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Many discussions on HD make it clear my retirement is unique, mainly because our income consisting of a pension and SS is more than adequate to live in the way we did when I was working.
Other than monitor my pension as it grew, there was no financial plan except to ensure receiving the employer match on the 401k so that meant saving at least 8% for a total of 12%. I also invested the compensation I received above base salary, both cash and equity.
But HD posts often get me thinking, what if there wasn’t a pension, what if it was all on me, what would I have done? Of course I don’t know, but knowing how I think about money and security, I can speculate.
Let’s see, no pension. First, I would keep track of what Social Security would provide to us. Second I would use two separate ways two save and invest. First in the 401k but also outside a retirement plan.
Those brokerage savings would be thought of as two pools of money.
One part of the account to keep investing and growing in retirement and the other for the sole purpose of buying an annuity at retirement to cover basic living expenses.
I would periodically check to see the amount of annuity income those investments could buy so between that and SS I would know our retirement income stream.
Back in July 2007 Jonathan wrote in the Wall Street Journal
“If you try to pay for retirement by slowly drawing down your nest egg, there’s a risk you will outlive your savings or your finances will get derailed by rotten markets. To protect yourself, you’ll want insurance-in the form guaranteed of lifetime income.
Your Social Security benefit will provide some of this insurance, and you may have a pension as well. If you want further protection, consider buying immediate annuities that pay lifetime income.”
That is exactly what I am saying.
I would also have saved all forms of compensation above base salary as I actually did. Today the dividends on the company stock I saved and accumulated for the last twenty years generate $25,000 in annual income. Bond interest is about $1,600 a month tax free.
Fidelity says my brokerage account asset allocation “resembles a Growth with Income strategy and my retirement account investment “resembles a Growth strategy. The growth and income strategy in the brokerage account is where bond funds reside, including muni funds.
Is that good? Is it the way it should be? I don’t know.
With all this speculation I am still faced with determining the best investment strategy and also the dreaded withdrawal strategy. I like to think I have minimized the withdrawal issue by using an annuity with my withdrawals limited to the income generated by interest and dividends – at least that’s what I imagine, but then there are RMDs to deal with.
Has this theoretical retirement allowed for survivor benefits? Hopefully, but not with the certainty of a pension survivor annuity.
This world without a pension is scary and complicated. There are many decisions to be made, many unknowns to deal with.
My hat is off to the great majority of Americans who live in my theoretical world. It’s not an easy road to a secure retirement. And for sure an early start to saving and investing is very important.
“…But HD posts often get me thinking, what if there wasn’t a pension, what if it was all on me, what would I have done?”
I think the answer to your question is in another post in this very issue of Humble Dollar:
“Forget budgeting and tracking spending. HumbleDollar editor’s approach to saving in his 20s and 30s: Sock away every penny possible.”
Even more so with fewer and fewer people getting pensions these days.
It sounds like you have a sizable amount of company stock that provides key dividends to your income. Are you concerned about the risk that the company could experience adverse events that lower or eliminate their dividend or, worse, the stock has a sharp downturn?
It is a 125 year old utility so I’m thinking that is unlikely, but there is always risk. It’s about 20% of all investments.
My father and father-in-law both spent their careers with a single employer and both retired with a pension, paid healthcare and Social Security – and not much else. When I retired, I had a very small pension, a 401K balance, an IRA rollover from several employers, some personal savings, Social Security and Medicare. My son, who has many years left to work, will likely end up with money in a rollover IRA, a Roth IRA that his mother and I started for him at age 15, Social Security – maybe, and Medicare – another maybe, and whatever his mother and I can leave to him.
The world has changed and my expectation has been for some time that we can only expect our children to have in retirement what they can save and what they may inherit. For too many people, this presents a grim future if they lack the fundamental financial ability to save early and save often. This also places a premium on the need to know how to effectively manage the financial resources we have accumulated in order to ensure their growth and not be swallowed up by fees and risky decision making.
