What if I have to fund more of my retirement myself?

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effillus
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What if I have to fund more of my retirement myself?

Post by effillus »

This is an asset allocation question: There's more and more talk about the future viability of Social Security (I'm 65 and claiming), given the current economy and reducing contributions to the payroll tax. Plus, there's more and more talk about the future of public pensions (I receive a moderate pension from the state of Illinois, where pension are only about 40 percent funded and precarious, to say the least). Given the possibilities that my future SS and pension payments may be reduced and I will have to fund a greater portion of my retirement myself out of personal savings and investments, I am debating with myself: Should my allocation be MORE aggressive, given my age, in order to promote the likelihood of future growth, or LESS aggressive in order to assure that I have cash when I need it? Or am I silly to even be worrying about this?
delamer
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Re: What if I have to fund more of my retirement myself?

Post by delamer »

It isn’t silly to consider the possibility that SS benefits or your pension could be reduced.

But how that should impact your allocation depends a lot on the level of your nest egg relative to the level of your expenses.
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9-5 Suited
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Re: What if I have to fund more of my retirement myself?

Post by 9-5 Suited »

If you are worried about this, I would assume you will receive 75% of your expected pension/SS values as a “bad case” scenario and then set an asset allocation with the rest of the money that allows you a high probability of achieving your desired annual expenses less the pension/SS. And ideally an allocation that allows you to sleep at night, ie not riskier than you can realistically handle.

I wouldn’t set an allocation that anticipates cataclysmic events like SS or pension going away entirely. That would very likely lead to sub optimal decision making and the likelihood of it happening is very small. We have a way of adapting.
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FiveK
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Re: What if I have to fund more of my retirement myself?

Post by FiveK »

That is a judgment call, with no clearly correct answer except in hindsight.

E.g., your trade-off might be a more conservative allocation that is likely to have your spending ability fall short of what you want, vs. a more aggressive allocation that has a better chance of providing your desired spending ability but also may cause you to fall further short than the conservative allocation. The choice is yours....

If, however, a conservative allocation would likely give you all the spending ability you want, that's your answer.
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Re: What if I have to fund more of my retirement myself?

Post by 000 »

Keep working, stay healthy, and get out of any debt you have.
Grt2bOutdoors
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Re: What if I have to fund more of my retirement myself?

Post by Grt2bOutdoors »

It's silly of you to assume your Social Security benefits will be cut, especially as you state you are age 65 AND already claiming (receiving it). Why? Because at the present time, the trustees report states that it may be a future event where benefits could be reduced, but those presently claiming don't have that issue - the benefits you receive today are present value benefits, not future value benefits and the fund is actuarial sound. It will be future claimants who may have an issue. Again, the key word is "may" because circumstances can change anytime between now and then.

As for Illinois, you would be smart to assume that pension could be cut at any time if you are not already drawing benefits or if you are younger than age 75.
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Re: What if I have to fund more of my retirement myself?

Post by Beehave »

My unschooled thoughts:

If we enter a period of strong growth, then pension and SS funding should improve and stocks should do well. The major concern would be if inflation took off also.

If we enter a period of decline, then the financial conditions of pensions and SS will likely decline as well and stocks won't be likely to be doing well either. You may well need cash and bonds to ride that period out. There may be defaltion.

But decline can also come with stagflation.

For someone with significant stakes in pension and Social Security, it seems to me that funding some "period of time" (expected expenses for say a year or two) with a liquid asset and then emphasizing inflation protection and growth makes the most sense out of a fraught future.

Certainly, it is worth hoping to live long into retirement, and what a dollar will buy years down the road is almost sure to be less than what it buys today, I'd suggest that growth and inflation protection must be prerserved in the asset allocation if possible (in other words, secure an emergency fund for emergency expenses, secure a living expense fund for "n" months of expenses [you pick "n"], and then have funds dedicated to ensuring you have growth and can withstand a bout of inflation).

I'm trying to suggest taking a long view here, because retirement is hopefully long, and even if there may be upcoming funding issues for a pension or SS, it is conceivable that they are only temporary, whereas a long retirement pretty much absoutely will require growth regardless.
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Re: What if I have to fund more of my retirement myself?

Post by afan »

Grt2bOutdoors wrote: Sun Aug 09, 2020 3:20 pm Because at the present time, the trustees report states that it may be a future event where benefits could be reduced, but those presently claiming don't have that issue - the benefits you receive today are present value benefits, not future value benefits and the fund is actuarial sound. It will be future claimants who may have an issue. Again, the key word is "may" because circumstances can change anytime between now and then.

As for Illinois, you would be smart to assume that pension could be cut at any time if you are not already drawing benefits or if you are younger than age 75.
I do not believe this accurately characterizes the trustees' report. It does not say that cuts will apply only to future claimants. It says there would be a cut in total benefits paid.

