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Adam Grossman’s last article, “Self Defense” really got me thinking. How would I deal with spending in retirement if my income was like most folks – investments and Social Security. I know the answer – not well.
In our house, the last workday of the month is still referred to as “payday,” the day my pension arrives at our bank. There are no withdrawal decisions, no looking at investments and thinking about the next month’s withdrawal.
We are very fortunate indeed, but to deal with my personality that steady, guaranteed, even fixed income stream is essential. I seriously doubt I could cope in retirement depending on withdrawals from investments. I like things as certain as possible.
I watch our investments daily, sometimes hourly, on a bad or exceptionally good stock market day. And yet what the market does from day to day doesn’t really matter.
Actually each year I set a goal to see our investments reach a new high. No good reason though, just a game of accomplishment of some sort. I must be a case study in some psychology book. Maybe I’m demonstrating to myself I got from the lowest paid worker of 15,000, to a 90th percentile 80-year old.
If anyone asks my retirement advice, I will always say create an income stream that generates monthly income without decisions or unnecessary risk. I won’t claim it’s always the best result, but it’s less stressful – I think.
Social Security is the foundation for most people. I would buy an immediate annuity to cover living expenses- combined with Social Security. To make that annuity purchase easier, during my pre-retirement working days I would designate a fund accumulated just for that purpose – psychologically the money is already gone when you use it. It would make my annuity purchase decision easier.
I would then assess the interest and dividend income to be generated from investments. They are not 100% guaranteed, but pretty close and at least using them doesn’t deplete assets. In our case after all these years our dividend and interest income exceed my net Social Security (after income tax and Medicare withholding).
So, Social Security, a annuity or pension, plus investment generated income, is it feasible, practical, less stressful? To my personality it is.
And you still may have a pot of money to leave behind. Frugal folks may even be able to reinvest that investment income later in retirement.
Hey, it’s just my way of thinking, my obsession for security and minimal stress. There are flaws here somewhere.
I’d like to discuss them.
As I went from full-time work into phased retirement I began moving my investments to a more cautious approach. I don’t have a pension, but after working about 54 years I do have retirement savings and a social security benefit (I began working and paying taxes while in high school and worked continuously thereafter, preferring to go to college nights). In retirement I worked part-time and continued to save via a Roth IRA. My spouse and I have our retirement funds pretty much on “auto-pilot”. I’ve modified my goals in retirement. I’ve gradually increased my RMDs and altogether have withdrawn about 24% of my portfolio; we have yet to tap G’s retirement savings. After 8 years of withdrawals our net-worth has been reduced about 6% from a peak in 2021. I shifted my priority to focusing on inflation as the boogieman. Using a variety of calculators, I annually pay attention to whether or not our funds can sustain our lifestyle and fund all of our “life event goals and expenses throughout retirement”. Knowing the last part is what has given G and I a stress-reduced retirement. We think of money as fuel and a means to an end. With aging and ill family members requiring care, etc. I really don’t think it is possible that in our case that our lives are “stress-less”.
I actually took my pension as a lump sum 3 years ago, then used just part of those funds to purchase a joint SPIA with guaranteed return of premium that will pay me or my wife for the rest of our lives (whichever one lives longer). I used 1/2 of the 1.5 million lump sum amount to purchase the SPIA. Pension lump sum payouts are sensitive to the current interest rates at the time. I was lucky enough to hit the interest rate at the time of my retirement for the lump sum payout to be to my advantage. Using 1/2 of my lump sum to purchase the SPIA gave me the same monthly income as my pension would have paid me. The other 1/2 of the lump sum payout is in a Fidelity ZERO total market fund.
Those are impressive numbers. I wonder how half the lump sum could replace all of the pension when the purchased annuity must have been using similar interest rates?
