There are times in life when fears have to be faced. When I was a young, the dark scared the hell out of me. Today, it’s running out of money in retirement. So in July, I ran an article that asked Will I Run Out Of Money in Retirement?
Unfortunately, the scariest scenario of all wasn’t considered – Social Security benefits cut and a pension freeze. Sure, I froze my pension benefit in simulations but that was only a part of a worst case scenario. It would be negligent to not consider a simultaneous social security cut too.
Today, we’re going to freeze the pension and cut social security benefits. How will that impact my withdrawal rate? What is the long-term impact to my portfolio balance? And most important of all, will I run out of money in retirement?
Is Social Security at Risk?
The fear of social security cuts is running rampant in today’s media. Of course, the program has become highly political too, especially in an election year.
We’ve all heard the chatter. The sky is falling crowd says social security will become insolvent. Period! The primary source of social security revenue is the payroll tax, so why don’t we just increase that? I do know this, it must be addressed soon.
If nothing is done, the odds are that 2035 (+/-) will be the year when benefits are cut. COVIS-19 isn’t helping either. Millions of people out of work means fewer people are paying the tax. Studies are starting to come forward saying the virus and its economic impact have shortened the life of social security by 2-4 years.
Here’s the bottom line – cuts to social security are certain if nothing is done. Personally, I’m optimistic because no politician wants to face an angry older voter base. Mix horrible American retirement saving statistics with social security cuts and the end result is more poverty for seniors.
Regardless of how this shakes out, it’s prudent for me to assume some benefit cuts to my planning process. I’ve got to face the fear of what the results will show. Reality can be a slap in the face but it’s still reality. Let’s see how things look …
So, What’s The Damage?
The outcome of this scenario has caused me to take notice. It’s funny how things look good on paper when you show the “Optimal Plan.” The Optimal Plan shows your $1.1M growing to $2.5M, ending income of $147k annually, and the withdrawal rate averaging only 0.7%. That is a sweet plan!
The scary part of the Worst Case plan is a 5% portfolio withdrawal rate that drops the portfolio balance drop to $764k (from $1.1M). This gives a Optimal to Worst Case portfolio range from $2.5M (Optimal) to $764k (Worst). That is concerning and it doesn’t count the expensive travel trailer and truck we were going to purchase. It also doesn’t consider long-term care either.
As concerning as the Worst Case looks, we could minimize the impact by reducing expenses. We do have a $25,000 annual travel plan budgeted and that could come down. And I’m sure we could squeeze some other generous expenses some too. It’s not optimal but it’s doable and could still enable me to retire at 62.
There are some things we just don’t control (i.e. pension, social security, market returns, employment) and that’s what scares people. To address uncontrollable market returns, I’ve forecasted only 3.5% returns in retirement. I could be the greatest employee at the greatest company but still get canned.
But the things we do control can overcome most issues. We can increase our savings rate, reduce expenses, manage investment risk, and work longer. A focus on the uncontrollable can paralyze the best of us so don’t be a victim.
Summary
Thank goodness I ran this scenario. Better the devil you know and in this case pension and social security cuts are the devil. So, is my income floor at risk? Well, it certainly would take a major hit in a worst case scenario. But 40% of my expenses are discretionary, at least that’s what I forecast. This provides some comfort even though it might mean less travel.
When I ran scenarios in July, I didn’t want to consider what a combination pension freeze and social security cut might do to my retirement. Ignorance or being oblivious is not a plan. If retirement is to be blissful and stress free, then look the devil square in the eyes. It’s really that easy.
Thanks for reading!
Mr. TLR