Author Topic: Pension and inflation  (Read 4824 times)

process

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Pension and inflation
« on: February 22, 2014, 07:45:51 AM »
Can anyone help me figure out how much I have to save in order to retire, with my pension as a factor?  I will get approximately 24000/year when I retire, but there will be no COLA.  Initially, I will be able to live entirely on the pension (for a couple of years), but due to inflation the value of that 24000 will decrease every year.  How do I calculate how much I have to save to off-set the loss due to inflation?

warfreak2

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Re: Pension and inflation
« Reply #1 on: February 22, 2014, 07:57:31 AM »
What pension do you have, that isn't index-linked?

justchristine

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Re: Pension and inflation
« Reply #2 on: February 22, 2014, 08:11:33 AM »
Before my company decided to terminate our pension I was struggling with the same problem until I found cfiresim.com.  You can enter your pension as not adjusted for inflation and then play with your savings to find a success rate you are comfortable.

arebelspy

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Re: Pension and inflation
« Reply #3 on: February 22, 2014, 08:20:28 AM »
Can anyone help me figure out how much I have to save in order to retire, with my pension as a factor?  I will get approximately 24000/year when I retire, but there will be no COLA.  Initially, I will be able to live entirely on the pension (for a couple of years), but due to inflation the value of that 24000 will decrease every year.  How do I calculate how much I have to save to off-set the loss due to inflation?

Essentially you'll want to find out how much per year that loses in real value, then calculate what sort of stache you need to compensate for that loss.

You can take a guess at inflation, or use historical inflation via something like www.cfiresim.com

If, for example, I put in the all default scenario (75/25 stocks/bonds allocation, default fees, etc.), retiring 2014, change spending to 24k/year, start pension in 2014 for 24k that is not inflation adjusted, a $300k portfolio gives you the typical 95% success rate.

This doesn't include any Social Security, which will help as well.

Go run your own scenarios there and play around with different portfolio amounts, but I'd say somewhere in that 300k neighborhood should be good.

EDIT: CFireSim suggestion beat by justchristine while I was typing up this response and playing with the numbers.  Good call, jc.  :)
EDIT 2: May have found a cfiresim bug around non-cola'd pensions.  Posting on their forums about it.  Hold results pending that.

What pension do you have, that isn't index-linked?

Not sure how it's relevant.. There are lots that don't.
« Last Edit: February 22, 2014, 08:26:53 AM by arebelspy »
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warfreak2

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Re: Pension and inflation
« Reply #4 on: February 22, 2014, 08:25:10 AM »
I don't know very much about them, but I can't imagine why there would be demand for pensions that aren't linked to inflation - seems like it defeats the point of having a pension, if it doesn't provide you with a secure income after you retire.

arebelspy

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Re: Pension and inflation
« Reply #5 on: February 22, 2014, 08:28:50 AM »
I don't know very much about them, but I can't imagine why there would be demand for pensions that aren't linked to inflation - seems like it defeats the point of having a pension, if it doesn't provide you with a secure income after you retire.

Most annuities you buy (which is basically a pension) aren't COLA'd.

COLA is an expensive thing to provide.  It's much cheaper to provide one that isn't.

And since people are bad at understanding inflation, it doesn't seem that big of a deal... at first.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

warfreak2

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Re: Pension and inflation
« Reply #6 on: February 22, 2014, 08:32:11 AM »
Oh, so that's how it is.

arebelspy

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Re: Pension and inflation
« Reply #7 on: February 22, 2014, 08:37:50 AM »
Oh, so that's how it is.

Unfortunately, yeah.  It's even cheaper to provide no pension!  And thus the ball rolls on.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Cassie

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Re: Pension and inflation
« Reply #8 on: February 22, 2014, 11:31:39 AM »
It is better of course to have a pension with a cost of living but I think it is better to have one without then not to have one at all.  Unfortunately, they are really getting to be things of the past.

process

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Re: Pension and inflation
« Reply #9 on: February 22, 2014, 01:28:28 PM »
Thank you, I'll try the FIRE calculator.  Arebelspy, please let me know if there is a bug.  And you are right, most of the people I work with don't really understand their pensions, and just keep working until they are told they can get 80%.  I'm not willing to do that. 

bo_knows

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Re: Pension and inflation
« Reply #10 on: March 02, 2014, 08:29:19 AM »
Normally I'm lightning fast on bug reports for cFIREsim, but I was on vacation :)

Here is what I posted on cFIREsim.com, regarding the bug: http://www.cfiresim.com/phpbb/viewtopic.php?f=2&p=863#p863

So, whats happening here (which you can sort of see if you choose to download the CSV output file), is that the pension is being added to the "portfolio" before market gains/losses are being calculated. So, those 15% successes are as a result of that $24k making some market gains before the spending withdrawal occurs.  This is probably not the way to do it. We should be adding any pension/income AFTER we calculate market gains, so that something like this doesn't happen.

I'll work on a fix, and probably have it out this afternoon.  Should be easy.

vern

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Re: Pension and inflation
« Reply #11 on: March 02, 2014, 11:49:41 PM »