Not necessarily. Pension calculations can have some interesting nuances. I wrote about this unique situation in late November, 2022. Pension plans can define how often they update the interest rates they use to calculate lump sums. Plans may use the calendar year, meaning they only update the rates at the beginning of their. This happened in 2022 at my old employer. Interest rates rose sharply that year, but the pension admin was still using much lower rates. For my old employer, lump sum amounts would have dropped some 25% from December 2022 to January 2023. Insurance companies use current rates. This led to a rare case where it made sense to take a lump sum from the pension, and then purchase an annuity.
Several of my former colleagues did exactly what Dan did. They were able to replicate their monthly pension with about 70% of the lumps sum amount. It would be interesting to understand the conditions that produced a “2 for 1” bargain in Dan’s case.
All you say is true, we changed our rate each January – used for vested terminations, but that doesn’t explain how half the LS covers the full pension.
Why would the annuity provider use greatly different rates unless there was a time lag between the calculation and annuity purchase of the annuity is not immediate.
It just sounds too good to be true to me. That employer could have bought annuities for everyone and cut its costs in half.
I’m not an actuary, but I’ve spoken to a few, and pensions a re tricky things. Not every pension fund is set up the same.
some, like my former employer, use IRS 417e defined rates for phased period of time. My brother-in-laws pension used a 10-year treasury rate for calculating lump sums. And I’ve seen interesting rules related to early retirement withdrawals, and various subsidies that come with them. The upshot is you need to look at the pension plan specifics to understand how it works.
I can say with certainty, that in late 2022 several former colleagues of mine were able to take a lump sump, and then purchase a commercially available annuity with an equivalent terms to what their monthly pension would have been, for about 70% of the lump sum value.
Ten year Treasury rates went from about 0.9% to 4% during 2022, and then closer to 5% for parts of 2023. As I said, we would need the details of the plan, and timing of the termination and annuity purchase to
Lower interest rates increase lump sums, higher rates increase the payout on a annuity also affected by age, start payout date and even state, but if the rate is the same or very close and the form of payout the same SLA for example, I can’t see how there can be such a spread in value.
This is correct except that for a short period of time, for some plans that didn’t adjust their rates during the year, for some lucky few who met eligibility at the time, the interest rates were not the same or very close. Assuming a 25 year term, a change in the interest rate from 1% to about 4% reduces the present value of the annuity by roughly 30% for the same monthly payment. So an annuitant could effectively purchase the same monthly amount for 70% of the lump sum payment.
To achieve a 50% reduction would require a larger increase in the interest rate, to almost 8%. Maybe there were some other, non-actuarial, conditions in Dan’s pension. In our plan, there were early retirement subsidies for certain employees that were quite generous, but they only applied to the monthly benefit. not the lump sum calculation. If you met the criteria, you could claim aThe lump sum at 60, however, was calculated using an actuarially reduced monthly benefit amount, about a 35% reduction. thus, for those of us who were eligible, the lump sum offered was about 65% of the present value of the monthly benefit. If the lump sum calculation at 60 had used the great subsidized amount, the resulting greater lump sum amount would have been able to purchase a comparable annuity (in the rapid interest rate scenario) at less than 70%.
When the megacorp offered me a lump sum buyout it wouldn’t have come close to replacing my pension, so I refused it. But that was back in the 90s and I was a lot younger then, and able to retire early with the pension.
It was the same with me in 2017 – the lump sum was about 30% of the Present Value of the monthly benefit. Part of that was the Early Retirement subsidy some of us were eligible for. The monthly was clearly the better deal at the time. The situation Dan relayed is an anomaly in my experience.