The good news is that there are a lot credible financial resources available today that didn’t exist when I started work. Low cost ETF’s and index funds, as well as target date funds or balanced funds have also proliferated that have both simplified and reduced the risk of the investment management process. That said, starting a savings and investment plan early is still perhaps the greatest determinant of future financial security.
Contrary to the title, the road to retirement does not have to include a pension. I have the smallest of pensions, as after 21 years and helping our company GROW from $1 million to $250 million, it was decided I was no longer needed. So at age 48, I learned my pension would be $1000 per month, and lucky I got that and started to take it at age 55. I invested it and today it is worth $1.2 million. That $1000 pension and Social Security was not going to get me through retirement. Luckily, I had the mindset to contribute the maximum to my 401K, and add IRA’s. My wife even went back to work for 3 years, and fed her 401K. With discipline and continued saving, like a guy named Jonathan, we are very comfortable in our retirement living at one of the top CCRC’s in Missouri. Thanks to good markets over the last 57 years, we made it with ease. You have to work the system with what you got to get what you need.
Since most people don’t have a pension what you say is true, but it is a lot easier and less stressful with a pension especially when a pension and SS provide more than you need.
One mental “trick” I used to get past the feeling of spending a “chunk of change” to buy our immediate annuities (back in 2013) was to view our retirement savings (mostly 401k) in two parts. The main part (roughly 2/3rd) would be used as an investment vehicle to permit flexibility and growth. The other 1/3rd would be treated as a self-funded pension, shifting the risk from the stock market to high quality insurance companies (with state guaranty association backing). That “pension” in combination with my SS benefit at full retirement age (FRA) would be targeted to cover essential expenses. I used “my” SS benefit (rather than “ours”) so that the coverage would also apply to a surviving spouse. Since I didn’t start SS immediately upon retiring, we also used a bond ladder to cover income shortfalls until my SS was claimed.
In our case, I didn’t claim SS until age 70 and consequently, increased the estimated SS benefit at FRA by another 32%. This delay allowed such lifetime income to now cover almost all our expenses (essential and discretionary) – leaving just major travel expenses as an income shortfall. This meant all IRA withdrawals are for such discretionary spending. The “extra” SS income can also be an inflation hedge (to cover essential expenses) for a surviving spouse in the future. Additionally, while we are both alive, we also have my wife’s SS benefit as supplemental income (available to use for discretionary expenses).
Over the past 12 years being retired, the non-COLA immediate annuities plus our SS benefits continue to cover all our expenses except for travel. While I had considered a possible annuity add-on, I have not felt the need to further increase that self-funded pension given the growth of our SS benefits. Our current RMDs covers all our travel expenses. Given roughly half of our portfolio are in Roth accounts, our advisor has told us that we can comfortably spend twice our RMD (as they’re withdrawn from our T-IRA accounts) and still be considered conservative. Now that we are 75/78 and our portfolio, with an average asset allocation of 70/30, is larger than when I retired (after the annuitization), I’m not sure if the lack of COLA on that self-funded pension has had that much of an impact on us (so far).
The mental strategy to buy an annuity is exactly what I favor.
As someone who has admitted in previous comments that I’m envious of your company-pension situation, Richard, I appreciate this thought experiment you’re doing here. I posted last year how I went about trying to concoct a simple, self-made peace-of-mind inflation-indexed pension that, along with Social Security and some growth in my remaining savings, is intended to get me across the finish line.
You write: “I would keep track of what Social Security would provide to us.” I, of course, used my and my husband’s projected SS figures in my plan. But now reading the warnings about possible cuts of around 25% in 2033, three years after I was planning to start collecting, I guess I need to recalculate my numbers, just in case this situation finally comes to head instead of getting fixed. (My husband is sure the politicians will somehow put it back on track 100% for everyone; I’m not as sanguine about that.)
