Government pension and Saving 25x Your expenses

[alexabreana]

Does the save 25X you expenses still apply if you are getting a government pension?? I will retire in 3 years and my retirement will pay me $3,000 monthly for life.  Wondering the save 25% your expenses still applies to  me? 
 
My pension has a 2 percent yearly inflation adjustment

My monthly expenses are 2k

Kristina

[DreamFIRE]

Does the save 25X you expenses still apply if you are getting a government pension?? I will retire in 3 years and my retirement will pay me $3,000 monthly for life.  Wondering the save 25% your expenses still applies to  me? 

Kristina

25%??  No.  You need to be able to pay 100% of your post-FIRE expenses.  So come up with your budget and make sure you have enough to pay the bills, but you should have a buffer and additional for discretionary spending as well.

[BicycleB]

Most government pensions are fine income sources! But, many of them do not include inflation adjustments. Make sure to account for inflation in your planning. Find out whether your pension is inflation adjusted.

Illustration: If you retire at 55 and live to be 91, you've got 36 years coming. Inflation at 2%/year would cut the value of the pension in half by then.

No one can be certain of inflation rates, so no one can be sure of how much the reduction will be. But you can estimate. As a crude example, if you estimate that your pension will have an average buying power equal to 2/3 of its original amount, and the original amount is $3000/month after tax, then you would plan on the pension paying for $2000/month of expenses. In the early years of pension draw, you would invest the extra, so that the resulting investments would compensate you during the phase when the pension's buying power drops below $2000.

Are there ways to protect against inflation, instead of just guessing the future amount? My personal theory is that if you're up for it, a mortgage or set of mortgages that are the same size as the pension would shelter it quite nicely. But I've never seen that described by anyone else.

[alexabreana]

Great advice. Thank you.

[wenchsenior]

The way we are planning to do it is plan for the pension (which theoretically will be inflation adjusted) to cover X$ of our annual projected spend.  So our savings need to cover 25x the remainder of our annual projected spend.

[TheAnonOne]

The way we are planning to do it is plan for the pension (which theoretically will be inflation adjusted) to cover X$ of our annual projected spend.  So our savings need to cover 25x the remainder of our annual projected spend.

Yes, there is no magic here, you simply need the portfolio to be 25 times whatever you want to take from it. If you only need 5k more a year to live, then you really only need $125k

[TomTX]

Does the save 25X you expenses still apply if you are getting a government pension?? I will retire in 3 years and my retirement will pay me $3,000 monthly for life.  Wondering the save 25% your expenses still applies to  me? 

Kristina

25%??  No.  You need to be able to pay 100% of your post-FIRE expenses.  So come up with your budget and make sure you have enough to pay the bills, but you should have a buffer and additional for discretionary spending as well.

OP already answered this.

Their monthly expenses are $2k

Their pension will be $3k, with a 2% bump every year.

Congratulations, OP! You only need to keep a stash for unusual expenses or in case of inflation outpacing your pension.

You win!

[skiersailor]

Be careful about assuming that your expected pension payments are guaranteed.  Many pensions are underfunded even using very aggressive and unrealistic assumptions such as 7.5% net investment returns (your own pension's actuarial assumptions are disclosed in its 5500 - search for "valuation liability interest rate" or "investment rate of return").  The situation is much worse if you recalculate their funding status using conservative return assumptions (which are more appropriate for pension portfolios).  Few pensions will disclose their funding status under conservative assumptions, but you can see an example of how rate of return assumptions affect pension valuations on the Washington State website here (enter 5% for discount rate and watch what happens to funded ratio compared to the default "statutory rate" of 7.5%):

http://fiscal.wa.gov/actuarydata

Even if your state constitution guarantees pension liabilities (assuming you have a state pension), some systems are beyond hope.  Illinois guarantees its pensions, but its tax rates are already extremely high.  If the state raises taxes even higher to pay its pension liabilities, residents will flee the state, the economy will collapse and the pensions will fail anyway.  Illinois is only one recession or market collapse away from no longer honoring its pension obligations.

In theory, the PBGC insures pension obligations, but its guaranteed payments may be much lower than you have been promised, and the PBGC is in imminent danger of collapse due to the multiemployer pension crisis.

Nobody wants to admit that pensions aren't as secure as they lead you to believe, but it seems prudent to discount an expected pension benefit based on one's current age and the pension's funding status using conservative assumptions.  So if a pension states that it is 88% funded at a 7.5% return, and it's 62% funded at a 5% return (like the Washington State SERS pension), then I would assume pension payments somewhere in that range.  The older you are, the higher you would be in that range and the younger you are the lower you would be (since pensions tend to protect retiree benefits at the expense of younger workers).

[Rosy]

The way we are planning to do it is plan for the pension (which theoretically will be inflation adjusted) to cover X$ of our annual projected spend.  So our savings need to cover 25x the remainder of our annual projected spend.

Yes, there is no magic here, you simply need the portfolio to be 25 times whatever you want to take from it. If you only need 5k more a year to live, then you really only need $125k

But wouldn't you increase that $125K by a third to allow for inflation reducing the buying power of the monthly $3K down the road? or would it be best to do like someone suggested and also set aside $1K each month (out of the $3K pension) in the beginning - while $2K still covers all expenses in full?