What Would You Do Game....

[Peter Parker]

When I retire in 3yrs, 8 months, 4 weeks and 5 days (but who's counting) I will have a pension that pays $7000 per month.  My wife and I will both be 60 years old at retirement and we will have about $800K in my 457 (assuming no growth until retirement).  I know this doesn't sound very mustachian, but if my wife and I could spend about $11K per month in retirement, we could live an extravagant lifestyle (i.e. do everything we'd like to do). I know this won't be hard to achieve because my wife will also have a pension and we will both be able to collect social security at some point. In fact our delimma is what will we do with the excess....So here's my What Would You Do questions:

1.  My wife has the ability to take her monthly pension at about $8900 per month OR she could take a LUMP SUM of $1.6 Million What would you do?  Take the monthly pension and invest excess or take the lump sum, invest, and draw against that (as well as the $800K 457) as needed?

2  We can take Social Security at 62, 67(FRA), or at 70 with.  What would you do?

And of course, I'd like to hear why would you make the selections you did. 

Some things to consider--we have three kids that we'd like to help out (but not enable).  We plan on leaving them a our home when we croak (which will be worth about 1.2million--SF area:  What can I say?), but we don't necessarily feel obligated to leave them more than that.  In fact, any giving we do, I'd like to do it while my body is still warm :-}.  We are both currently in good health and plan to live a long life....knock on wood.

Thanks for playing along....

[BeardedMustache]

Re: the pension lump sum... sounds alot like the lottery question.

If you think you can avoid blowing it on big ticket items and earn a rate of return that exceeds the payment amounts then take the lump sum. Also consider the current political environment and tax implocations. Is the pension fully funded or do they have a shortfall? Is your state in financial difficulty? If the answers to these are yes, then take the lump sum.

I'm a bird in the had kind of person, so I'd likely take the lump sum and SS at 62.

[Cranky]

Is she healthy? Do you get the full pension if she dies in 3 years?

[SubmarineNavigator]

When I retire in 3yrs, 8 months, 4 weeks and 5 days (but who's counting) I will have a pension that pays $7000 per month.  My wife and I will both be 60 years old at retirement and we will have about $800K in my 457 (assuming no growth until retirement).

Congratulations.

...   I know this doesn't sound very mustachian, but if my wife and I could spend about $11K per month in retirement, we could live an extravagant lifestyle (i.e. do everything we'd like to do)

We have been living on my Navy pension and my wife's DOD pension [total about $2,000/month] for a few years. We went into retirement with no debt and we are fine.

Your math looks real good ;)

... 2  We can take Social Security at 62, 67(FRA), or at 70 with.  What would you do?

I have been on pension for 16 years. I am still a few years away from Social Security. I have looked at the various levels of benefit I could get at different ages. I do not know what I am going to do. It is a lot more cash then what we need.

[Peter Parker]

Re: the pension lump sum... sounds alot like the lottery question.

If you think you can avoid blowing it on big ticket items and earn a rate of return that exceeds the payment amounts then take the lump sum. Also consider the current political environment and tax implocations. Is the pension fully funded or do they have a shortfall? Is your state in financial difficulty? If the answers to these are yes, then take the lump sum.

I'm a bird in the had kind of person, so I'd likely take the lump sum and SS at 62.

Thanks for the input!

Pension is fully funded and stable.  As indicated, I don't see a need for much more than 11K per month and therefore don't think we'd be blowing it on big ticket items....

[Peter Parker]

Is she healthy? Do you get the full pension if she dies in 3 years?

Thanks for the questions!

She is healthy and both have longevity in our family.  The pensions amounts quoted are with full survivor benefits so if either of us dies the other still gets the pension.

[MDM]

1.  My wife has the ability to take her monthly pension at about $8900 per month OR she could take a LUMP SUM of $1.6 Million What would you do?  Take the monthly pension and invest excess or take the lump sum, invest, and draw against that (as well as the $800K 457) as needed?

Take our best guess at which side of the curve is most likely, and proceed accordingly:

See rows 94-113 on the 'Misc. calcs' tab of the case study spreadsheet if you would like to adjust inputs.  The chart is for a $1,600,000 lump sum vs. $8900/mo.