I now see that “set it and forget it” for newer retirees might really only be available to those in your situation with guaranteed pensions, and maybe not even then if inflation eats away at other parts of your savings and SS doesn’t hold firm.
If one wants to address this with an annuity, it does take a chunk of change plus one has the loss of liquidity and no inflation protection (unless one wants to “buy” a fixed increase of 2-3% which results in a significantly smaller starting payout). If one chooses the annuity without a fixed increase this needs to be balanced with significant long term stock exposure at market risk for some semblance of inflation protection. To generate a personalized annuity-like approach one can also use an individual TIPs ladder, which is what we are doing. It does take a larger chunk of change to generate the same income as the annuity with the tradeoff of inflation protection and liquidity. This is not difficult-it takes a strategy and buying one TIPs per year. Individual TIPs offer preferred inflation protection to TIPs funds because you have guaranteed purchasing power held to maturity and TIPs funds are subject to market and interest rate risk.
Boy, you wouldn’t last a day with my plan 😂 all my retirement income I’m expecting to come from brokerage accounts invested almost entirely in equities until I reach SS age. Either sale of stock or just dividends should do the trick. I’m very impressed at your retirement income though, you’ve got a very well-crafted system.
Thanks for an interstellar post. It brings up so many questions and decisions that need to be made in lieu of an ample pension. You mention the $1600 from bond interest. Previously you wrote that came from saving all your SS benefits. With no pension would that still have been possible? Would you still shoot for 100% income replacement, and would that be a combination of SS and annuity? Similar question with the $25K in dividends. Would some of those funds have been used to purchase an annuity ? Did you assume your 2nd pension would have been converted to a deferred comp plan?
To me the more interesting question is what if your career stopped just before reaching VP and executive comp? No pensions, just base salary and whatever pre and after-tax savings your family could manage, and SS?
Indeed a lot of what ifs. No pension, probably no investing SS. However, the reality is most of that saving was while I was still working, but I doubt I would have had the mindset to invest it.
I would still shoot for 100% base pay replacement, but unlikely to achieve I suspect. I would be very reluctant to use the dividend stocks for the annuity since they provide an income stream.
My second pension is simply the excess of what my qualified pension would have provided except for the IRS income limits imposed on qualified plans. It is considered a deferred compensation plan. When I retired I had to write a check for $16,000 to pay Medicare FICA on the assumed future value of the non-qualified pension.
Had my career ended before exec comp and no pension, I might still be working 😁 and life both before and after retirement would be very different. I would have had to save much more than I did. No Cape Cod house for sure, probably different college experience for the children.
If it had ended before with a pension, the effect would be a loss of nearly half of our investments.
Frankly, knowing how I fret over income security and money in general – even with what we have, I would be permanently stressed without an income stream.
The value of a pension accumulated over nearly fifty years can’t be overstated and these days probably impossible to achieve.
My experience and thinking about the alternatives strengthens the risk I see in retiring with 70% to 80% income replacement. It just seems to me there is little room for error. I like to cover all the bases to the maximum extent possible – hence working to age 67 while others enjoy retirement 10+ years sooner.
Again, you only need 100% income replacement if you are spending 100% of your income. Why do you assume everyone does that? As I’ve posted before, after I retired I paid off my mortgage, stopped saving for retirement and saw my taxes nose dive. I only needed 40% of my salary to maintain the same lifestyle. Before I moved to the CCRC my pension plus SS were above my expenses but still about 40% of my inflation-adjusted final salary. Maybe it would be a risk for you to retire with less than 100% replacement, but that’s not everyone’s experience.
That’s fine with me. I assume nothing. But I disagree it is only desirable if you are spending 100%.
Our mortgages were paid off years before I retired so no savings there. we never stopped saving something and our taxes never took a nosedive while our health insurance premiums increased more than ten fold.
I certainly know most people live on far less than 100%. I always said it was “desirable.” It provides a cushion against both inflation and unexpected spending. That’s why we can maintain our lifestyle after 15 years of inflation erosion to income without yet taping investments.
