Financial Independence

[jdw_fire]

i have gotten the impression that some people think that people who retire early with a pension r some how 2nd class FIREd. so my question is, is someone who retires early with a pension less FI then someone who retires early with out a pension?

 

[aaronc879]

i have gotten the impression that some people think that people who retire early with a pension r some how 2nd class FIREd. so my question is, is someone who retires early with a pension less FI then someone who retires early with out a pension?

I would say it's the other way around. It's much easier to FIRE if you have a pension. It doesn't take much to FIRE if you have a pension except putting in your time.

 

[FIREd]

i have gotten the impression that some people think that people who retire early with a pension r some how 2nd class FIREd. so my question is, is someone who retires early with a pension less FI then someone who retires early with out a pension?

I think that someone who retires with a 100% secure pension is more FI than someone who retires without a pension.

 

[jdw_fire]

I think that someone who retires with a 100% secure pension is more FI than someone who retires without a pension.

what is a 100% secure pension?

 

[haha]

what is a 100% secure pension?

A federal pension comes pretty close wouldn't you say? And it seems that Texas law enforcement pensions are more 100% than most any other thing I could think of.

 

[shoe]

DH has a COLA'd pension and I feel we are less financially independent though if you had asked me a week ago I would have felt differently. It seems that the "Health Care Stabilization Fund" fund that was used to keep insurance premiums low has been so hard hit by the downturn that it will be depleted in 3 years. They are looking at the possibility of denying spouses access to healthcare so if that were the case, I would have to buy it privately. With a myriad of auto-immune diseases, I doubt I would fare well.

 

[OAG]

DH has a COLA'd pension and I feel we are less financially independent though if you had asked me a week ago I would have felt differently. It seems that the "Health Care Stabilization Fund" fund that was used to keep insurance premiums low has been so hard hit by the downturn that it will be depleted in 3 years. They are looking at the possibility of denying spouses access to healthcare so if that were the case, I would have to buy it privately. With a myriad of auto-immune diseases, I doubt I would fare well.

What has Health Care got to do with a COLA'd Pension? They are two different things. However, I will agree a COLA'd Pension WITH health care is better than just a COLA'd pension, but still contend they are two different things.

 

[Midpack]

I have highlighted this distinction before as it colors the responses here noticeably. Nothing is 100% secure, but any pension (COLA or not) and/or retired healthcare can only make one more secure. I would like to see someone make the argument that SIRE is less secure. SIRE may deal with some uncertainty, but FIRE will be confronted with every conceivable uncertainty. No one ever said either was a 2nd class citizen, we all make our own choices and live with the consequences. Where it gets me is when someone nearing RE asks 'am I ready' and someone advises them to 'go for it, I did' without knowing much about the person asking - and it's been done here many times. When the person answering has a COLA'd pension and retiree health care answers someone with nothing but their own resources (401k, savings) - it's irresponsible IMHO...such is the Internet, you get what you pay for.

 

[Rambler]

Both about the same, I reckon. Neither one is ever 100% secure. If a real depression happened, like in the 30s where 90% of market values were lost and lots of companies were going under, who would be more secure: the guy with a pension from a company that disappeared? or the guy who was barely FI before the crash and subsequently lost 90% of the value of his holdings? Neither was any more FI than the other...my opinion, FWIW.

R

 

[shoe]

What has Health Care got to do with a COLA'd Pension? They are two different things. However, I will agree a COLA'd Pension WITH health care is better than just a COLA'd pension, but still contend they are two different things.

You're right OAG, it doesn't have anything to do with it. My bad. It's just my recent knee-jerk response since learning my healthcare is not assured.

 

[cashbalancetrouble]

A private pension, even COLA, is only as good as the company behind it if it is over the PBGC limit. For instance, many airline retiree pensions were severely reduced when the airlines went belly up and the PBGC took over. If you were retiring early today at 55, the annaul guarantee max is $24,300. After 35 years DW has $6K/month pension earned but would be crazy to take it and feel safe. A lump sum is much safer, but the new PPA rules says the lump can only be paid at 50% of amount due to the pension being underfunded. If the plan every reaches properfundin, she can get the rest as a lump then.

