Pension or Portfolio ?

[FIRE'd@51]

Does this explain how to manage through a decade long, poor performing market?

No, but it significantly lowers the hurdle rate. I was responding to HOBO's claim that one needed 2.5% after inflation to fully amortize the $2 million over 30 years by withdrawing 80K (in today's $) annually.

 

[keegs]

No, but it significantly lowers the hurdle rate. I was responding to HOBO's claim that one needed 2.5% after inflation to fully amortize the $2 million over 30 years by withdrawing 80K (in today's $) annually.

Sorry for commenting off topic but among the issues that concern me about this roll your own retirement are extended market downturns as we've recently experienced and like what took place in the sixties.

 

[chinaco]

One part that was not in the poll and could not be is age. If I were at FRA... my decision would be different than at 55. That would be a determining factor, plus current state of health, etc...

I find this poll interesting. What is not shown is whether or not the voters are actually FIRED or approaching it. That might make a difference in choice.

Most people do not understand risk [or how to frame it]... if for no other reason they do not understand all of the components that could cause adverse events. They only understand the impact after an event occurs. I include myself in this category.


With your investment you have two big risks that you have to overcome? Other investors actions (the market) and your actions. Your actions are by far the biggest risk to your individual financial well being!

I suspect some of the responses were driven by age. If I were 70 that $2MM looks more attractive than at 55 or 50.

A COLA Annuity (from a top rated insurance company) for $80k would be very expensive.

 

[FIRE'd@51]

Sorry for commenting off topic but among the issues that concern me about this roll your own retirement are extended market downturns as we've recently experienced and like what took place in the sixties.

That's fine. Maybe for your risk appetite, the COLA'd annuity is the way to go.

For myself, if all I had was $2 million, I would not trade it for 80K a year (COLA'd) for life with a future value at my death of zero, which is another way of stating the poll question. Yes, this has been a bad decade for stocks. 1966-1982 was an even worse period for both stocks and bonds (at least bonds have performed well the past 10 years). Someone, who traded his/her portfolio for a 4% COLA'd withdrawal pension back in 1982 missed out on a compounded real return on stocks of almost 15% per year and bonds of about 7.5% per year for the next 18 years.

 

[Emeritus]

That's fine. Maybe for your risk appetite, the COLA'd annuity is the way to go.

For myself, if all I had was $2 million, I would not trade it for 80K a year (COLA'd) for life with a future value at my death of zero, which is another way of stating the poll question. Yes, this has been a bad decade for stocks. 1966-1982 was an even worse period for both stocks and bonds (at least bonds have performed well the past 10 years). Someone, who traded his/her portfolio for a 4% COLA'd withdrawal pension back in 1982 missed out on a compounded real return on stocks of almost 15% per year and bonds of about 7.5% per year for the next 18 years.

Why did you pick 1982

Why not 2007? (that's me)

FWIW both I And DW have both DB pensions and tax sheltered retirement funds.

I believe the actuarial value of my inflation protected pension (at 59) is worth 22 to 22 times the annual payment. However I hedged my bets and when I retired (2007) I did not use IRA money to purchase additional years. Instead it is in Vanguard and equivalent index funds. I carry term insurance to balance the pension structure with DW's pension.

I can go back the other way by consuming assets and postponing DWs SS
At this time that looks very attractive

 

[FIRE'd@51]

Why did you pick 1982

I picked 1982 because to me it felt the closest to what we are experiencing now. The "fear factor" was comparable, the unemployment rate was comparable, etc. There had been a long period of the stock market going nowhere, like today. The 1980-82 market decline was the second (after 73-74) big decline in less than 10 years, not unlike today with the 2000-2002 decline followed by the late 2007 until early 2009 decline. The big difference was the high inflation back then, which on top of everything else was a "killer", and probably the cause of the FIRECALC failures for those who retired in 1966-68 period.

 

[Emeritus]

I picked 1982 because to me it felt the closest to what we are experiencing now. The "fear factor" was comparable, the unemployment rate was comparable, etc. There had been a long period of the stock market going nowhere, like today. The 1980-82 market decline was the second (after 73-74) big decline in less than 10 years, not unlike today with the 2000-2002 decline followed by the late 2007 until early 2009 decline. The big difference was the high inflation back then, which on top of everything else was a "killer", and probably the cause of the FIRECALC failures for those who retired in 1966-68 period.

It's still cherry picking, Since you know what happened in retrospect
I have a big chunk in the stock market but no illusions that it will replicate the past.

 

[FIRE'd@51]

It's still cherry picking, Since you know what happened in retrospect
I have a big chunk in the stock market but no illusions that it will replicate the past.

I'm not cherry picking - just reiterating what happened. I'm trying to recall how I felt in the summer of 1982, and I recall it being downright scary, not unlike today.

