000 monthly cushion. Granted this can be eaten away over time, but for me I will have 2 huge COLA increases that dwarf my loss in pension COLA. My child support ends and my daughter graduates college in 3 years and my house will be paid off in 10. So budget wise it shouldnt hurt me. My only investment plans are adding maximum limit to I Bonds and working enough each year to do a Roth. Im not a financial genius and fall in category of monthly cash flow strong, asset weak. So Im just doing things to help protect keeping cash flow strong, and not worry too much about accumulating assets ( glad my dear daughter doesnt read this forum).

Alan 11-26-2011 09:29 AM

Quote:

Originally Posted by Tekward (Post 1134315)
Two factors are impacting my planning (54 with a target of 2-4.5 years): low returns with inflation present (which hopefully is a temporary phenomena) and the disappearing COLA (as seen in the Rhode Island adjustment and can be predicted for other for other near bankrupt retirement plans). The second factor has a significant impact long term.

In the past I have forecast a comfortable retirement assuming that inflation is offset by conservative returns and COLA adjustments (Navy Reserve 34 year retirement starting at 60, SocSec). Now if I assume that instead of zero portfolio growth, I see a net loss to inflation of say -3%, then the worth of my portfolio will be cut in half in 24 years without considering a single withdrawal.

Is anyone else forecasting long term losses due to the removal of COLA and how are you factoring it into your plans? Thanks.

I don't have COLA pensions and I've never planned on a minimum future rate of return. I always relied on the retirement planning calculators to do this for me. Before retiring I used FIRECALC, Financial Engines and the calculators on Fidelity.

Are the retirement calculators you use now suggesting probabilities of success that are too low for your liking?

Tekward 11-26-2011 10:50 AM

Well I used FIRECALC for the first time and it doesn't look too bad. Assuming no COLA for the Navy pension, 50% Soc Sec (per Midpack's suggestion) and the 90% minimum adjustment for bad return years my spending stabilizes at ~45K - 2/3rds of my initial withdrawl amount. That decrease is in line with Bernicke's Reality Retirement Plan and sounds livable. The constant dollar withdrawal rate has me broke in 20 years.

I did add an adjustment for weddings (three daughters) and some college help for my youngest. I did not adjust for car replacement and home repairs. Have others taken it to that level of granularity?

Nords 11-26-2011 11:02 AM

Quote:

Originally Posted by Tekward (Post 1134315)
low returns with inflation present (which hopefully is a temporary phenomena)
Is anyone else forecasting long term losses due to the removal of COLA and how are you factoring it into your plans? Thanks.

Are you personally seeing inflation in your spending? Because the military retirement COLA has more than made up for it in my spending.

If there's inflation in other areas of our lifestyle, our changing lifestyle has more than made up for it. We were spending more on groceries until our daughter moved out. We were eating out more until we ER'd. Our fuel costs dropped after ER. Our taxes dropped after ER. Our clothing expenses dropped after ER. And so on...

As for marrying off three daughters: I really like the approach of "Here's $xxxx, have a really good wedding or a nice honeymoon or a big head start on your retirement savings. Let me know when you want me to be at rehearsals!"

Alan 11-26-2011 11:03 AM

Quote:

Originally Posted by Tekward (Post 1134377)
Well I used FIRECALC for the first time and it doesn't look too bad. Assuming no COLA for the Navy pension, 50% Soc Sec (per Midpack's suggestion) and the 90% minimum adjustment for bad return years my spending stabilizes at ~45K - 2/3rds of my initial withdrawl amount. That decrease is in line with Bernicke's Reality Retirement Plan and sounds livable. The constant dollar withdrawal rate has me broke in 20 years.

I did add an adjustment for weddings (three daughters) and some college help for my youngest. I did not adjust for car replacement and home repairs. Have others taken it to that level of granularity?

At age 54 I think that assuming you'll receive only 50% of your SS is too aggressive but will certainly provide a good safety margin. I'm a little over 5 years away from SS and I'm assuming 100% these days, but already have enough margin to cover a cut of 50% should that happen.

My pre-retirement budget worksheet did include items for major expenses such as car replacement.

Tekward 11-26-2011 11:15 AM

Nords, I've always been upfront with the girls - one check for the average cost and then it is up to them how they spend/save. I find that spending habits are linked to the source of the funds.
The unexpected upside is that it has given me an cushion for years with bad economies. The average cost dropped from $28.7K to $19.6K from 2007 to 2009. The Wedding Report | Wedding Statistics and Market Research for the Wedding Industry

rescueme 11-26-2011 11:22 AM

Quote:

Originally Posted by Alan (Post 1134346)
I don't have COLA pensions and I've never planned on a minimum future rate of return. I always relied on the retirement planning calculators to do this for me. Before retiring I used FIRECALC, Financial Engines and the calculators on Fidelity.

