Tag: pension

Evaluating Annuities, Pensions, and Social Security – SWR Series Part 56

February 6, 2023 – Welcome to another installment of my Safe Withdrawal Rate Series. See the landing page of this series here for an intro and a summary of all the posts I’ve written so far. On the menu today is an issue that will impact most retirees: we all likely receive supplemental cash flows in retirement, such as corporate or government pensions, Social Security, etc. Some retirees opt for an annuity, i.e., transform part of their assets into a guaranteed, lifelong cash flow.

Of course, if you are a long-time reader of my blog and my SWR series you may wonder why I would write a new post about this. In my SWR simulation toolkit (see Part 28), there is a feature that allows you to model those supplemental cash flows and study how they would impact your safe withdrawal rate calculations. True, but there are still plenty of unanswered questions. For example, how do I evaluate and weigh the pros and cons of different options, like starting Social Security at age 62 vs. 67 vs. 70 or receiving a pension vs. a lump sum?

Also, you might want to perform those calculations separately from the safe withdrawal rate analysis, from a purely actuarial point of view. For example, we may want to calculate net present values (NPVs) and/or internal rates of returns (IRRs) of the different options before us. Clearly, NPV and IRR calculations are relatively simple, especially with the help of Excel and its built-in functions (NPV, PV, RATE, IRR, XIRR etc.). However, the uncertain lifespan over which you will receive benefits complicates the NPV and IRR calculations. How do we factor an uncertain lifespan into the NPV calculations? Should I just calculate the NPV of the cash flows up to an estimate of my life expectancy? Unfortunately, the actuarially correct way is more complicated. But Big ERN to the rescue, I have another Google Sheet to help with that, and I share that free tool with you.

Let’s take a look…

Continue reading “Evaluating Annuities, Pensions, and Social Security – SWR Series Part 56” →

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”” →

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis! Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”” →

The Ultimate Guide to Safe Withdrawal Rates – Part 17: More on Social Security and Pensions (and why we should call the 4% Rule the “4% Rule of Thumb”)

Welcome back to our series on Safe Withdrawal Rates. This is already the 17th installment! See Part 1 here and make sure you also check out the Social Science Research Network Working Paper we posted on the topic, now with 2,000+ downloads!

In any case, if you have followed the series so far you must have noticed that we are no fans of the 4% Rule and much of what we posted here dealt with the “4%” portion of the 4% Rule. For example, in Part 3 of this series we show that when equities are as expensive as today (Shiller CAPE > 20), failure rates of the 4% Rule have been unacceptably high in historical simulations.

But I think I missed this really important point:

The only thing more offensive than the “4%” part is the word “Rule”

That’s because the word “Rule” makes it sound as though the 4% is some sort of a scientific or mathematical constant. But it’s not. It ain’t scripture either, even though it’s often portrayed that way! There is no one-size-fits-all solution for withdrawals in retirement. With today’s lofty equity valuations and measly bond yields, a 3.25% to 3.50% initial withdrawal rate would be much more prudent. But there is another element that creates just as much variation in SWRs: Different assumptions about Social Security and/or pension benefits: The benefit level, the number of years before benefits kick in, how much of a haircut you want to assign to account for the risk of potential future benefit cuts, etc. and they all create so much variation in personal SWRs that the whole notion of a safe withdrawal rate “Rule” is even more absurd. The 4% Rule should be called the 4% Rule of Thumb because 4% is merely a starting point:

SWR = 4% Rule of Thumb

+/- adjustments for equity/bond valuations

+/- adjustments for idiosyncratic factors, e.g. age, Social Security, pensions, etc.

How much of a difference do these idiosyncratic/personal factors make? A huge difference! A prime example is the case study I worked on over at the ChooseFI podcast: a couple in their early 50s expects pretty generous Social Security benefits after a long career and probably wouldn’t have to worry too much about future benefit cuts. If they both wait until age 70 to claim benefits and are able to reduce their withdrawals from their portfolio dollar for dollar once Social Security kicks in, their Safe Withdrawal Rate estimate goes up from a measly 3.5% to somewhere around 4.5% or even 4.75%. Instead of saving 28.6x annual expenses, they’d need only 22.2x or even 21.1x. That’s a difference of several $100k!

How to quickly and easily gauge the impact of future cash flows from Social Security or pensions on the SWR is the topic of today’s post! Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 17: More on Social Security and Pensions (and why we should call the 4% Rule the “4% Rule of Thumb”)” →

The Ultimate Guide to Safe Withdrawal Rates – Part 4: Social Security and Pensions

Title Picture credit: Flickr

Update: We posted the results from parts 1 through 8 as a Social Science Research Network (SSRN) working paper in pdf format:

Safe Withdrawal Rates: A Guide for Early Retirees (SSRN WP#2920322)

After a one-week hiatus over the holidays when we wrote about a lighter topic (dealing with debt, booze, and cigarettes, go figure), let’s return to the safe withdrawal rate topic. We’ve already looked at:

  • the sustainable withdrawal rates over 30 vs. 60-year windows (part 1),
  • capital depletion vs. preservation (part 2)
  • and the current expensive equity valuations (part 3).

The bad news was that after all that number-crunching, the sensible safe withdrawal rate with an acceptable success rate melted down all the way to 3.25%. So much for the 4% safe withdrawal rate! That 25x annual spending target for retirement savings just went up to 1/0.0325=30.77 times. Ouch! Sorry for being a Grinch right around Christmas time!

But not all is lost! Social Security to the rescue! We could afford lower withdrawals later in retirement and, in turn, scale up the initial withdrawals a bit, see chart below. How much? We have to get the simulation engine out again!

swr-part4-chart2
With Social Security (and/or a pension) later during retirement, we can afford higher initial withdrawal rates!

Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 4: Social Security and Pensions” →