Apparently, there is no mechanism to selectively distribute those cuts to some people but not others.

I plan for the benefits cuts to come in about the size and about the time the trustees predict. That prediction is updated annually and the last report noted that it was too soon to tell what effect COVID would have.

Illinois pension: I don't follow it. Is there some provision of Illinois law that lets the state cut pensions differently for those above and below 75? I did mot think so, but again, I don't follow it.

I thought the biggest problems were a constitution that prohibited cutting pensions and plans that are so hopelessly underfunded that there seems no way out. This would have to be resolved with legislation or IL constitutional amendment.
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Steve Reading
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Re: What if I have to fund more of my retirement myself?

Post by Steve Reading »

effillus wrote: Sun Aug 09, 2020 12:52 pm This is an asset allocation question: There's more and more talk about the future viability of Social Security (I'm 65 and claiming), given the current economy and reducing contributions to the payroll tax. Plus, there's more and more talk about the future of public pensions (I receive a moderate pension from the state of Illinois, where pension are only about 40 percent funded and precarious, to say the least). Given the possibilities that my future SS and pension payments may be reduced and I will have to fund a greater portion of my retirement myself out of personal savings and investments, I am debating with myself: Should my allocation be MORE aggressive, given my age, in order to promote the likelihood of future growth, or LESS aggressive in order to assure that I have cash when I need it? Or am I silly to even be worrying about this?
You should think of Social Security and pensions as "safe" assets with predictable income, somewhat like bonds. To the extent those future benefits are more uncertain or might be eliminated, then you might make your current allocation more conservative to make up for it. And you'll want to lower your expenses somewhat as well in the future.

You certainly wouldn't make it more aggressive. If you're comfortable with your current allocation and benefits, then having less in bonds AND with less in future benefits is just riskier than what you have today.

That said, I thought reduction in SS would only affect new people about to claim. Those claiming already would be "grandfathered in". Someone correct me if wrong!
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afan
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Re: What if I have to fund more of my retirement myself?

Post by afan »

Steve Reading wrote: Mon Aug 10, 2020 3:31 pm
That said, I thought reduction in SS would only affect new people about to claim. Those claiming already would be "grandfathered in". Someone correct me if wrong!
I believe the trustees' report simply says there would be a benefit reduction. It does not say "only for future claimants" and as far as I know, there is no mechanism to give more to some retirees and less to others. Everyone would take the same percentage cut.
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Re: What if I have to fund more of my retirement myself?

Post by McDougal »

afan wrote: Mon Aug 10, 2020 4:46 pm
Steve Reading wrote: Mon Aug 10, 2020 3:31 pm
That said, I thought reduction in SS would only affect new people about to claim. Those claiming already would be "grandfathered in". Someone correct me if wrong!
I believe the trustees' report simply says there would be a benefit reduction. It does not say "only for future claimants" and as far as I know, there is no mechanism to give more to some retirees and less to others. Everyone would take the same percentage cut.
Haven’t past changes applied to everyone? I know, no one knows nothing!
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Re: What if I have to fund more of my retirement myself?

Post by tibbitts »

McDougal wrote: Mon Aug 10, 2020 4:52 pm
afan wrote: Mon Aug 10, 2020 4:46 pm
Steve Reading wrote: Mon Aug 10, 2020 3:31 pm
That said, I thought reduction in SS would only affect new people about to claim. Those claiming already would be "grandfathered in". Someone correct me if wrong!
I believe the trustees' report simply says there would be a benefit reduction. It does not say "only for future claimants" and as far as I know, there is no mechanism to give more to some retirees and less to others. Everyone would take the same percentage cut.
Haven’t past changes applied to everyone? I know, no one knows nothing!
Some past changes have, maybe the best example being benefit taxation.
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Re: What if I have to fund more of my retirement myself?

Post by tibbitts »

effillus wrote: Sun Aug 09, 2020 12:52 pm ...Should my allocation be MORE aggressive, given my age, in order to promote the likelihood of future growth, or LESS aggressive in order to assure that I have cash when I need it? Or am I silly to even be worrying about this?
My only comment is that a more aggressive allocation doesn't equate to ending up with more money. You have to be prepared for a reasonable probability of ending up with less than you would with a more conservative allocation, particularly over as short a period as your lifetime.
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Re: What if I have to fund more of my retirement myself?

Post by Artful Dodger »

afan wrote: Mon Aug 10, 2020 3:19 pm
Grt2bOutdoors wrote: Sun Aug 09, 2020 3:20 pm Because at the present time, the trustees report states that it may be a future event where benefits could be reduced, but those presently claiming don't have that issue - the benefits you receive today are present value benefits, not future value benefits and the fund is actuarial sound. It will be future claimants who may have an issue. Again, the key word is "may" because circumstances can change anytime between now and then.

