Author Topic: How much does a pension affect our 'stache?  (Read 2220 times)

SheepDog

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How much does a pension affect our 'stache?
« on: April 29, 2017, 12:47:43 PM »
Quick question about pensions and 'staches.

Wife and I are both mid 20's and working at stable local government / public safety jobs.  We pay into a state ran pension system and do not get a 401k or SS benefit.  Our pensions are based on years of service and final average salary to determine a guaranteed monthly pay out for life after retirement.

Currently assuming no major increases in salary or pension system changes, I can retire at age 52 and receive about 45k a year in benefits, plus a 2% COLA per year after age 55.  I could chose to retire slightly earlier at 48 but receive a slight penalty to by benefits to the tune of about 5-10k less per year.   Medical coverage has been recently changed this year and now the pension system no longer provides health insurance starting in 2018.  Instead, they will begin offering a monetary stipend (has not been defined yet) for the retiree to purchase their own coverage of their choosing.  I fully expect this stipend to disappear before I reach my deadline.  There is currently an ongoing attack on all of Ohio's pension systems and there is a chance that we might not even have a pension system by the time we reach our 50's.

The wife's situation is exactly the same, except she has to work an extra three years to receive full benefits.

Our employers also offer a deferred compensation program which we fully intend to max out after some of our debts are paid off.  These are invested in index funds from Vanguard and we can put 18k each into the accounts. 

I should also note that we have to each work at least 5 more years to reach the 10yr "vesting" requirement.  At that point, if we chose to quit our jobs for private sector work or chose to FI/RE before we reach full retirement age, we are still eligible for a greatly reduced benefit at the above mentioned ages.  We could also chose to take the money from the account if we leave pre-retirement and roll it into a IRA or 401k but we loose the employer contributions if we do so. 

Wow, that turned out longer than I planned!

I guess the basic question I was getting at is how do you think we should plan our savings out and build our 'Stache alongside the pensions?  We don't want to under save and struggle later in life and we don't want to over save and have way more money than we need and struggle through life currently.  We like the idea of FI/RE before we reach pension age but we would be throwing away a lot of money to do so.  The goal is for both of us to retire at the "Early" stage and have enough savings to make up for the early retirement penalty and then some. 

pigpen

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Re: How much does a pension affect our 'stache?
« Reply #1 on: April 29, 2017, 01:31:14 PM »
My wife and I also both have government jobs that offer a pension. The value is calculated similarly to your system. One thing I would do is to check online to see how well-run your state's pension system is in order to account for risk. You don't want to depend entirely on that money and then have it taken off the table 20 years from now. Our state is one of the top-five best funded in the country, so I'm fairly confident that it'll still be around when we need it.

We basically just save as much as we can and account for the pension funds as a bonus that we'll have later as well. Have you used cFIREsim? That allows you to figure in future income streams to check your FI status for various scenarios. For example, if we were considering retiring, say, three years from now, I would estimate what that would make my retirement payments be at age 60 when I'm able to start taking them, and then plug that in as a value that I'll start receiving in 2031 (we're a little older than you guys -- 46 and 42). I wouldn't look at it as an early retirement "penalty" necessarily if you don't go the full 30 years (or whatever your time period is). You're still getting something. Then if those numbers look really good, I might try it for two years with that retirement benefit, or five years -- whatever, you get the point.

Depending on what you spend, the pension can make a big difference in cutting years off your work life, even if you don't get the full benefit. Remember also that the calculations will change quickly if you get a couple of raises and bump the final average salary.

Finally, depending on how confident you are in the long-term solvency of your state's system, you might consider investing a little more aggressively, knowing that you have that money waiting. Some people will look at the pension in the same way as a bond fund when calculating their risk tolerance.

I don't know if any of that helps or not, but if you have any questions, let me know.


RetiredAt63

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Re: How much does a pension affect our 'stache?
« Reply #2 on: April 29, 2017, 04:42:18 PM »
We also had reliable pensions coming, so we were less cautious with our RRSP investments.  Asset allocation was all stocks (well, mutual funds), no bonds.

pigpen

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Re: How much does a pension affect our 'stache?
« Reply #3 on: April 29, 2017, 08:53:00 PM »
We're not quite gutsy enough to do 100% stocks, but we're at 80/20. It's not a bad idea, though. Our pensions will cover somewhere around 75% of our expenses once they kick in.

DoubleDown

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Re: How much does a pension affect our 'stache?
« Reply #4 on: April 30, 2017, 10:01:53 AM »
I'd definitely encourage you to save and invest as much as possible of your take-home pay. If you can save 50-70% of your combined pay, you'll end up rich pretty quickly, regardless of your future pensions. Even though you don't have a 401k at work, you can take advantage of IRAs for both of you and save on taxes. And continue pouring as much money as you can into taxable investments as well. Then, in a few years, you'll have a good idea of when you can make the call on leaving and being sure to have enough, plus having a better idea of just how reliable your expected pensions will be.

