No matter how hard you try, you can only estimate and forecast so much. Eventually, you’ve got to go to the source and get the real data. I’m talking about the data from the people that are the true sources of data truth. Whether its social security, annuities, or pensions you must eventually get some numbers from those that will pay you.
I’ve been playing with the social security estimator for a while and I’m please with what it shows. That’s assuming that the government can pull their heads out of their butt and make sure it stays funded. Seriously, I’ve been paying into this fund for decades. Eventually, it’s going to be my turn to collect and I better not get screwed. But this is a happy article and I’ll get around to showing how the social security estimator works. Today, we get to talk about the other magical income source I receive and that’s my corporate pension.
A couple of years ago, my Senior Vice President and I were talking about retirement. He seemed to be getting tired of “the game” and his retirement date sped up by a couple of years. Though I’m making over $300,000 this year, he’s making the big money. With bonuses and such I’d bet he’s making at least twice my income. Either way, he told me that I should contact our company retirement team to get an accurate pension estimate under different scenarios. It was good advice and I knew I’d eventually get around to it but I finally made the call.
Our company provides a website that shows what all my retirement benefits are, including an estimate of my pension. The problem is they show my estimate as a single life annuity. And they only show three retirement dates: 55, 62, and 65. The single life payout option would be great if I was single or my wife had plenty of her own money to sustain her in retirement. But that’s not our situation. We’ve been a single family income household for almost all of our 28 years of marriage. She’s dependent on my pension, social security, and our investments to provide a lifestyle and security once I retire.
What I really need to know is what the payout will be if I take Joint Life with 50%, 75%, or 100% payout options. I’ve had to use annuity estimators from Charles Schwab and others just to try and figure it out. Those were helpful but, again, you’ve got to go to the source of truth to get the real numbers.
Buffer Assets – A Bridge To Delay Social Security
The cool thing about receiving information is that you can now action it or at least plan an action. Unless all hell breaks loose and my plans completely fall apart, I will retire at 62 years old. I’ve written often about why but the bottom line is life is too short and it’s time to enjoy the fruits of my labor. Too many of my peers have died either just before or just after retirement and it wakes you up to not take this life for granted. So, 62 is my target date and I’m etching that is stone.
Here’s another nugget of important information to consider – I will take social security at 70 years old. We are a single-earner household so me delaying is best for our finances. This is also important to know because I’ve got to overcome the hardest part of that choice – making sure our finances can last until 70.
Thankfully, I’ve got a corporate pension that will cover our essential living expenses until 70. So, if my wife and I want to have any fun, we need to make sure we have some buffer assets to cover our discretionary spending. We are targeting $50,000 annually in discretionary spending until 70, at which time it’s likely that will reduce as we age.
The chart below explains the source of that $50,000 in annual cashflow. I like this exercise because it gives us clear direction on what needs to be in place before I retire. I’ll explain each asset and how we are setting it up prior to my retirement at 62. Each one of these assets will bridge us to taking social security at 70 years old.
NQ 401k (Restoration Fund)
Because I’m a highly compensated employee, this fund is available to me. Unfortunately, I’m limited to how much I can contribute to my 401k but I’m using this fund to specifically cover our discretionary (fun) spending for the first 5 years of my retirement. It’s basically a bond with my company, which is rated BBB by S&P, that pays out the balance over 5 years once I retire. We all know the horror stories of people putting all their eggs in their company stock or bonds. I’ve had work friends ask me why I’m not putting more into this fund and I remind them of the horror stories.
By retirement, I’ll have about $200,000 in this fund that pays 5.5% to 6% annually. I’ve committed myself to have no more than 15% in this fund. Since it pays so well I’d love to have more in it but managing risk, especially this close to retirement, is critical. With a corporate pension coming my way, this will pay for the first 5 years of retirement fun. Also, since I’m running a bucket strategy, this fund is located within my 2nd bucket (income bucket).
I-Bonds
I’m using I-bonds in the same way I’m using my NQ 401k explained above. This year, my wife and I have started buying these bonds up to our limits ($20,000 annual per couple). We are buying them in $5,000 increments so that we don’t have to cash in an entire $10,000 bond if we don’t want/need it. By the time I reach 67, these bonds will provide approximately $25,000 each year. I like them because they are tax deferred, which means we don’t have to pay interest on them until we cash them.
These are safe government bonds that will keep pace with inflation. Again, because I’ve got the pension these will be used for discretionary spending after my NQ 401k funds stop paying out. I think these bonds should find a way into most people’s taxable portfolio. Again, these are located in my 2nd (of 3) bucket (income bucket).
Dividends
Most of these dividends will come from my taxable stock portfolio. I have a goal of achieving $15,000 in annual stock dividends by June 2025 (when I retire). So, if I achieve that goal then I should be closer to $20,000 by the time I’m 67 (2028). Add in some real estate crowd funding, municipal bonds, and anything else that pays a dividend in my 2nd bucket (income bucket).