As for Illinois, you would be smart to assume that pension could be cut at any time if you are not already drawing benefits or if you are younger than age 75.
I do not believe this accurately characterizes the trustees' report. It does not say that cuts will apply only to future claimants. It says there would be a cut in total benefits paid.

Apparently, there is no mechanism to selectively distribute those cuts to some people but not others.

I plan for the benefits cuts to come in about the size and about the time the trustees predict. That prediction is updated annually and the last report noted that it was too soon to tell what effect COVID would have.

Illinois pension: I don't follow it. Is there some provision of Illinois law that lets the state cut pensions differently for those above and below 75? I did mot think so, but again, I don't follow it.

I thought the biggest problems were a constitution that prohibited cutting pensions and plans that are so hopelessly underfunded that there seems no way out. This would have to be resolved with legislation or IL constitutional amendment.
I agree with you as regards to Social Security. I just read the Trustees Report summary as well as the Center for Budget and Policy Priorities analysis. They're clear in the 2020 report that by 2035, Social Security will have exhausted their reserves. From the CBPP...

2035 is the “headline date” in the trustees’ report, because that is when the combined Social Security trust fund reserves — that is, the excess contributions it has collected and invested in Treasury bonds over the past three decades — will be depleted. At that point, if nothing else is done, the program could pay 79 percent of scheduled benefits, mostly out of workers’ ongoing contributions, a figure that would slip to 73 percent in 75 years.

If nothing is done, we're looking at a 21% reduction for all beneficiaries. 2035 is a few years away, and so they can certainly make some changes to partially or fully reverse the planned reductions. The trustees report primarily suggests raising the tax, increasing the level of income to be taxed, and reversing the tax deduction on employer provided health insurance and the employee portion protected from tax under section 125 plans.

They also note that the "excess contributions" held in treasury bonds amount to $2.9 trillion, and these will be cashed in over the next 15 years adding to the overall budget deficit.

My wife receives a small State of Illinois pension, and as you noted they would need to rewrite or amend the constitution to reduce benefits. While I haven't looked at the actuarial assumptions, I think a big part of Illinois' problem is a guaranteed 3% annual COLA. This may have been a reasonable assumption when they revamped the pension system in the mid 90s, but in recent years has resulted in benefit increases far exceeding actual inflation.
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Re: What if I have to fund more of my retirement myself?

Post by Grt2bOutdoors »

afan wrote: Mon Aug 10, 2020 4:46 pm
Steve Reading wrote: Mon Aug 10, 2020 3:31 pm
That said, I thought reduction in SS would only affect new people about to claim. Those claiming already would be "grandfathered in". Someone correct me if wrong!
I believe the trustees' report simply says there would be a benefit reduction. It does not say "only for future claimants" and as far as I know, there is no mechanism to give more to some retirees and less to others. Everyone would take the same percentage cut.
I don’t believe there is precedent for everyone receiving the same percentage cut. Pensions which go through a benefit cut usually inflict the most damage on those of working age in a declining scale into age 75, at least that has been my experience in reading the notifications my relatives have received over the year from pensions they had vested benefits in and were currently receiving benefits. I believe the thought process is those of an advanced age have little in the way of human capital to be able to recoup shortfalls in their paid benefits. In the past when there was a perceived shortfall, there was action taken by Congress where the full retirement age was gradually increased thereby shortening the length of time some recipients would receive their benefits due to death (the older you have to be to claim the less time you may be able to collect).
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Re: What if I have to fund more of my retirement myself?

Post by afan »

Except that we are dealing with current federal law for SS and IL statutory and constitutional law for the state pension. None of these, apparently, permit selective cuts for some people but not others.

For SS, read the trustees' report.
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Re: What if I have to fund more of my retirement myself?

Post by bertilak »

An aside:

If you are worried about a cut in SS could than not be made up by spending some of your nest egg on a annuity?
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Re: What if I have to fund more of my retirement myself?

Post by Grt2bOutdoors »

bertilak wrote: Tue Aug 11, 2020 7:17 am An aside:

If you are worried about a cut in SS could than not be made up by spending some of your nest egg on a annuity?
The cost of an annuity has gone up due low interest rates.
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Re: What if I have to fund more of my retirement myself?

Post by dbr »

You can't asset allocate your way out of spending too much. If you really want to plan for taking more income from your portfolio later you have to spend less now. Generally the optimum asset allocation is more stocks at higher need to spend, but the overall success starts to fall to untenable levels if the spending is too much. By spending we mean portfolio withdrawals.

These things can be modeled in programs such as www.firecalc.com . There is an "other spending/income" tab where you can figure out how to imply changing income from pensions or SS. After that try different asset allocations compared to just reducing the planned spending rate.
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Re: What if I have to fund more of my retirement myself?