I don't have any illusions that we will replicate the past. But I'm not prepared to bet heavily that it won't. There are important differences today. In 1982 we had a much more pro-business administration, that was pursuing pro-growth policies (cutting tax rates and reducing regulation), which, politics aside, was good for the stock market. Also, it appeared that inflation was being brought under control, and interest rates had started to come down. In August of 1982, Henry Kaufman at Salomon Brothers, who was one of the most highly-regarded interest rate forecasters at that time, essentially called a bond market bottom (high in interest rates), and both the bond and stock markets began to take off. Also, after severe tightening to get inflation expectations under control, the Fed was beginning to ease. Today we face worries of just the opposite, increasing inflation and rising interest rates, albeit from historically low levels. If the Fed doesn't get this right and a replay of the late 70's and early 80's takes place on the inflation and interest rate front, it won't be pretty.

So I guess my gut feeling is that we are very close to an inflection point, one way or the other, and that's what I am trying to prepare for, best as I can.

 

[harley]

I've been reading recently about the psychology of investing, and about recency (overweighting the recent events). You can see a lot of it in the investing behavior in the 90s and the oughts. I believe we're also seeing it now on this thread. I'm a short to mid term bear personally, but I still believe that over my life expectancy (25-30 years) we'll see enough mixed market response that there will be a good chance of a mildly conservative investor equaling or beating the pension/COLA amount. Obviously I have no proof of future events, but for me and my risk tolerance it would be worth it to take the gamble. As I said before, I prefer control and the chance of leaving the COLA adjusted principal (or better) to my heirs. JMO, YMMV, TANSTAAFL, etc.

Edit: Interestingly enough, at this moment we're exactly tied, 28 to 28 (13 undecided). I would have bet that's about how it would go.

 

[Hobo]

It's still cherry picking, Since you know what happened in retrospect
I have a big chunk in the stock market but no illusions that it will replicate the past.

For a more technical analysis of the returns on the stock market, I suggest you read this web page: Observations: Best & Worst 20-Year Returns in Stock Market History

Just in summary, the author provides a graph that over any given 20 years, the nominal rate of return can vary between 5% to 15%. He gives the same caveat that I did:

Finally, it's again important to remember that these are nominal returns, not "real" returns. That means that these returns have not been adjusted for inflation.

I wish FIRE'd@51 would use these terms because "after inflation" and COLA'd are confusing.

But to your point of cherry picking good times vs. bad times, the "real" rate of return for the stock market over any given 20 years will vary between 2% and 12% (assuming inflation is 3%). There is no way on God's green earth, that you can possibly know which 20 year period you are about to encounter in the future. Also, the rate of return is just too small. At 7% per year, it takes 10 years to double your money. Nobody is getting rich at that rate.

For that reason, I have always avoided the stock market. I would much prefer to have my money invested in something that I can get grip on; something that I have a good idea of what will be happening with my money. That has meant making second mortgage loans, investing in real estate, or being personally involved in financing new businesses. That was when I was younger.

In the hypothetical case that this thread presents of portfolio vs. pension, the person making this choice must be in the 55-65 age bracket (because they don't give pensions to young people).

At that age,I think most people want peace of mind and stability for the future. Unless picking stocks is a hobby you feel comfortable with (which I am not), then trying to make more than 5% in the stock market (year over year) has too much risk for me. I believe the numbers bear me out that the pension of $80k per year, with an annual increase for inflation, is the preferred option.

 

[Emeritus]

I'm not cherry picking - just reiterating what happened. I'm trying to recall how I felt in the summer of 1982, and I recall it being downright scary, not unlike today.

IMHO it still cherry picking
S&P 500 Index (1960 - Present Weekly) - Charting Tools - StockCharts.com

 

[Emeritus]

For a more technical analysis of the returns on the stock market, I suggest you read this web page: Observations: Best & Worst 20-Year Returns in Stock Market History......


At that age,I think most people want peace of mind and stability for the future. Unless picking stocks is a hobby you feel comfortable with (which I am not), then trying to make more than 5% in the stock market (year over year) has too much risk for me. I believe the numbers bear me out that the pension of $80k per year, with an annual increase for inflation, is the preferred option.

Fully agree with your first point
However on the second point its an annuity, not a return. For a 30 year old its a great deal for an 80 year old its a terrible deal

Based on my analysis the pension is worth about 1.7 million to a 60 year old but I'm flexible. At 55 take the pension for sure

 

[harley]

For a more technical analysis of the returns on the stock market, I suggest you read this web page: Observations: Best & Worst 20-Year Returns in Stock Market History

Just in summary, the author provides a graph that over any given 20 years, the nominal rate of return can vary between 5% to 15%. He gives the same caveat that I did:

I wish FIRE'd@51 would use these terms because "after inflation" and COLA'd are confusing.