You have mentioned many times that your CCRC won’t kick you out if you run out of money which tells me while unlikely, it’s on your mind.
It is to your credit that you could live your lifestyle on 40%. We could not come close. I admit a lot of what we spend is on family, not essential, but that too is part of our lifestyle and always has been.
Whether it’s desirable depends on your values as well as how much you spend. If I had tried to replace 100% of my salary I would have had to work a lot longer and would have missed out on years of great travel, and I couldn’t have done it with pension plus SS in any case. Since it wasn’t necessary, it would have been a waste. Naturally, with no COLA on my pension, running out of money is always a possibility, however distant. Come to that, the situation with SS is a bit worrying, too. Not enough to convince me to buy an annuity with no proper COLA, though.
Sadly, I don’t think “most” people live on less than 100%, although clearly some do. It’s more likely a lot need more than 100%, certainly from one job.
The most people I was referring to are retired people. And absolutely most live on much less than 100% of their working income. Just look at the SS data for e ample.
Thanks for a very honest reply. I’m with you on appreciation my pension. With regard to 70% income replacement, I think it is a strong function of someone’s pre-retirement cash flow. The last 20 years before we retired we saved aggressively in our 401k’s while paying for college for 2. Once college was complete, we had another 13 years of maxing out 401k’s and HSAs, weddings, paying off our primary home, and eventually by a vacation home. Much of those expenses went away in retirement. We now live fairly lavishly on well below 70% of our pre-retirement income.
as a thought experiment, supposed Connie got a 6 figure job the last 10 years before retirement. Would you have felt the need to replace her income also, or just yours? That’s the kind of decision many retirees in my circle face.
Your last paragraph is like when I say we lived only on base pay, not total compensation. So if Connie got any job, that income would not be used for any ongoing expenses or ongoing commitment. Thus no, I would not seek to replace it. But if it was used for basic spending, yes.
Dick: You mention fretting over income security and money in general. Where do you think that comes from? Is it a reflection of early childhood experience? For instance, growing up, did you sense that your parents were always worried about money?
Yes, it probably is.
While we didn’t experience anything close to poverty, my parents lived very much paycheck to paycheck. In fact, some weeks there was no pay. If my father didn’t sell a car, he had to take an advance on future sales. It was only when I was in my late teens that he received a salary.
We didn’t own a car until I was about 15 even though he could have paid dealer cost.
My mother and grandmother made a lot of our clothes. Vacations were few and short.
I grew up in a very small apartment with five of us. All my aunts and uncles had houses. My parents couldn’t buy one until my father was in his 60s and then only because it was shared with my sister’s family the rest of their lives.
They didn’t have any investments and kept what money they had in a checking account. I did talk my mother into buying 75 shares of PEG back in late 60s, but she would never reinvest dividends.
When my father was let go from his job when he was in his mid sixties and forced to retire they lived on SS alone.
For sure I never wanted to repeat any of that. I still regret my father dying before seeing our house on Cape Cod or knowing I could buy a Mercedes which is the car he was so proud to sell for many years.
Is it possible to overthink this? As for pensions, they may not be stable. This is particularly true for certain public pensions. Here’s one possible roadmap. Mine was similar and I do not have a pension, yet it worked.
1. Get a useful education at reasonable cost to you. Be aware that you are preparing for an unknowable future. Your skill may cease to have value in 10, 20 or more years in the future. Continuous education is a method to extend one’s value.
2. Develop critical thinking skills.
3. Save a portion of one’s income, begin at 10% but strive for 15%. Begin early and be consistent.
4. Invest in tax sheltered accounts including a Roth-IRA.
5. Invest in a Target Date Fund (5 indexes). When time permits one can learn about other forms of investing.
6. Avoid lifestyle creep and live within one’s means. Buy what you really need, not what you want. (There will be plenty of time for that later).