Lump sum payouts come with the serious problem of reinvestment risk, a risk I think many people underestimate. And just think how much longer you’ll live not having to worry about your investment returns. 🙂
I also agree with this. Did the math and even with our small pensions it wasn’t really going to be an advantage to do a lump sum. Chris
I agree, i would never give up a pension even without a COLA
Hi Dick,
After reading your post I’m not sure what you are worried about and why, given your income, you are looking at your portfolio every day and even hourly. You’ve set up a system, it seems to have worked for you for years, why should it fail you in the future? If it ain’t broke…
So you know, my financial set-up is somewhat similar to Jackie who commented earlier. I’ve spent decades saving and investing (two different skills) and I’m super frugal for reasons that I don’t really understand, other than I value freedom from financial worry more than I value stuff. After decades of investing 100% in equities, I have enough money now to withstand whatever happens in the future, although if push comes to shove, I can live less affluently and be happy. For the past two years I’ve been patiently selling equities (now 55% of my portfolio) and buying fixed income investments such as preferred shares and investing in master limited partnerships of energy transfer companies, both of which currently compare well (if you are willing to put in the time and effort to buy right) to the historical annual return from the S&P 500 index. I no longer need to take on unnecessary risk to live my life. I’m not trying to score big: I have enough. Or as Warren Buffett said so well: “never risk what you have and need, for what we don’t have and don’t need.” Of course, I wouldn’t object to more money, and that’s probably true of you and the other commentators, but don’t drive yourself nuts.
Tom
I was advised to invest in one of those limited partnerships several years ago. It went up nicely, then down and then they shut it down and I lost $25,000😱
Dick – very thoughtful post. Thank you for sharing.
As blasphemous as it may sound, I actually chose a lump sum payout of my modest pension in late 2023 at age 59. The primary driver in my squirrelly mind was the lack of a COLA associated with my pension. Inflation had already significantly devalued my pension even before my planned claiming age of 65 and it would continue to do so throughout my retirement. Maybe this is a reasonable thing path, maybe not.
Using a SPIA (or multiple SPIAs) to generate additional secure income is an option for sure. The biggest personal hurdle I see with this possible path is my deep distrust of insurance companies to deliver as promised. Their track record for being outstanding personal finance partners is questionable at best.
Setting up an extended TIPS ladder is an alternative that I am considering as well. Using one has its challenges as well but at least these challenges largely are mine to control.
I am not sure which path of these three I will choose (SPIA, TIPS or none of the above). Time will tell.
Thanks again for sharing!
If you didn’t take the pension because it didn’t have a COLA, why would you be considering a SPIA?
Dick,
We have a completely opposite approach to funding our retirement.
Thanks to our frugal nature and high propensity to save, combined with having only one child – very late in life – 50 years old – (after we already saved a large nest egg) we’ve managed to amass enough savings that we just don’t have to worry about it. My husband and I were never super high earners. He closed out his career at the manager level and I touched the Associate Director level for a year. But with 2 incomes, we easily fell into the “affluent” category. We saved from very early on – when we had the good luck of a rising stock market and no negative financial hits like prolonged unemployment or a special needs child. I also had the good luck to discover Jonathan’s column in the WSJ so I automated savings outside of our 401Ks. We never sold during a downturn – just looked around for more cash to invest. The result is a pile-o-savings. The pile is the retirement strategy.
For retirement, our approach is to target 5-7 years of savings in near cash (stable value funds, CDs, etc.) in case of market downturn. We do that in a completely haphazard way (much like our investing strategy). Reading your post prompted me to look at our cash reserves. It looks like it might be a good idea to sell some stock. If I get around to it. I probably will, maybe. Yes definitely, but I don’t feel like it today, maybe tomorrow. Luckily, the pile is big enough that if its cut by 50%, it will still be enough..
What worries me? Inflation. Also, even though we can withstand a prolonged market downturn, I still hate the thought of it. Have we thought about annuitizing? Yes, but doubt we will do it. With the realization of how big the pile is, we have experienced a bit of spending creep. In order to replace a substantial portion of our spending, we would need to spend more that $2,000,000 on annuities. I just can’t see us pulling the trigger on that. We saved incrementally, we invested incrementally, I convert investments to cash incrementally. It’s just not our nature to make major financial moves. Buying our current home gave me nightmares, even though we could definitely afford it. That single transaction was huge. Buying the annuities would much bigger.
I can’t see looking at investments daily or even often – I think it would create a lot of anxiety even during normal market fluctuations. Now I only look when I want specific information – like to figure out if is it time to sell some investments. During downturns, I don’t look at all – too depressing and since I’m not going to sell, there is not point. And it’s been fun seeing the value of the pile jump when you only look once in awhile.