2  We can take Social Security at 62, 67(FRA), or at 70 with.  What would you do?

Put our situation into http://www.bedrockcapital.com/ssanalyze/ and see what it says.

[Peter Parker]

1.  My wife has the ability to take her monthly pension at about $8900 per month OR she could take a LUMP SUM of $1.6 Million What would you do?  Take the monthly pension and invest excess or take the lump sum, invest, and draw against that (as well as the $800K 457) as needed?

Take our best guess at which side of the curve is most likely, and proceed accordingly:

See rows 94-113 on the 'Misc. calcs' tab of the case study spreadsheet if you would like to adjust inputs.  The chart is for a $1,600,000 lump sum vs. $8900/mo.

2  We can take Social Security at 62, 67(FRA), or at 70 with.  What would you do?

Put our situation into http://www.bedrockcapital.com/ssanalyze/ and see what it says.

Wow.  MDM!  Thanks for the info!

[sokoloff]

I'd take the lump sum, keep it invested 70+% in a broad-based equities mutual fund (up to 30% bonds, though if the money is [logically] for the kids, you're investing for a 30-something year old, not a 60-something year old's time horizon, so I'd go heavily equity-weighted).

That $1.6MM will give you $5K/month with little risk of it ever running out. Add that to your pension and you're already more than there before considering social security. You're very likely to leave a 7-figure sum to the kids with this plan.

[BTDretire]

$8900 x 12 = $106,800
$106,800 / $1,600,000 = 6.675%
You need to earn at least 6.675% to break even, BUT,
You have the $1,600,000 in your hand, it's yours, not just an income stream.
That's important if you did want to leave the money to anyone.
 RE: SS, I'm still working on that for myself, I think the number crunchers need to
develop a program to run through the calc's similar to firecalc.
One important item for the calc is if you draw at 62, you don't spend that out of your retirement accounts and they continue to grow.

[scottish]

Who's backing the pension?   Any chance they could go out of business and take the pension fund as executive retention bonuses?  (for example)

[Bateaux]

I don't trust pensions after having mine robbed with 20 years of service.  Get the money in your name and in your control.  A lot can happen to a pension in 30 years.  Ours was well funded for years, the early boomer retirees started leaving in large numbers and the pension was bleeding cash.  They have kept it solvent for now for those already drawing.  I'd take the lump sum.

[RobFIRE]

Well, sounds like basically you're going to have a lot of money whatever you do.

If I've understood the numbers, you say you've a $7k a month pension, wife could have nearly $9k a month or $1.6m lump sum, and you have a separate 457 plan with another $800k. Then you say $11k a month, so I assume that's the net income from $7k + $9k.

So I think for me, there would be some luxury spending I would enjoy in retirement, such as holidays/travel and meals out. However, with a paid off house I don't think I would be wanting to spend anywhere near an average of $11k a month (I could do it but it would not feel reasonable). Even if I had $2k a month for the basics and another $2k for luxuries, and $20k a year in lump sum allowances (replacing cars, house repairs etc.), I'd still only be around $6k a month. Of course I would want a capital contingency should there be e.g. health or care needs later in life, but I think that would be covered by the capital held to derive income.

So if it were me I would be seeing it as me having a lot of excess money, that I would be looking to put to good use. So probably I would take the wife's pension as a lump sum and invest it, as that would maximise the total amount available to give to charity or leave to children. I would then plan whether I wanted to give money to charity on an ongoing basis, or would prefer to leave a large lump sum on death, and would probably plan to do some of both.

My understanding of the US SS rules are that the payments increase significantly if you defer it, so I would model how that would work if you have long life expectancy. I would go for the option that maximises total income assuming you live to 85 or older.

[former player]

Why are you proposing to work those 3yrs, 8 months, 4 weeks and 5 days?

Also, think about downsizing from a house to a flat for ease of maintenance as you age and lock up and leave for travels before then.

[MrThatsDifferent]

I’d take the lump sum and invest it, add the growth to my monthly budget. You’re going to have an insane amount of money. Enjoy it, you’ve earned it. I’d create a charitable trust to help people in need and leave what doesn’t go to the kids with that trust.

[aceyou]

What do you want and when do you want it? 