7. Educate oneself in basic finance and use Quicken or similar to track one’s financial progress.
8. Find like-minded friends, associates and a companion. Avoid all of the others.
9. Don’t be concerned about over saving. If the day arrives when you have won the trifecta of savings (a pension and personal retirement savings and social security) then you may be able to retire much earlier than you might have expected. If you don’t have a pension then you can always purchase an annuity. You can then become a philanthropist.
Public pensions are the most stable of all even given the underfunding by many states. I can’t find any case where a state employee lost their pension because of it. In some cases, including NJ, they have lost, as least in theory temporarily, their COLA.
On the other hand, generally, government pensions are far more generous than private pensions in things like counted compensation, COLAs, early retirement. In the case of NJ as an example, employees could take loans from the pension fund at an interest rate below the assumed return on the pension trust thus causing a loss to the trust for thousands of loans.
Private employer plan are at greater risk, but limited because of the regulatory oversight since ERISA establishment of the pension insurance from the PBGC.
In 2023 the median public pension system was equipped to finance 76% of its pension obligations. This excluded unfunded health and lifestyle benefits, which now surpass pension debt. “Taxpayers are exposed to more than just the public employee benefit debt of a single municipality. A more accurate picture would require adding the public employee debt of all overlapping government entities—including school districts, counties, cities, and states. “
Illinois has $186 Billion in Public Employee Benefit Debt (about $14,500 per capita). There have been several attempts to overhaul public pensions, but that requires a revision to the state constitution. Illinois voters have been unwilling to allow the legislature to do this. The problem seems to be that a constitutional convention would have no restrictions on those attending. Other states in the top 10 include New Jersey with about 146 Billion and California with $148 Billion. The top 10 states are underfunded about $870 Billion.
As a contrast, about 25% of public companies offered pensions in 2022.
All correct. I sat on two state commissions reviewing this several years ago. Politicians promise what taxpayers can’t afford, all too often to gain public union support.
Government workers aren’t losing their pensions though.
Nj got creative. The lottery was supposed to be devoted to programs for education and disabled, but now it’s been made an asset of the teachers pension fund on the theory that too helps the education process.
And it’s still underfunded.
So having one bankrupt institution, backing another bankrupt entity, one should feel safe?
If you are referring to the PBGC According to its Fiscal Year (FY) 2024 Annual Report (released in November 2024), both its Single-Employer and Multiemployer insurance programs have positive net financial positions:
I think the question is, if you put the equivalent of 12% of your salary into a 401K for most of your career, what investment option did you choose for these 401k monies? Did you take risk and put money into the S & P 500 for example? Or perhaps a Total Stock Market Fund? Had you done so over an almost 50 year career, you would have had a huge amount in your 401k. According to my HP12C had you invested just $6000 a year for 50 years at the average 7% return for equities you would have around $2.4Million in your 401k at retirement. I suspect that for the final 20 years of your career your 401k deductions would have been much larger. Given your conservative point of view, I suspect that you chose more conservative investment options…..
The other thing I would point out is that between 2008 and 2022 while the Fed was keeping interest rates very low, annuities didn’t seem as desirable because what the amounts annuity companies were asking to buy one was much higher than today. For many, perhaps, still a good option.
Your last point is consistent with my experience. I looked at fixed term annuities as a bridge to SS at 70, but the payouts in 2017 – 2022 were not attractive. I created my own within my portfolio.
So you’d basically try to recreate what you have? Makes sense given how many times you’ve said you love what you have!
It’s easier to just save in one investment account, using a an asset allocation that keeps you comfortable. When you had enough to buy an annuity to replace your income, you’d be done.
Then you’d have to decide, do I have enough outside of that to be comfortable. If not work a bit longer, that reduces the cost of the annuity and increases the remainder.
Yes I would try, but it would not be easy. I like the idea of compartmentalizing money for specific purposes. Not necessary I know, but makes me comfortable and no extra effort. That’s why we have six accounts in one bank. A lot easier than spreadsheets 🤑
A lot of people like compartmentalizing, I was just commenting that it doesn’t add anything and could confuse things in a system where you’re becoming more involved.