Are the retirement calculators you use now suggesting probabilities of success that are too low for your liking?

I agree with Alan, and have done the same in my/DW's joint planning.

As to his second comment, it may be that your plan is not "robust" enough to survive and if it is to be used as a measurement to declare ER, may force you into rethinking your plan.

Just my simple POV/opinion...

W2R 11-26-2011 11:24 AM

Quote:

Originally Posted by Tekward (Post 1134315)
Is anyone else forecasting long term losses due to the removal of COLA and how are you factoring it into your plans? Thanks.

Absolutely. Right now I am spending about 1.9%, and putting the rest back into my portfolio. Also I am living as far from an LBYM lifestyle as I have ever led, so I can tighten the belt without much suffering. That is how I am factoring COLA issues with SS and pension into my plans.

Consider also that assisted living facility costs will probably rise as the baby boomers reach their 80's. Kind of scary, huh.

REWahoo 11-26-2011 11:27 AM

Quote:

Originally Posted by W2R (Post 1134395)
Absolutely. Right now I am spending about 1.9%, and putting the rest back into my portfolio.

Your daughter is gonna have a blast with the money.... :)

ziggy29 11-26-2011 11:34 AM

It's bad enough that COLAs are becoming "Diet" COLAs when they are still given. It's even worse that the CPI that COLAs are based on is already significantly undercounting the real, effective inflation most households of moderate means are experiencing.

Too bad one can't directly invest in food prices, health care prices or education prices.

obgyn65 11-26-2011 11:39 AM

I am 46, retiring next year. To answer your question, 1) counting on 25% reduction in SS benefits 2) I may keep a part time position as a clinician to make up for any adverse benefits to my financial plans.
Quote:

Originally Posted by Tekward (Post 1134315)
Is anyone else forecasting long term losses due to the removal of COLA and how are you factoring it into your plans? Thanks.


kyounge1956 11-26-2011 02:01 PM

Quote:

Originally Posted by Midpack (Post 1134332)
(snip)...for about 20 years I have always built our (me and DW) plan on receiving at most 50% of our 'projected' Soc Sec benefit. (snip)

I'm confident that many here have planned on reduced Soc Sec benefits in some form. YMMV

Quote:

Originally Posted by Alan (Post 1134383)
At age 54 I think that assuming you'll receive only 50% of your SS is too aggressive but will certainly provide a good safety margin.(snip)

I also only count half of my projected SS when making retirement plans. The other half is a safety cushion in case I have underestimated or forgotten some other expense category, or in case my income from pension or portfolio is less than projected.

To answer OP's question, I suggest flexible retirement planner, a free online Monte Carlo simulator. You can run simulations on your pension with or without COLA, change the average inflation rate or portfolio returns and simulate "what if" scenarios such as a large loss in your portfolio at some time during retirement.

W2R 11-26-2011 02:09 PM

Quote:

Originally Posted by REWahoo (Post 1134399)
Your daughter is gonna have a blast with the money.... :)

Yep. She'll blow it all on iPods and iPhones, trips to see concerts, elaborate Hallowe'en costumes and decorations, and collectors' editions of video games. :rolleyes:

But I'm not doing so badly myself. My projections tell me that my spending has gone up this year by about $4K. Love my new easy chair, sofa, loveseat, and ottoman that I got a little while back. ;D From what I understand, new retirees tend to loosen up the purse strings after the first couple of years.

If the market keeps shrinking, my spending will be a bigger percentage just due to that alone.

I just wish I could buy an extra 20 years of life!! Where's the immortality store when I need it...

Alan 11-26-2011 02:16 PM

Quote:

Originally Posted by W2R (Post 1134464)
I just wish I could buy an extra 20 years of life!! Where's the immortality store when I need it...

It's on Bourbon Street, next ddor to the Voodoo shop ;D

W2R 11-26-2011 02:20 PM

Quote:

Originally Posted by Alan (Post 1134470)
It's on Bourbon Street, next ddor to the Voodoo shop ;D

Oh goody, I'll run down there and give them ALL my money! Thanks so much. ;)

That's right after I pay off the French Quarter urchin who says, "hey, I'll bet you $5 I can tell you where you got dem shoes."*

*(the $5 answer is "on your feet")


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