Hermit
Thinks s/he gets paid by the post
Now that I have been retired for 6 months and it is a new year, I thought I should understand the SWR thing a little better. I have a non-COLA pension. I tried to find a thread that provided this information, but couldn’t find it exactly although I found the idea of using an annuity as a close approximation for the current value of a non-COLA pension. I’m sure I am stating the obvious for most, but maybe this post will help someone in a similar situation. Following is an example of calculations I used to determine the impact of a non-COLA pension on a SWR.
Portfolio = $1,000,000
Pension = $50,000 per year
Present Value of pension = $796,254:
The value of an annuity for a 60 year old male single life, no payments to beneficiaries represents the current value of the non-COLA pension. (See Immediate Annuities Overview — ImmediateAnnuities.com. My assumption is that all vendors are fairly close and this is a good ballpark number.)
Current value of Portfolio and Pension:
$1,000,000 + $796,254 = $1,796,254
Spendable income with SWR at 4%:
$1,796,254 * .04 = $71,850.16
Deduct Pension:
$71,850.16 - $50,000 = $21,850: available for withdrawal from portfolio at 4% SWR for the first year
SWR for spending pension only:
$50,000 / $1,796,254 = 2.8%
SWR ignoring non-COLA pension:
SWR: $1,000,000 * .04 = $40,000: available for withdrawal for the first year
Spendable income with pension:
$50,000 + $40,000 = $90,000: for the first year
Assumed additional available funds when ignoring impact of inflation on pension:
$90,000 – $71,850 = $18,150 or 1.8% of portfolio
SWR while ignoring pension:
$90,000 / $1,796,254 = 5%
Couclusion: If you ignore the effects of inflation associated with a non-COLA pension, your actual SWR will likely be a lot higher than you expect.
Portfolio = $1,000,000
Pension = $50,000 per year
Present Value of pension = $796,254:
The value of an annuity for a 60 year old male single life, no payments to beneficiaries represents the current value of the non-COLA pension. (See Immediate Annuities Overview — ImmediateAnnuities.com. My assumption is that all vendors are fairly close and this is a good ballpark number.)
Current value of Portfolio and Pension:
$1,000,000 + $796,254 = $1,796,254
Spendable income with SWR at 4%:
$1,796,254 * .04 = $71,850.16
Deduct Pension:
$71,850.16 - $50,000 = $21,850: available for withdrawal from portfolio at 4% SWR for the first year
SWR for spending pension only:
$50,000 / $1,796,254 = 2.8%
SWR ignoring non-COLA pension:
SWR: $1,000,000 * .04 = $40,000: available for withdrawal for the first year
Spendable income with pension:
$50,000 + $40,000 = $90,000: for the first year
Assumed additional available funds when ignoring impact of inflation on pension:
$90,000 – $71,850 = $18,150 or 1.8% of portfolio
SWR while ignoring pension:
$90,000 / $1,796,254 = 5%
Couclusion: If you ignore the effects of inflation associated with a non-COLA pension, your actual SWR will likely be a lot higher than you expect.