Pensions and the 4% rule

[imnontrad]

The amount you need in investments to satisfy the 4% rule is (annual expenses -pension/SS - passive income)*25.

But you need to consider how secure the pension is (as in if it could ever be reduced like it was for RI state employees or go away completely if the company goes out of business) and if there is any inflation clause. A pension of $1,000/month may be great now but that amount will not see as great 20 years from now.

 

[Davis65]

This thread has finally convinced me that the so-called "4% rule" does more harm than good. It isn't a rule: it is a rule-of-thumb. As a starting point for retirement planning, it's not altogether bad. But when people think that it is a substitute for actual retirement planning, it is dangerous. And when others come along and ask how pension managers can "steer clear of the laws of math and reality that the rest of us face", I'm going to lose it.

Anyone planning retirement should develop a much more complex plan that takes into account their desired spending, their expected income from various sources, and their expected returns from their own portfolio in the 21st century, not use solely a rule-of-thumb developed in the 1970s based on an arbitrary portfolio. They should do their homework before making such a huge decision as retiring.

Any pension manager who relies on a simplistic guideline as the 4% one should be fired, taken to the village square, pelted with over-ripe fruit, and made to wear a polyester leisure suit while dancing to the greatest hits of KC and the Sunshine Band.

 

[TheWizard]

This thread has finally convinced me that the so-called "4% rule" does more harm than good. It isn't a rule: it is a rule-of-thumb. As a starting point for retirement planning, it's not altogether bad. But when people think that it is a substitute for actual retirement planning, it is dangerous. And when others come along and ask how pension managers can "steer clear of the laws of math and reality that the rest of us face", I'm going to lose it.

Anyone planning retirement should develop a much more complex plan that takes into account their desired spending, their expected income from various sources, and their expected returns from their own portfolio in the 21st century, not use solely a rule-of-thumb developed in the 1970s based on an arbitrary portfolio. They should do their homework before making such a huge decision as retiring.

Any pension manager who relies on a simplistic guideline as the 4% one should be fired, taken to the village square, pelted with over-ripe fruit, and made to wear a polyester leisure suit while dancing to the greatest hits of KC and the Sunshine Band.

I like Davis65's refined SOH.

I also like his "desired spending" target for retirement income, rather than coming up with a low-ball figure based on expenses in your full-time working life...

 

[mijoy]

Please let's not devolve into petty anti-public-sector rhetoric.

The question was asked, and Gumby has come close to answering it.

A key difference is risk pooling. It is no different for pensions than for a garden-variety annuity. The 4% rule essentially assumes that the individual will live the whole time. You have to oversave to make sure you don't run out of money. On average, people using the 4% rule will leave a large estate.

OTOH, a pool of people may assume that some will live a long time, while others will die early. This facilitates a larger "withdrawal rate" if you will.

BINGO!

Many people die young.

 

[rodi]

Thanks for the interesting discussion.