Post by TN_Boy »

effillus wrote: Sun Aug 09, 2020 12:52 pm This is an asset allocation question: There's more and more talk about the future viability of Social Security (I'm 65 and claiming), given the current economy and reducing contributions to the payroll tax. Plus, there's more and more talk about the future of public pensions (I receive a moderate pension from the state of Illinois, where pension are only about 40 percent funded and precarious, to say the least). Given the possibilities that my future SS and pension payments may be reduced and I will have to fund a greater portion of my retirement myself out of personal savings and investments, I am debating with myself: Should my allocation be MORE aggressive, given my age, in order to promote the likelihood of future growth, or LESS aggressive in order to assure that I have cash when I need it? Or am I silly to even be worrying about this?
How much of your spending is covered by your pension and SS? What is the withdrawal rate from your savings now?

For example, just making up numbers, maybe your SS + pension is 60k and you withdraw 20k per year from a nest egg of size $500,000, so your spending is 80k per year. Knowing those numbers would tell me how much I'd worry about pension or SS cuts.

If your pension and SS pay most of your expenses, I think an annuity would be a bad idea.

I would worry more about the Illinois pension than SS.

Also, the potential benefit cut to SS would occur when you are 80. Which gives you a lot of time to consider what to do. Although I do not argue that current law says there would be cuts across the board, I personally would not worry much about my benefits being cut were I now 65 and claiming.
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Re: What if I have to fund more of my retirement myself?

Post by CoAndy »

Grt2bOutdoors wrote: Sun Aug 09, 2020 3:20 pm It's silly of you to assume your Social Security benefits will be cut, especially as you state you are age 65 AND already claiming (receiving it). Why? Because at the present time, the trustees report states that it may be a future event where benefits could be reduced, but those presently claiming don't have that issue - the benefits you receive today are present value benefits, not future value benefits and the fund is actuarial sound. It will be future claimants who may have an issue. Again, the key word is "may" because circumstances can change anytime between now and then.

As for Illinois, you would be smart to assume that pension could be cut at any time if you are not already drawing benefits or if you are younger than age 75.
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Re: What if I have to fund more of my retirement myself?

Post by willthrill81 »

Grt2bOutdoors wrote: Tue Aug 11, 2020 8:27 am
bertilak wrote: Tue Aug 11, 2020 7:17 am An aside:

If you are worried about a cut in SS could than not be made up by spending some of your nest egg on a annuity?
The cost of an annuity has gone up due low interest rates.
That's true, but the impact of the annuitant's age still has a larger impact on SPIA payout rates. A 75 year old, opposite sex couple can still get a joint lifetime SPIA paying a fixed nominal 6.5% right now.
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Re: What if I have to fund more of my retirement myself?

Post by CyclingDuo »

effillus wrote: Sun Aug 09, 2020 12:52 pm This is an asset allocation question: There's more and more talk about the future viability of Social Security (I'm 65 and claiming), given the current economy and reducing contributions to the payroll tax. Plus, there's more and more talk about the future of public pensions (I receive a moderate pension from the state of Illinois, where pension are only about 40 percent funded and precarious, to say the least). Given the possibilities that my future SS and pension payments may be reduced and I will have to fund a greater portion of my retirement myself out of personal savings and investments, I am debating with myself: Should my allocation be MORE aggressive, given my age, in order to promote the likelihood of future growth, or LESS aggressive in order to assure that I have cash when I need it? Or am I silly to even be worrying about this?
Not silly to be worrying about it all given the weekend headlines, but let some dust settle first. Time will tell, but for now...

What's your current AA and what would you change it to in a meaningful way that would make a difference without incurring a level of risk that you would not be rewarded for over the next decade or two?

There is always the option to do some part-time work or consulting work now for a few years to bring in a little cash flow while you stock pile what you don't spend from the pension and SS (without mucking up your taxes and IRMAA).
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Re: What if I have to fund more of my retirement myself?

Post by afan »

If you have the ability and opportunity to bring in money by working more, you should consider doing so until you feel comfy with your retirement finances.

Not everyone has that option.
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Re: What if I have to fund more of my retirement myself?

Post by TN_Boy »

afan wrote: Tue Aug 11, 2020 1:51 pm If you have the ability and opportunity to bring in money by working more, you should consider doing so until you feel comfy with your retirement finances.

Not everyone has that option.
Without more information from the OP, such as the information I suggested providing, I think we have nothing to say. (It's certainly not time to suggest going back to work!).

If the OP's finances are such that cuts in SS and pension would be devastating (e.g. very limited investments), then suggestions could be made. But we have no idea from the information thus far whether that is true or not.

So, OP, give us a few more details.
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