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Dear HD readers: We had so much fun with the original version of this post, that I thought it might be fun to add a 3rd possible route to funding retirement at $138,000/yr. Of course, there is no reality in this, no real personal info, it is just a scenario. And, most important, any legal route that get you to your desired retirement income is the right one for you.
One of my friends is hitting 73 in August and we were discussing his need to do an RMD this year. I’m older and have been doing them for some years already. Our financial affairs have one major difference; he has a significant pension and I do not have any pension. I’d say that we are both comfortable. I think he likes his situation, and I like mine.
I thought it might be interesting to create a possible scenario where three people might arrive at the same retirement income through different routes.
Joe has a pension, SS and some savings split between taxable and tax deferred (25/75). He makes around $138,000 per year.
Bill has no pension, he has SS and savings split between taxable and tax deferred(25/75). He makes around $138,000 per year.
Paul has no pension, he has SS and savings split between taxable and tax deferred (67/33). He makes around $138,000 per year.
They are the same age, are retired receiving SS. The all receive $48000 per year in SS. Joe has a $5,000/Mo no COLA pension, and takes 4% of his $750,000 savings each year to reach his $138,000 income. Bill takes 4% of his $2,250,000 savings each year to reach his $138,000 income. Of course, as Bill ages, he will have to take larger RMDs, but he can lower what he takes out of his taxable account to try to keep his income the same as Joe and Paul. Paul has been investing in Dividend Kings and collects $60,000 in dividends from his taxable account. He also takes a 4% withdrawal from his approximately $750k tax deferred account. His dividends have been growing around 5% on the average each year.
All have a reasonable allocation to equities in their financial assets. They all own a home without a mortgage.
I suspect that Joe had some kind of government job and that Bill worked for a corporation. Bill might have had a higher income while he was working. Paul owned a small business.
We might be discussing Sally, Cheryl, and Elizabeth instead of Joe, Paul and Bill….the names are just for convenience.
So, which might you like to be and why?
Joe and Bill are about to have an ugly blind date named IRMAA.
Bill, even though I really like guaranteed income. So I would delay SS to maximize the COLA, perhaps buy a deferred annuity like a QLAC and use a TIPs ladder to mitigate inflation risk. (Not that different from what we are actually doing although we do have 3 small pensions, one with a diet COLA.
I suspect the responses maybe affected by recency bias. With the stock market doing so well for so many years, higher savings appears to have the stronger case. Would the responses change if we had just experienced a recession, or long overdue correction?
Where is the pension … In a rust belt school district teetering on insolvency or the federal government? Big difference
I did some quick back of the envelope numbers.
Joe: $750,000 savings 75% tax deferred, and $60,000 annual pension (no COLA).
Bill: $2,250,000 savings 75% tax deferred, and $0 pension.
Both have social security income.
If we assume the pension is the equivalent to a bond, and if $60,000 annual is equivalent to a 4% withdrawal, then the “bond” is worth $1,500,000.
Let’s assume Joe’s pension is taxable at 12% and Bill’s 4% withdrawal is also taxable at 12%. Joe’s tax is $7,200 and Bill’s annual tax is $10,800.
However, Bill can take from both taxable and non-taxable savings. If we use 25%/75% then Bill’s taxable account is $562,500 and at 4% the withdrawal is $22,500 and the 12% tax is $2,700.
My observations:
I’d assume Bill would use the tax advantaged approach, so his income per year would be $4,500 more than Joe’s, all other income being taxed equally (an assumption).
Bill’s tax deferred account is $1,687,500 which is larger than Joe’s pension if we think of it as a bond.
Bill can invest his $2,250,000 at get at least 5% annual return, or $112,500 annual return. This would exceed his hypothetical annual withdrawal of $90,000.
If the pension stops after 25 years of retirement with Joe’s death, then Bill’s residual account value would seem to be larger, possibly $2,000,000 or more.
One issue with pensions is they might not be cast in stone. For example, certain Public Pensions in Illinois are severely underfunded.
Just my 2 cents, on a 1 cent envelope.
I’d be very happy with either option. 138k is way beyond my expected income needs for retirement. If I had to pick I would probably choose the pension option, and after I had a nice cash reserve I’d go 100% stocks with that 750k savings, since that would probably more than make up for any (normal) inflation concerns long term.
Based on the comments here, i wonder why there is general angst over the demise of pensions. 😳 To many folks it seems they would rather go it alone.
Is there general angst over pensions? I don’t think so. If they were in high demand I think companies would offer them to secure better employees.
I can only speak for myself, but the fact that Joe’s pension has no COLA, and Bill has $1.5 million more in assets makes the choice easy. The OP asked us which scenario we’d prefer, not what we think of pensions!
Interesting. I guess I’m too conservative, but i like the $60,000 guaranteed income rather than face the markets for basic income. My pension doesn’t have a COLA either.