Most posters here understand real return quite well, and the various terms are pretty much interchangeable. However, I agree to some extent, COLA and after inflation or real are not quite the same, since the gov't determines the COLA, and can game it to some extent. But for the most part they all mean the same thing.

But to your point of cherry picking good times vs. bad times, the "real" rate of return for the stock market over any given 20 years will vary between 2% and 12% (assuming inflation is 3%). There is no way on God's green earth, that you can possibly know which 20 year period you are about to encounter in the future. Also, the rate of return is just too small. At 7% per year, it takes 10 years to double your money. Nobody is getting rich at that rate.

Since I am assuming you are talking real return, 7% is just fine. If you are living off of a 4% SWR (after inflation), that 3% also adds up over time. It may not buy you a seat on Virgin Galactic, but it beats the 0% after inflation you'll be making on the pension.

For that reason, I have always avoided the stock market. I would much prefer to have my money invested in something that I can get grip on; something that I have a good idea of what will be happening with my money. That has meant making second mortgage loans, investing in real estate, or being personally involved in financing new businesses. That was when I was younger.

That's called a personal choice. Do what makes you happy.

In the hypothetical case that this thread presents of portfolio vs. pension, the person making this choice must be in the 55-65 age bracket (because they don't give pensions to young people).

That's interesting. I guess all my military friends need to be giving back that money they've been getting since their late 30s or 40s.

At that age,I think most people want peace of mind and stability for the future. Unless picking stocks is a hobby you feel comfortable with (which I am not), then trying to make more than 5% in the stock market (year over year) has too much risk for me. I believe the numbers bear me out that the pension of $80k per year, with an annual increase for inflation, is the preferred option.

If the numbers bore you out, the poll wouldn't be tied. Obviously two people can look at the same numbers and come to different conclusions, based on their interest in investing, appetite for risk, trust in the gov't's numbers, etc. As far as picking stocks, that's not necessary. There's indexing, asset allocation, etc for other methods of matching (not necessarily beating) the market gains. But stock picking works fine too, if that's your interest and method. And when you get tired of it you can take the $2M and buy SPIA with COLA, and still be where you would have been in the first place, although possibly with some money left over due to that compounding 3% over the 10-20-30 years.

I'm not advising any of this, just pointing out that there are different strokes for different folks, and no way at this point to know which is better. You pays your money and you takes your chance.

 

[dex]

Sorry for commenting off topic but among the issues that concern me about this roll your own retirement are extended market downturns as we've recently experienced and like what took place in the sixties.

It isn't off topic. It is very much on topic. The people taking the $2M are saying they can beat the market (stocks/bond) and pension.

I think that is extremely difficult.

If, you took the $2M.
You could address your issue by putting 2 years of 80K+inflation in near cash investments. That would mean that the money not in near cash would have to outperform the market to a larger degree.

The people wanting to take the $2M are projecting a better than perfect world for their decision. A simple risk not addressed is the health risk - from mental to physical - have a depression or stroke; how will that affect your investment choices. and performance?

 

[Gotadimple]

e.

The people wanting to take the $2M are projecting a better than perfect world for their decision. A simple risk not addressed is the health risk - from mental to physical - have a depression or stroke; how will that affect your investment choices. and performance?

Or, that they don't need the full $2M to live on for the next 30-40 years.

-- Rita

 

[ziggy29]

It isn't off topic. It is very much on topic. The people taking the $2M are saying they can beat the market (stocks/bond) and pension.

I think that is extremely difficult.

If, you took the $2M.
You could address your issue by putting 2 years of 80K+inflation in near cash investments. That would mean that the money not in near cash would have to outperform the market to a larger degree.

The people wanting to take the $2M are projecting a better than perfect world for their decision. A simple risk not addressed is the health risk - from mental to physical - have a depression or stroke; how will that affect your investment choices. and performance?

I think it's like asking people whether they would prefer a bird in the hand or two in the bush.

Some people prefer the security and certainty of the bird in the hand, especially if "one bird" is all they need. Others would prefer the potential of the two in the bush. There's no right or wrong for the subjective decision as to whether one favors certainty/security or a potential higher payout with less certainty. That's entirely a question of risk tolerance and risk management.

 

[FIRE'd@51]

The people taking the $2M are saying they can beat the market (stocks/bond) and pension.

I don't think they are saying they can beat the market, just that they can beat the internal rate of return on the pension, which on a statistical average is fairly low, about 1.25% real for someone who trades a $2 million portfolio for the pension for 30 years. At least that's what I'm saying. Furthermore, as was pointed out above, the portfolio gives one more flexibility in terms of taking bigger withdrawals in one year for an unexpected emergency (which ultimately gets made up by either better returns or future cutbacks in spending, if necessary).

