I have a complicated retirement withdrawal situation and thought I would get some opinions. I'll try to keep it as simple as possible so you can actually make it thru this. My wife and I both have DB pensions. Once we retire we have the option of delaying collecting the pensions ( for as long as short as we want) and having the money deposited into a "DROP" account which pays 8-10% guaranteed interest depending on the rolling 10 yr avg returns of the pension fund. We also have a pretty good sized chunk of money in tax deferred and taxable accounts.
Option 1) Live completely off of our investments until they run dry (about 10 years) while letting the DROP accounts build up. At that point we would start collecting our pension and the interest from the DROP accounts. There would be no stock market risk after the 10 years but there would be pension risk and we would have no money of our own to fall back on if the pension got into trouble. The pension fund is strong at this point but I don't like having all of my eggs in one basket. This option results in the highest amount of income due to being able to withdraw 8-10% interest every year as opposed to the standard 4% SWR of a lump sum of money.
Option 2) Forget about DROP and draw our pensions and 4% of our investments each year. Smallest amount of income, but still more than enough.
Options 3) Some combo of the first two options. The combo I came up with was this: Year 1 I draw my pension and she allows the pension benefit to go into DROP. The next year we switch. Basically we are drawing half of the pension amounts and depositing half into our DROP accounts. We do this for an arbitrarily picked 7 years. We then go to option 2 for 4 years and live off of pension checks and our investments while allowing the DROP accounts to compound but with no more contributions. After 11 years we draw our pension checks, the interest from DROP account as well as a percentage of our investment accounts.
Hopefully you made it this far....
Withdraw rates from option 2 look like this:
Year 1) 9.0%
Year 2) 5.9%
Year 3) 6.3%
Year 4) 5.3%
Year 5) 3.6%
Year 6) 3.8%
Year 7) 3.4%
Year 8) 3.5%
Year 9) 3.2%
Year 10) 3.4%
Year 11) 3.1%
Withdraw rates from option 3:
Year 1) 6.1%
Year 2) 9.0%
Year 3) 6.5%
Year 4) 9.0%
Year 5) 7.2%
Year 6) 8.2%
Year 7) 4.2%
Year 8) 4.5%
Year 9) 4.1%
Year 10) 4.4%
Year 11) 3.1%
Its too complicated to explain why the WR rates jump around but is related to the fact that our pensions start several years apart and are different amounts. Option 3 seems much riskier due to higher withdrawal rates but remember that our DROP accounts are being funded all during this time. At the end of 11 years the withdrawal rates are both 3.1% and will stay there. Option 3 results in about $18000 extra annual income basically for the rest of of our lives.
I'm assuming 7.5% returns each year on our investments. I think if I could count on consistent 7.5% returns, Option 3 would be a no brainer, but if returns are bad for a few years at the beginning of the plan, option 3 could be pretty bad since withdraw rates are significantly higher for several years at the beginning.
Thoughts?
Option 1) Live completely off of our investments until they run dry (about 10 years) while letting the DROP accounts build up. At that point we would start collecting our pension and the interest from the DROP accounts. There would be no stock market risk after the 10 years but there would be pension risk and we would have no money of our own to fall back on if the pension got into trouble. The pension fund is strong at this point but I don't like having all of my eggs in one basket. This option results in the highest amount of income due to being able to withdraw 8-10% interest every year as opposed to the standard 4% SWR of a lump sum of money.
Option 2) Forget about DROP and draw our pensions and 4% of our investments each year. Smallest amount of income, but still more than enough.
Options 3) Some combo of the first two options. The combo I came up with was this: Year 1 I draw my pension and she allows the pension benefit to go into DROP. The next year we switch. Basically we are drawing half of the pension amounts and depositing half into our DROP accounts. We do this for an arbitrarily picked 7 years. We then go to option 2 for 4 years and live off of pension checks and our investments while allowing the DROP accounts to compound but with no more contributions. After 11 years we draw our pension checks, the interest from DROP account as well as a percentage of our investment accounts.
Hopefully you made it this far....
Withdraw rates from option 2 look like this:
Year 1) 9.0%
Year 2) 5.9%
Year 3) 6.3%
Year 4) 5.3%
Year 5) 3.6%
Year 6) 3.8%
Year 7) 3.4%
Year 8) 3.5%
Year 9) 3.2%
Year 10) 3.4%
Year 11) 3.1%
Withdraw rates from option 3:
Year 1) 6.1%
Year 2) 9.0%
Year 3) 6.5%
Year 4) 9.0%
Year 5) 7.2%
Year 6) 8.2%
Year 7) 4.2%
Year 8) 4.5%
Year 9) 4.1%
Year 10) 4.4%
Year 11) 3.1%
Its too complicated to explain why the WR rates jump around but is related to the fact that our pensions start several years apart and are different amounts. Option 3 seems much riskier due to higher withdrawal rates but remember that our DROP accounts are being funded all during this time. At the end of 11 years the withdrawal rates are both 3.1% and will stay there. Option 3 results in about $18000 extra annual income basically for the rest of of our lives.
I'm assuming 7.5% returns each year on our investments. I think if I could count on consistent 7.5% returns, Option 3 would be a no brainer, but if returns are bad for a few years at the beginning of the plan, option 3 could be pretty bad since withdraw rates are significantly higher for several years at the beginning.
Thoughts?
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