There will be alot said next month in the news about pension trouble due to the PPA kickin in rules about underfunded pensions as of April 1. At 60 to 80% funding, lump sums are limited. At below 60% funding, pensions must halt accruals and susspend all lump sum selections.

 

[Walt34]

Perhaps six of one and half-a-dozen of the other. I do have a COLA'd pension, but that only works if the pension is adequately funded and managed. To my knowledge the County is one of the few with no unfunded pension liability, but the scale of the recent losses makes me wonder about that.

Just heard on the news that current employees will have a 0% pay increase this year.

 

[MichaelB]

I don't understand the pension debate. During the working years a pension is equivalent to earning a higher income offset by having a higher savings rate. During the retirement years it is equivalent to allocating a greater part of the portfolio to an annuity or fixed income. This part of the portfolio is not risk free but risk can be assessed and applied to the overall portfolio.

One is neither better nor worse off, because each portfolio can be allocated to the same level of risk.

 

[calmloki]

Focusing on the word independent - my emotional response is that the pension-less FI is more independent because they are more likely to be entrepreneurs, small business people, small farmers, etc. and less likely to have worked 20-30 for the big corporations, government, or the military. Emotionally, those with a pension are perhaps more financially secure, but financially dependent - not independent. In my purely emotional opinion.

 

[Bikerdude]

i have gotten the impression that some people think that people who retire early with a pension r some how 2nd class FIREd. so my question is, is someone who retires early with a pension less FI then someone who retires early with out a pension?

You have two people who want to retire at age 55. Each needs $50,000 per year. One saves $1,250,000 and retires. The other works for a state government until age 55 and retires with a cola pension of $50,000.

Bottom line, both planned and both executed. Both retired.

Which was more difficult to do is open to interpretation.

 

[ziggy29]

All else being equal, someone with a pension is much more likely to be secure in retirement than someone who doesn't. Having said that, someone with no pension and $10M in investments is probably more FI than someone with $500K in investments and a $20K annual pension.

I answered "no" because I assumed all else being roughly equal. Someone who has no pension (or a very small one like me) coming to them needs to have a LOT more of their own savings to FIRE than someone who does.

 

[W2R]

Someone who has no pension (or a very small one like me) coming to them.

How small will your pension be, as a percentage of your present salary+bonuses+options? Just curious and wanted to know how you are defining "very small".

 

[ziggy29]

How small will your pension be, as a percentage of your present salary+bonuses+options? Just curious.

If I choose the 100% survivor income option (i.e. worst-case, lowest payout), it would be about $260 a month at age 55 or $600 a month at age 65 (based on 12 years of service at an old job from 1987-99). It certainly beats a poke in the eye, but it's not really something that would sustain me. It could slightly reduce the amount of investments I need to FIRE, but not that much lower, especially if we have much inflation between now and then.

In reality, I wouldn't be surprised if they offer to cash me out with a lump sum just before my 55th birthday. I doubt the current cash value is much more than about $30K.

 

[Cruising2022]

what is a 100% secure pension?

Can you really picture Congress letting a poor little old teacher going down the tubes because the county went bankrupt? Or can you really picture Congress letting all these poor scruffy auto workers wail to the cameras about losing their pensions? I can't.

Flip it over... can you picture Congress bailing out some ex-MSFT programmer on a 401K? I can't, either.

In an idealized world, pensions would be very insecure. It's no different than placing 100% of your money in one stock, and the projections are often grossly unrealistic and based on a company's best years. In this world of socialized losses, I'd say just about every blue collar and local government pension is safe.

 

[ziggy29]

In an idealized world, pensions would be very insecure. It's no different than placing 100% of your money in one stock, and the projections are often grossly unrealistic and based on a company's best years. In this world of socialized losses, I'd say just about every blue collar and local government pension is safe.