Four children, sixteen years of college and one income-now 11 grandchildren makes for a different journey for sure.
My concern with complex withdrawal strategies to fund expenses is that I can do it now, but my wife has no interest. If for any reason, I am unable to do this in future, we will have a big problem.
Keep it simple for yourself and your spouse, put financial transactions on auto pilot, and focus on other good things in life (before the time runs out).
Good point.
Dick, In your idea of a stress less retirement, how would you fund say a $10,000 monthly fee if you or your spouse had to enter a memory care unit, or a nursing home?
We both have LTC insurance which would cover half that, the balance could from our SS payments and investment earnings. We don’t use SS for daily living expenses, mostly travel so that becomes available. If necessary, we could use the RMDs.
Dick, My husband’s aunt and uncle have LTC policies. They are both in their 90s with limited mobility but are still able to manage in their own home because their policies cover in-home care, with many extra benefits.
So do ours.
I was betting with myself that you would have LTC policies. Furthermore, I’m betting you have had those policies a long time, perhaps long enough to have the really generous more than 3 year of coverage, and relatively shot waiting period….but that the cost of these polices has gone up quite a lot since you purchased them.
Following in the same vein, we do not own LTC policies. If we had the need could just pay the costs.
We have had the policies for over 30 years. We offered them through my employer as a group. Since I put them in as benefit, I had to set an example and enroll. Ours are $185 day benefit for up to five years. I doubt the policy is even available today. In fact, a few years ago the insurer offered a deal to get our premiums back if we would drop the policy.
You’ve got me beat, Dick! I’ve had my policy for “only” 23 years. As I’ve mentioned before, at least once a year Genwirth sends a letter begging me to accept a refund or take a “lower benefits for lower premiums” offer. I don’t plan to budge – just keep paying the increasing premiums. I saw how well assisted living worked for my mother in law for more than five years at a facility near my retired brother in law.
How much did you pay over those 23 years? I have no policy, invested the $’s and will pay when the time comes. Generally you only have to coverage for 3 years, so $120K a year times 3 = $360,000. Over those 23 years I know have a $937,000 in my Vanguard account. I know a need could have occurred earlier, but there is risk in everything. Please understand I dislike insurance companies, because they are so conservative and rarely loose. I also really dislike annuities. I favor investing in the S&P 500 and follow the Buffett rule. This all works for me.
It works until it doesn’t.
I don’t view insurance or annuities as an investment. They offer protection from risk and a measure of security for a fee.
You chalk up an early need to use LTC as a risk, I bet if it occurred your view would not be so casual.
Your logic reminds me of folks who say they could do much better if they had all the Social Security payroll taxes to invest. No doubt some could if every investment, every life event for 40 years went exactly as planned – and they had the discipline to follow through for those 40 years.
Those people are few IMO.
You are ignoring the fact that Linda and Dick have been fully covered by their policies for 23 and 30 years (or a significant number of those years if they had a waiting period) while you would have been hard pressed to fund LTC during the years when the amount in your Vanguard account was much smaller.
LTC costs are also outpacing inflation and while 1/3 of people will never need it, 20% will need 5 years or more.
Same. We said “no thanks” and kept our policies, which we’ve had for quite a while.
Thanks for an interesting post Dick. You may be interested to know there is sound academic support for your approach. It’s known as the “Safety-First Retirement Plan”. Dr. Wade Pfau has written many articles and books about it, as well as others. He differentiates between a “Probability Based” retirement approach – using the total investment portfolio as a retirement income source – and “safety-first” – creating secure income sources to match a hierarchy of spending.
It is a source of confusion to academic retirement researchers like Pfau why more people don’t annualize (or “pensionize”) their retirement portfolio. The reasons I’ve heard generally reflect a fear of dying early and losing a big chunk of their wealth. It’s similar to why people prefer a lump sum option instead of a monthly pension option. Their heirs don’t inherit the monthly benefit. I do think that a simple, safe and inexpensive method to annuitize retirement savings would benefit many modestly wealthy retirees.
