Author Topic: Planning for early retirement when you have pensions at 60 - 4% rule not usable  (Read 5729 times)

Bullseye

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This is a mental problem I've played with for awhile now, looking to see other opinions on it. 

My wife and I both have pensions with 15 years of time in so far, meaning that given our frugal budget, we will easily be able to live on these at age 60 with no other income needed.  Even if we stopped working by age 45 (we're 36 now).   Given this, the standard advice that you are FI/ready to retire when your annual income needs are 4% of your assets is not really valid.  We don't need an ongoing income for life, we just need to cover expenses for 15 years.  I'd be surprised if others here aren't in a similar boat, given the low income needs of many Mustachians, and the fact that CPP/OAS in Canada (like your SS/? in US) can easily amount to $30k/year for a couple, for life (we have other pensions as well as this). 

So how do you plan and invest for that?  My take is to do a spreadsheet showing our annual income needs, add in 3% inflation every year, assume 2% interest on the assets, then extend that out for 15 years till the pensions kick in.  So if starting expenses are $30k, you'd need $600k at the start.  The problem is that this is almost as high as if you just saved enough for the 4% rule!  In that case, you'd need $750k, but that $750k wouldn't run out to zero like in the first example.  The upside of the first example, though, is that your assets would be 100% safe, versus having to use an asset mix that incorporates risk to achieve the 4% SWR. 

So what do you do in this scenario?  I'm comfortable with some market risk, and wouldn't mind having something left at 60 instead of nothing, just in case. 

tooqk4u22

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First, regarding your pensions you need to see what they will pay out upon eligibility based on your various retirement ages and figure out what that amount is on inflation adjusted equivelant today. 

Second - your math is right (re the safe way vs. the 4% way) but all it tells you is that you need to take some investment risk - simply leaving it in a savings account you will lose to inflation.


So look at it in a more reasonable conservative scenario:
For the 15 year from 45 to 60, assuming you want to burn through it entirely then the 4% rule doesn't matter. 

Assuming $30k income needed today, inlfation of 3% per year, and 5% investment returns - you will need $376k if you stopped working today or in nine years when you turn 45 you will need $489k. Still a big number if you are starting from zero and is a testament to the power of compounding.

DoubleDown

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We're in a similar situation. I think you've got it basically right, but probably with some modifications that I think you'll find work significantly in your favor. Here's how I see it working in American terms, maybe some Canadians can translate :-)

You are correct that you need non-pension funds to bridge the gap between the date you stop working and when your pensions and Social Security (CPP/OAS?) kick in. I think you're overestimating the amount though. Assuming a 4% rate of return (corrected for 3% inflation, meaning a 7% real rate of return), you would need about $350,000 saved up in order to last you 15 years, spending $2,500/month. Now, that figure assumes you draw down the principal as well, such that you would have exactly $0 on the day your pension kicked in, so you can modify as you see fit. And of course that example assumes everything works perfectly according to plan, which won't happen. But anyway, you don't need anywhere near $600,000 or $750,000, probably only half that amount.

If you want to end up with some assets when you start taking your pension (not eating up all the principal over the 15 years), then you need to either have a bigger stash saved up, defer quitting longer, earn side income thru part-time work, live on less, or some combination of all of these.

Another possibility is one of you bites the bullet and works, say, for one extra year (quitting 14 years before pension starts instead of 15 years), where you can effectively save about 100% of their income to really add to your stash.

Another possibility is starting one or both of your pensions earlier, if your work allows that. You would likely get a lesser amount, but it would also help you bridge that 15 year gap at perhaps only a small penalty.

It's a bit of a tricky problem, because you have to balance wanting to leave, having enough saved, not shorting yourself out on your pension, but also not "hitting the jackpot" too late in life when all the deferred pensions/etc. kick in, but when you also might not enjoy the financial freedom as much. So I hear ya. But in all, it's a very good problem to have.

Bullseye

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Thanks for the thoughtful responses!  I am pondering my plan....

rjack

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Try using http://www.firecalc.com/ to do your analysis. It allows you to put in future income streams (pensions), current savings, and spending needs.

arebelspy

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Try using http://www.firecalc.com/ to do your analysis. It allows you to put in future income streams (pensions), current savings, and spending needs.

I was about to suggest the same thing.

Also keep in mind - what will your pensions cover after having been eroded for 15 years by inflation?  And do they increase with inflation after that (COLA'd) or not?
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sol

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If all else fails, there are insurance contracts you can take out against the future value of your pension.  Not that I personally condone such a path.

We're in a similar position, and trying to balance saving in taxable accounts with saving in retirement plans that can be accessed before retirement age through rollovers or sepps.  The tax benefits are significant enough to warrant even just swallowing the ten percent penalty to withdraw early, if it comes to that.

In broad outline, our plan is work a little longer than is probably necessary, then either spend more or give more away in retirement if we end up with extra.  Planning for the shorter time horizon is tough if you aren't comfortable with the higher risk that would otherwise be more appropriate.