My wife and I will be in a similar situation, but with slightly smaller pensions that we'll get around age 50.  Things that sound nice to us:

Lots of travel: a steady monthly income would work ideally for this.
Possibly a house on Lake Michigan or something like that: a lump sum would suit well for this. 

You asked what we'd do...I'd probably take the lump sum and buy a house on the lake immediately.  Then I'd use the pension for property taxes and to travel and live, likely still leaving a large monthly surplus.  That way when I died I'd have all that surplus money from the accrued monthly leftover income, plus whatever your 800k has grown to, plus a valuable property. At some point I'd probably consider employing some of that growing surplus to fun/worthwhile philanthropic pursuits as well.   

That's what I'd do, but again, it just comes down to what YOU want and when you want it. 

Good luck and congrats on setting yourself up so well. 

[Peter Parker]

Seems like the majority says to take the lump sum--and that is what I was leaning toward before asking the question.  I like the notion of not having most of our monthly income in one "pension" basket.  Even though both are well funded, as some you have mentioned, a lot can go wrong over 30 years.  I think if we took the lump sum, that would help "diversify" our retirement income.  I think it might let us "control" how much taxes we pay by deciding how much to withdraw each month.  When to take Social Security, however, is more perplexing

I have always been a "don't pay off the mortgage" guy.  That is what has allowed us to put away $800K into our 457.  So we will still have a mortgage to pay out of the 11K per month.  However, by driving extra money into our 457, we could pay the house off three times if we wanted, so I think it was well worth it. 

That being said, others have commented on the monthly budgeted amount of 11K.  Luxury, to us, means be a lot of things:  traveling for sure is a huge one, as well as helping others  who are in need. Both my wife and I have enjoyed our jobs (even though I bitch about it) and in retirement we may be able to use our professions working with (and giving to) non-profits.  But another "luxury" is being in a position of helping our kids while we are still alive.   

The house that we live in was an old decrepit Victorian that we have restored over the past 17 years and have made into a beautiful home.  While the house is too big for the two of us, we couldn't imagine any other place that would feel like "home."  There is definitely a since of "place" here.  The process of  rehabilitating this house helped instill a good work ethic in my kids (along with my wife's guidance and their own intestinal fortitude).  We are lucky to have three kids who value work and helping others.  I envision a time in retirement, that I travel to wherever they are living and helping them build/restore their own house.  I imagine that would be a good opportunity to not only provide some free labor, but also maybe slip in a few dollars for materials and/or tools.  I like tools :-).  To me this would be a huge "luxury"--giving, helping, being there while I'm alive and hopefully have them remember the time and effort their mother and father spent with them.

I came to the Mustachian way of thinking late.  I had done a number of things right (mostly by accident) and quite a few things wrong.  I suppose we could have been smarter with our money when we were younger and perhaps attain FI earlier and gotten out.  But mostly, I'm pretty happy with the way things turned out.  I have, however, exposed my kids to the MMM and hope they see the value of reaching FI as early as possible.

[aceyou]

Yeah, the most important think to keep in mind that with the position you are in, you really can't make a bad decision.  Either way life is going to be amazing and you will be able to do all the things you just described. 

[Kay-Ell]

I agree with aceyou.  It may take some of the angst out of your decision if you can let it really sink in that there's not a bad choice to make here.  You can check the "personal finance" box and live a life of security and luxury regardless of whether you take a lump sum, or when you draw on SS.

If you take your wife's $8600/month pension and add it to your $7000/month pension, you're still saving $4600/month before even considering SS.  For the sake of (a very conservative) argument say SS for you and your wife rounds your savings to $7000/month - your $800k nest egg turns into something like 11.6M (yes, eleven) over the next 30 years with a 6% rate of return.

On the other hand if you take the lump sum your liquid assets will come to about 2.4M.  For the sake of argument we'll use the same $2400/month SS number (for both of you) that I pulled from thin air for the previous scenario.  This means your monthly income consists of $7000 (your pension) plus $2400 (SS for both of you), bringing your draw down amount to $1600 to fill out your 11k/month budget.  Using the same 6% rate of return, your 2.4M turns into 12.8M over the next 30 years. 

All of this to say, it hardly matters what you choose at this point.  You'll be fine!  Deciding how to spend down, donate, create scholarships and/or trusts with the excess before you die is where the real decision making will come in.