Thinking about this reminds me how valuable a traditional pension is. To replace mine I would need to invest about $1M at today’s rates. If my company had not offered a pension, would I have been able to increase our retirement savings to generate that amount, in addition to what we saved for retirement. In a comment below you indicate you would purchase an annuity with after-tax dollars if you didn’t have a pension. That implies a pretty significant amount of financial resources available, especially if you were counting on interest and dividends to supply additional income.
Thinking about my and my wife’s peer group – engineers and nurses – I wonder how many have been able to save both qualified and non-qualified amounts to fund their retirement. It implies a high savings rate. For someone who is saving at a very high rate, they may see that as an “expense” that goes away at retirement that does not need to be replaced in their retirement income.
Rick, my work history and thus pension are unique. It couldn’t even be duplicated in my old company. I know I couldn’t have saved enough to come close to duplicating the income level it provides.
I always saved both qualified and non-qualified and I think everyone should do that once they have captured any employer match. Today my brokerage portfolio is a bit larger than my rollover IRA.
Actually, our 401k offered after tax contributions with a match. I saved a portion that way for several years. The result was that my first three RMDs were not taxable- actually a surprise.
I listen to Pfau’s pod casts occasionally but he sounds just like Mr Peppers from the 1952 sitcom I have a hard time taking him seriously. 😎 Listen to a YouTube of Mr Peepers and you will see what I mean.
Dick, I took CFP and RICP classes from Wade Pfau, so I understand. His voice not withstanding, he is a pretty smart guy. I’ve never heard of a 401k with a match of after-tax contributions.
I know he knows his stuff, but listening to those podcasts with his partner it’s tough to follow and to me they drag things out.
The only potential flaw I can think of is that, given your very conservative approach, your investments might underperform, leaving less money for your heirs. But since you’d have to give up some safety/security, it’s probably not for you. I’m talking about investing more in the broader equity market instead of dividend oriented stocks.
When I use Fidelity to analyze my investments it comes out a growth portfolio. If I was living off investments it might be too aggressive.
I’m not seeing any flaws in your structure. For us it’s going to be quite some time before inflation catches up with our guaranteed income sources. If that comes to pass our RMDs should be sufficient to get us to our expiration dates, (I think I am plagiarizing you from an earlier post). If not, I would not hesitate to buy an immediate annuity. And this is indeed a stress free way to live.
A person in such a situation could use annuities.
One observation I’ve made about the financial aspects of retirement from reading, both here and various other sources, are the variety of paths taken by folks which have provided acceptable results. It is not a matter of “right or wrong”. Investment decisions have different tradeoffs, and the choices we make are influenced by how each of us view those tradeoffs. I too desire to receive a defined amount of cash flow each year, but chose to generate this by taking planned annual portfolio withdrawals. Jonathan and Adam have written here previously about holding the equivalent of five years of withdrawals in cash and short-term treasurys, as a cushion against taking withdrawals during a bear market. You and I chose different approaches, yet each was the correct one based on our unique view of the known tradeoffs.
Having lived through the hyper-inflation of the late 70’s and early 80’s, I am very thankful that I don’t have to worry about watching the purchasing value of a pension eroding every day. Instead, after the 24 years my of retirement, I have to worry about how to spend the largess we now have via the growth of our investments.
And, there is no need to think about “next month’s withdrawal” in order to keep the honey flowing. Funding retirement is easy when SS plus taxable dividends, plus RMD’s equal 3 times your annual expenses.
So, between Mr. Quinn and myself you have the two extremes of retirement funding; having a pension that is large enough so when it plus SS easily exceeds your expenses you have no retirement worries, and on the other side, having no pension/annuity but instead a large enough amount of financial assets so that the total income they produce plus SS easily exceeds your expenses.
For most people, their answer will be something between these two extremes. And whatever decision they make when they retire and have to choose if they want to purchase any amount of annuity will be the right decision for them and their views of how to feel financially secure.