 

[Purron]

The people wanting to take the $2M are projecting a better than perfect world for their decision. A simple risk not addressed is the health risk - from mental to physical - have a depression or stroke; how will that affect your investment choices. and performance?

I thought about the health risk in selecting the $2 million versus the pension. I'd put half in an annuity and invest the remainder. Based on my age and a spousal benefit, the TSP annuity calculator says I'd get $54,516 per year. This would preserve a sizeable amount for my heirs in the event of my early demise while providing sufficient income to live on.

It's really about flexability for me. The pension provides none while the portfolio provides a lot.

 

[Hobo]

Most posters here understand real return quite well, and the various terms are pretty much interchangeable. However, I agree to some extent, COLA and after inflation or real are not quite the same, since the gov't determines the COLA, and can game it to some extent. But for the most part they all mean the same thing.

Since I am assuming you are talking real return, 7% is just fine. If you are living off of a 4% SWR (after inflation), that 3% also adds up over time. It may not buy you a seat on Virgin Galactic, but it beats the 0% after inflation you'll be making on the pension.

That's called a personal choice. Do what makes you happy.

That's interesting. I guess all my military friends need to be giving back that money they've been getting since their late 30s or 40s.

If the numbers bore you out, the poll wouldn't be tied. Obviously two people can look at the same numbers and come to different conclusions, based on their interest in investing, appetite for risk, trust in the gov't's numbers, etc. As far as picking stocks, that's not necessary. There's indexing, asset allocation, etc for other methods of matching (not necessarily beating) the market gains. But stock picking works fine too, if that's your interest and method. And when you get tired of it you can take the $2M and buy SPIA with COLA, and still be where you would have been in the first place, although possibly with some money left over due to that compounding 3% over the 10-20-30 years.

I'm not advising any of this, just pointing out that there are different strokes for different folks, and no way at this point to know which is better. You pays your money and you takes your chance.

Yes, I agree. Totally forgot about the military. The point I wanted to get across was the first couple of pages of comments seemed to be based on knee-jerk reaction. Nobody seemed to have first run through some basic economic calculations to see if there was an obvious choice. What if the $80k per year was equal to a 20% rate of return on $2 million? Then the pension would have been the obvious choice, right?

That may have been a misconception on my part. Maybe some people have worked with these kinds of large numbers so frequently they feel comfortable jumping to secondary factors, such as safety, control, etc.

As it turned out, the "present value" of both cho9ices were more or less equal - so the choice can or must be made on personal situation and preferences.

 

[harley]

I don't think they are saying they can beat the market, just that they can beat the internal rate of return on the pension, which on a statistical average is fairly low, about 1.25% real for someone who trades a $2 million portfolio for the pension for 30 years. At least that's what I'm saying. Furthermore, as was pointed out above, the portfolio gives one more flexibility in terms of taking bigger withdrawals in one year for an unexpected emergency (which ultimately gets made up by either better returns or future cutbacks in spending, if necessary).

eggzactly!

 

[keegs]

I've been reading recently about the psychology of investing, and about recency (overweighting the recent events). You can see a lot of it in the investing behavior in the 90s and the oughts. I believe we're also seeing it now on this thread. I'm a short to mid term bear personally, but I still believe that over my life expectancy (25-30 years) we'll see enough mixed market response that there will be a good chance of a mildly conservative investor equaling or beating the pension/COLA amount. Obviously I have no proof of future events, but for me and my risk tolerance it would be worth it to take the gamble. As I said before, I prefer control and the chance of leaving the COLA adjusted principal (or better) to my heirs. JMO, YMMV, TANSTAAFL, etc.

Edit: Interestingly enough, at this moment we're exactly tied, 28 to 28 (13 undecided). I would have bet that's about how it would go.

I think a few things can go on with regard to the noodle and investment decision making. One would be the band wagon mentality of getting in on a hot stock (when it's likely too late) and another, something I recall several years ago in investment discussions and perhaps somewhat age related is the reaction to risk events called "lizard brain".

Then there's me.... I have the deer in the headlights approach to managing our portfolio.

 

[ziggy29]

Then there's me.... I have the deer in the headlights approach to managing our portfolio.

Assuming a reasonably appropriate asset allocation, that's a lot better than hyperactively managing it and making moves based on the twin portfolio-killing emotions, fear and greed....

 

[FIRE'd@51]

The point I wanted to get across was the first couple of pages of comments seemed to be based on knee-jerk reaction. Nobody seemed to have first run through some basic economic calculations to see if there was an obvious choice. What if the $80k per year was equal to a 20% rate of return on $2 million? Then the pension would have been the obvious choice, right?

Well, the highest real return on the pension is 4%, if you live forever.