To me, in an ideal world, pensions would be managed conservatively enough to avoid blowing up, periodically change actuarial assumptions about life expectancies and payouts, and not assume rates of return that could only be met be assuming WAY too much risk.

The problem is that overpromising on pension benefits is a recruitment tool. Most private entities have realized that's a path to ruin. But they don't have the ability to keep raising taxes to make good on those overpromises.

Pensions themselves aren't the problem. Unrealistic assumptions about rate of return and unrealistic promises for benefits are the problem.

 

[W2R]

If I choose the 100% survivor income option (i.e. worst-case, lowest payout), it would be about $260 a month at age 55 or $600 a month at age 65 (based on 12 years of service at an old job from 1987-99). It certainly beats a poke in the eye, but it's not really something that would sustain me. It could slightly reduce the amount of investments I need to FIRE, but not that much lower, especially if we have much inflation between now and then.

Thanks - - That's interesting. My tiny federal pension after working about the same amount of time would yield about the same as yours, if I had to take the survivor annuity option. So don't feel bad. We're all together in this.

 

[Gotadimple]

I answered "no" because I assumed all else being roughly equal. Someone who has no pension (or a very small one like me) coming to them needs to have a LOT more of their own savings to FIRE than someone who does.

Actually, this is true whether one has a large or small pension. A pension is just an annuity purchased by the company. As others have said, those with the cash can purchase their own annuity. Regardless of the amount of the annuity, one can only be Financially Independent with other savings -- especially if they plan on Retiring Early. One can have all the cola'd or non-cola'd pensions in the world, but if you're too young for that 'other' annuity called social security, you need other income.

There are plenty of folks who work for large companies today who have no access to a pension, just their 401(k). As we all know, ability to LBYM and save is what allows those who are FIRE to be able to RE.

Some are envious of those who worked for a company that provided them with an annuity at the end of their career. Others are envious of those who have amassed a good amount of wealth. So the question is moot.

I voted No.

 

[ziggy29]

Thanks - - That's interesting. My tiny federal pension after working about the same amount of time would yield about the same as yours, if I had to take the survivor annuity option. So don't feel bad. We're all together in this.

Of course, mine's not COLA'd and those are the absolute amounts I'll get -- they are in 2020 dollars or 2030 dollars, not 2009 dollars. Still, beats a poke in the eye and it's certainly more than a lot of folks will get.

Oh, and I don't get any retiree health insurance. That's huge, probably more so than the pension, at least for FIREing before 65. [Edit to add -- of course, there's a good chance we'll have nationalized/universal health care by the time I retire, which could make that relatively moot.]

 

[freebird5825]

I viewed this as a simple fulcrum (seesaw), setting the pension on one end and the investment portfolio on the other. I did not include SS because of the RE factor.
I voted yes only because of the uncertainty of pensions in current times.
If a person has to rely on a pension for the majority of their RE income as opposed to their own investments, then they are more at risk.
Conversely, if a person's portfolio is their only income source for retirement, and things like 2008 happen, then the lack of a pension as backup (until recovery comes around) is the breakpoint.
Obviously, a balanced combo of both is ideal.

 

[ziggy29]

I voted yes only because of the uncertainty of pensions in current times.
If a person has to rely on a pension for the majority of their RE income as opposed to their own investments, then they are more at risk.
Conversely, if a person's portfolio is their only income source for retirement, and things like 2008 happen, then the lack of a pension as backup (until recovery comes around) is the breakpoint.
Obviously, a balanced combo of both is ideal.

Well, this points out the value of the "three-legged stool" model.

I do agree with this, but because the OP phrased the question in a way that led us to make our own assumptions, I assumed "all else being equal," meaning similar investment portfolio sizes -- and with that, sure having a pension would be more secure than not. But if you assume that someone who doesn't have a pension has saved considerably more in their 401K and IRA plans, that's not *necessarily* a foregone conclusion.