I think that Mr. Quinn retired sometime around 2009. He hasn’t said if, at that time, he had a choice to take a cash-out instead of the pension. I think that in 2009 interest rates were near zero at the bottom of that recession, and the cash value would have been very large making the choice a hard one. With a pension calculation based on 50 years of employment, I might have done the same thing. However, my employer did not have a pension scheme. Like most people today, there was no pension to take. So, instead, one needs to look at what it would cost to buy the security of a pension, vs. having to live without it, but with the possibility of much larger income over time.
We did not have a cash option. except for people who left employment with a vested pension. In fact, our unions did not want one fearing what would happen. In fact, several vested people did take lump sums and blew the money within a year.
As far as management went, it was never considered as there is a slight added cost to the trust of LSs – the lost revenue on future earnings.
However, consistent with my risk intolerances, I would not take a lump sum. Plus the pension assures lifetime income for Connie via survivor benefits. Planning for all that with investments is too much for me.
Dick, Do you really think there are flaws in your financial plan? Clearly, to effectively solve a problem, we have to identify it properly. What’s the use of generating a lot of brilliant solutions if you haven’t correctly identify what you think the problem might be.
if you are doing well and you have a plan that has already provided you with everything you set your goals for, you are ahead of the game. In previous posts you have shared your level of satisfaction with humble dollar readers.
We all might wish to tweak some portion of our plan but you seem to have done very well and may just want to continue on with your success.
My record of explaining my position on things is not stellar on HD.
Given I don’t actually have to deal with what I suggest is a stress less solution – that is without a pension, I really want to hear what people think of what I suggest, especially those dealing living on withdrawals and those who reject the idea of purchasing an annuity.
Dick,
Our retirement income is on “autopilot” too.
We both separately get Social Security. My wife ‘kept’ her last name at work. And we both get pensions.
That’s the vast majority of our income along with a bit of some interest and dividends too.
Dick, if I am reading your post right, I am thinking you would take part of your 401k if you had one, and use it to buy an immediate annuity? Or would you use a taxable account? We have not bought any annuities and am not sure we will. Our SS, pension, and a modest amount from our IRA will be more than enough. We might consider one of the ones that is simple and starts at age 85, but probably not. Retirement seems to be more complicated for us than it was for our parents and grandparents. And I had to educate our kids, luckily they are both on a good path. Chris
With a pension I would not buy an annuity either. If I did buy one it would be with after tax funds though so a portion of the annuity representing return of investment was not taxable.
“We might consider one of the ones that is simple and starts at age 85”
I believe you are referring to a QLAC a qualified longevity annuity contract.
Here is a link regarding this from Investopedia
https://search.app/gfiTY4DiPhY2FrK69
I think you underestimate human resiliency. To say you ‘seriously doubt’ you could cope if you had to rely on taking withdrawals from investments instead of getting a pension seems a bit extreme. I bet you’d adjust, just as millions of other retirees do. Those big brains of ours are amazing at coping and adapting to changing circumstances.
I think you also underestimate how driven humans are. You say you think you must be a psychological case study because you were able to climb a corporate ladder. But humans are a goal-oriented species. I’m pretty sure most people strive to improve their circumstances–financially or otherwise–throughout their lives.
Actually my comment about a case study was related to setting an asset goal, not my job. I need to fix that.
Adjust? No doubt I would, but not without ongoing stress and that was my main point.
It seems to me the possibility of running out of money or a major market downturn as remote as both may be, adds stress to retirement. My goal would be to minimize that stress.
In all my years reading HD the concerns about adequate assets, withdrawal strategies and prudent spending are recurring subjects.
You are right, people most often cope, but at what price?
What about the stress from your pension and/or annuity being diminished by inflation?
My last post covered that. Essentially covered by dividends and interest, in my case tax tax-free interest from muni bonds, but after 15 years we haven’t had the need to use it as income. Plus our starting income had a built in cushion.