Fewer accounts reduces the need for spreadsheets not the opposite!
Not for me. I enter my Fidelity account and everything I need is right on the screen including all our bank accounts.
The bank tells me what we spend each month including ATM withdrawals.
What does a spreadsheet tell you that you need and want to know that I can’t get without one?
Compartmentalizing things increases the need for spreadsheets and outside monitoring/analysis.
I think this so obvious it’s not worth thinking thru. How one deals with the complexity is up to the individual.
I like to calculate the present value of all my flows of fixed income, to make sure they’re represented in my asset allocation.
I’ve reduced my spreadsheet usage while I’ve increased my usage of sites like Boldin. The free tool is fairly robust and the monthly $8-10 provides a lot of information like IRMAA planning, roth conversions as well as legacy planning, expense planning.
The only potential problem with this plan is that purchasing an annuity at retirement means you’ll have to liquidate a substantial amount of assets which would result in a large tax bill if those assets were in equities. If you kept an appropriate percentage in bonds and then liquidated that portion to purchase the annuity, that would probably work out better for you, tax-wise.
The nice thing about having guaranteed income like an annuity is that sort of satisfies the fixed-income component of your portfolio and you can then invest the rest that much more aggressively. Just some food for <theoretical> thought!
We have (or will have) five main streams of income in retirement: pension (not nearly as large as yours, but better than average), interest/dividends from post-tax investments, 401(k) withdrawals, income from my part-time gig, and (eventually) Social Security. What if I didn’t have a pension? We would be down to four streams of income and the 401(k) percentage withdrawal would be a bit higher. I’d probably feel slightly less secure but knowing I could keep working for a while longer would take the edge off. It would not be a catastrophe.
Good.
Now 102.
How do you know when you can retire? Do you take an annuity income immediately or are prepared to wait longer to get a higher rate?
What savings rate do you need to target to get to the amount in pre and post tax accounts that you need to totally replace salary?
Since this is all theory i could retire when SS, plus the income from of an annuity covered all living expenses. I would buy annuity at retirement.
what could I or would i have saved above what I did is an unknown. However, saving all compensation above base salary might have done it.
Your theoretical plan is totally workable. The difficult part, as you mention in your final sentence, is getting the youngsters started early.
Dick, this is a great post, an honest effort to understand how many of the rest of us plan for retirement. It’s interesting that you feel you would need to separate your investments into two pools, but it makes sense from my recollection of how you organize your bank accounts and so forth. I do a little mental accounting myself.
The two pools is just a way for me to make it easier to let go of the cash for an annuity. In my mind once it was in that fund it is already spent. That’s why i use multiple bank accounts too. Once the money has a designated purpose i find it easier to use for that purpose.
I understand. My wife and I used a similar system to resolve the difference in our approach to money. I’m naturally a saver, while she was a spender. When we met, she’d never really known any other way. We had one bank account, but we had many “paper accounts” to save for future purchases. We had separate accounts for appliance replacement, major home repair and new car, down to $5 a month to buy me a new chainsaw 10 years hence.
Today, our thinking is much more aligned, and we’ve moved to mainly one pile of money to draw from. But I don’t disparage the old system in any way. We wouldn’t hesitate to move back to it should the need arise.
As detailed in a previous post, I’ve established a ten-year timeframe to develop a more concrete retirement plan. Currently, my long-term thinking for the period after these ten years centers on a base income primarily supported by Social Security (SS) and an immediate annuity with no COLA. My remaining portfolio would then be split: 50% would be time-segmented into 5-year spending blocks, with equity exposure increasing in the longer-term blocks. These blocks would be fully depleted over each 5 year time frame. The other 50% would be dedicated to providing inflation protection for the annuity and possible bequest potential.This is very much a preliminary idea that would best be described as a starting point and not the destination. I haven’t even modelled the concept yet!!