Cash
I’ll use whatever cash needed to cover the $50,000 discretionary target. I’ve got $10,000 notated but I’m not sure that will be needed. It’s possible I won’t spend 100% of all five of the $50,000 payments from my NQ 401k. If I don’t spend every one of those dollars then they’ll help cover some spending in my 67-69 years discretionary expenses. Also, my dividends will likely be more than $15,000 annually so I’m not sure I’ll need $10,000 in annual cash available. Either way, I’ll be ready just in case.
Choose, But Choose Wisely
Before we look at all our options, it’s important to state that we will be taking a joint life annuity option. The only question is which one and when. Why are we doing this when the single life is the highest payout? First, I want to keep things simple. Yes, I could take the single annuity option and then get life insurance on me but that’s complicated. Since I manage the investments, it’s important that things are simple for my wife upon my death.
Second, I don’t want her lifestyle to change too much at my death. She’s already going to lose her social security upon my death because she take my higher amount. That automatically lowers her annual income by about $20,000 annually. With the exception of 100% joint life, every option lowers her annual pension income. For example, if we take the 50% joint life annuity option, her annual payment will go from $78,660 annually to $39,330. It get’s cut in half. That means her income will lower $59,330 annually if we chose that option.
Something else that is important is we hope to convert my 401k funds into a Roth IRA. This means I’m wanting to keep our annual income down for as long as possible. This could be a consideration for delaying the pension too. What’s probably important today (since I’ve still got 3 1/2 years until retirement) is that I narrow my options.
Receive Pension @ 62 (upon my retirement)
As already stated, the single life annuity is out. My wife would lose $83,412 annually plus about $20,000 in social security benefits. That’s $103,412 annually she’d lose. I’d need a large life insurance policy and to make sure it’s invested properly to make up for much of that lost income. Again, single life is out.
And for the same reasons, I’m going to eliminate the 50% joint life annuity too. That’s $59,330 ($20,000 social security + $39,330 pension) annually we’d need to replace. That’s asking too much for a life insurance policy and creating an income portfolio. It also goes against my hope of keeping it simple for my wife, who doesn’t have much investment experience.
Lastly, we want to convert my 401k into a Roth IRA and we’d like to do that within the first few years of retirement. I’m working about 1/2 the year in 2025 so my income will still be pretty high. If we delay until 63 (and almost 64 into 2027) then we’d have all of 2026 with the lowest income we’d ever have. That would be a great time to convert. The downside of waiting is I’d have to use more of my assets and we’d have less fun (discretionary spending) in my first 1-1 1/2 years of retirement.
Receive Pension @ 63
After talking through the situation in the above section (taking pension @ 62), I’m going to automatically eliminate the single life and 50% joint life annuity. It’s just too much income to replace given our personal situation (yours may be different).
The biggest advantage of taking the pension at 63 is converting more 401k funds into a Roth IRA. If we delay until 63 we’ll have to come up with some more cash to tide us over. The more I consider the 75% joint life annuity the less I like it. My wife loosing $19,884 in the pension plus $20,000 in social security is tough, especially when considering that inflation will destroy some dollar value too.
Receive Pension @ 64 or @ 65
If we wait until 64 to take my pension, it will definitely have to be the 100% joint life annuity. That seems to be the answer for us. Continuing to wait until 64 or 65 would put a lot of strain on our assets early in our retirement. Additionally, it would take away our fun money when I’ll likely be at my healthiest. If I were to not retire at 62 then we’d be saving more and it would certainly take away any concerns we’d have financially but that’s not the plan. The plan is to retire when I have enough to retire. Enough is enough and that’s what the pension is helping us do, retire at 62 and having lots of fun until 70. Once we hit 70 then nearly $60,000 in annual social security will hit our accounts and we’ll be in fine shape.
Conclusion
Going through this initial exercise was good because it forced me to determine what’s important to me and my wife. We are building our plan to fit our needs. Trying to maximize our guaranteed income streams, reduce our risk, and have as much fun as possible. And let’s not forget figuring out how to take care of our long-term health and care needs plus leave my kids an inheritance. We figured out that if I die before my wife, it’s important to keep things simple for her, minimize the drop-off in her income, and make sure we can minimize taxes while I convert funds into my Roth IRA.
Though I’m still 3 1/2 years away from retirement, it’s already looking like taking the 100% joint life annuity at either 62 or 63 will be our best option. Our buffer assets that pay out from 62-69 will enable us to delay taking my social security until 70. These bridge assets reduce my sequence of return risks because those assets aren’t dependent on how if the stock market goes up or down. We can have our fun, using those buffer assets for discretionary spending. Think about that for a moment, I can spend my buffer assets until age 70 and not have to worry about how the stock market is doing.
There’s a lot involved and most people just don’t think through things. You hear that most people spend more time planning their vacations than their retirement. We used to be like that. The sooner you create a high-level plan the better. And each year you get closer, things become more real and accurate. The finer details need to be addressed the closer you get. You don’t need to be thinking about bridge assets when you are in your 20’s. Heck, and this is not to scare any young person, but who knows what social security looks like in 50 years.
Thanks for reading!
Mr. TLR