I retired early with a deferred a federal government pension (for me regular retirement age is 62, but I left at 47 so I have quite a few years to go before I'll receive anything from it). I've factored it into my overall retirement plans, but because I was fortunate to enough to invest early and regularly (every month, like clockwork), I ended up having enough to quit without the pension. So again, the moral of the story is just save and invest as much as possible, and it will all end up being clear soon enough.

mustachianteacher

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Re: How much does a pension affect our 'stache?
« Reply #5 on: April 30, 2017, 02:54:10 PM »
Very similar situation here.

Since you said your pension payments should cover about 75% of your expenses, you will need to save up the other 25%. Whatever that number is, multiply it by 25, and there you have a very rough estimate of what you need to save. Since you will have a longer than usual retirement, you may want to save more, but these are all very back-of-the-napkin calculations.

If the number is less than you thought but you're able to save more, by all means save more. That's what we're doing. I like having options, and the cushion will give us both peace of mind and flexibility.

spjulep

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Re: How much does a pension affect our 'stache?
« Reply #6 on: April 30, 2017, 05:01:05 PM »
How much do you like your jobs, and what part of FI/RE appeals to you? If you really love your jobs and would want to keep working for the fulfillment, planning for another 25 years of work seems reasonable. If you wanted to pursue other interests, it's possible there's a shorter path to FIRE for you, especially since you're not even expecting to get health insurance out of the pension.

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we don't want to over save and have way more money than we need and struggle through life currently

The key is to find opportunities that both save money and increase happiness. I have been thrilled to learn how often these are aligned.

SheepDog

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Re: How much does a pension affect our 'stache?
« Reply #7 on: May 01, 2017, 09:57:31 AM »
How much do you like your jobs, and what part of FI/RE appeals to you? If you really love your jobs and would want to keep working for the fulfillment, planning for another 25 years of work seems reasonable. If you wanted to pursue other interests, it's possible there's a shorter path to FIRE for you, especially since you're not even expecting to get health insurance out of the pension.

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we don't want to over save and have way more money than we need and struggle through life currently

The key is to find opportunities that both save money and increase happiness. I have been thrilled to learn how often these are aligned.

I really don't want to be doing what I'm doing right now for another 20 plus years.  Maybe changing employers sometime in the next few years will change that feeling.  The pension and some other benefits are just too good to leave on the table and walk away from (and because I have zero work experience / training outside of my current job lol). 

My wife on the other hand is passionate about photography.  She has a part-time side hustle and a 2-year degree in photography theory.  Retiring early would allow her to take on more photography work which is what she wants to do.

SheepDog

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Re: How much does a pension affect our 'stache?
« Reply #8 on: May 01, 2017, 10:10:11 AM »
Very similar situation here.

Since you said your pension payments should cover about 75% of your expenses, you will need to save up the other 25%. Whatever that number is, multiply it by 25, and there you have a very rough estimate of what you need to save. Since you will have a longer than usual retirement, you may want to save more, but these are all very back-of-the-napkin calculations.

If the number is less than you thought but you're able to save more, by all means save more. That's what we're doing. I like having options, and the cushion will give us both peace of mind and flexibility.

My math is working out something like this:

Lets assume yearly expenses are 50k (include mortgage).  We'll earn 70k pre tax in retirement at 55 if we work the full term. 

Quitting at 45 might only get us 25k per year but we wont receive even that amount until 55.

We would have to save enough to earn us 50k per year for 10 years or so, then be able to reduce the withdrawal to 25k to add it to the pension.

50,000 / year * 10 = 500,000 +  25,000 / year * 15 = 375,000 = 875,000.  We'd need 875,000 in the next 15 years or so to bridge the gap.  Although at that point I'd be 3 years away from 48 and retiring with a much larger pension.

I just pulled these numbers out of my rear but that's basically the scenario.

In my mind it seems early FI/RE only makes sense financially if we can save up the needed money much earlier than our pension maturity date.  If we can't make it soon enough, it makes more sense to work another couple years to get the full pension.

I really wish we would have thought about this 5 years ago lol.

spjulep

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Re: How much does a pension affect our 'stache?
« Reply #9 on: May 01, 2017, 11:21:24 AM »
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I really don't want to be doing what I'm doing right now for another 20 plus years.

That is super helpful. You might want to post a case study in the forum area if you want more specific feedback. If you were a few years away from pension, I'd stay stick it out. But to invest another 20+ years for a potential payout (remembering that they can take away pension benefits), wow. Make an exit plan, start generating skills for a higher paying job in the private sector or something like that. People who discover the MMM approach in their 20s are so lucky to save their way into FIRE.