Can I Safely, for the most part, Retire?

[Kingghoti]

Greetings, Long time lurker/learner and mostly new poster here with a request for feedback on the "Can I Retire" question.
I am the poster child for financial "don't do's" - mostly I never learned to live below my means until the last 10-12 years.
So, here I am, at 70. I am planning to retire this fall when I'm 71. Slow-go years, here we come!
I would appreciate any feedback both as to financial risk and around my pension payout choice (lump sum vs annuity).

Age:
DW and I are are both 71 this year.

Annual expenses in retirement. Income tax included in All other exp.
20k - Mortgage P&I (28 years left @ 3.125%)
10k - Residence property taxes & HO insurance
15k - Medical
15k - LTC (100% benefit, no elim. period. unlimited lifetime benefit, in-home and domiciliary care)
60k - All other expenses
=====
$120k

Home equity = maybe $150k
Based on supposed market value $550k.
No debt other than mortgage.

Income in Retirement
$65k - SS
$14k - No-COLA annuities from prior jobs
====
$79k

Income deficit: $41K

Investments
Cash: HYSA $40k
IRA/401(k): $700k today 45/55 stock/bond

Pension 12/1/22 and payout choice to make:
$487k lump sum or $32k/yr annuity, no-COLA, 75% survivorship benefit.

Lump sum
Funding the deficit takes 3.4% Withdrawal rate. $41k/($700k+$487k).
Pretty much we'd be "living off our RMDs."

Annuity
If I take the $32k pension annuity the WD rate goes to ($41k-$32k)/$700k, or 1.3%. In year one.

Tradeoffs
I am hesitating to take on an annuity pension at 71 (breakeven against the lump sum is at age 85) versus having a much larger investable balance for inflation and for setting up 3 years of some instrument (bonds to hold to maturity?) for sequence of returns protection.
That'd be $41k X 3 or $123k for the SORR stash. On the other hand, we don't have to worry about 30/40 years of inflation eroding the pension to almost nothing, though

I am trending toward "Yes" I can retire." and "Lump sum."

Any thoughts, criticisms, error callouts, all would be greatly appreciated.

Best! and thanks in advance!! I have learned so much from this community. I feel like just laying this out here has helped me immensely.

[JoeRetire]

I am trending toward "Yes" I can retire." and "Lump sum."

Seems reasonable to me.

[homebuyer6426]

I am trending toward "Yes" I can retire." and "Lump sum."

Agreed

60k - All other expenses

If most of that 60k isn't essential, you could always reduce that spending should you have a need. Provides some cushion

[WoodSpinner]

Op,

I would take the Pension and comfortably retire!

Having faced this decision a few years ago, I underestimated the psychological benefit of the pension in funding my expenses.

You will still have significant investment for growth but much more assured income.

My $.02

WoodSpinner

[delamer]

Do the expenses include income taxes? Because you’ll be paying some.

Have you run numbers as what to expenses and income will be for the surviving spouse when the first of you dies? Sometimes numbers that work fine when you are both alive become a problem when one spouse is gone.

For instance, some expenses obviously go down for a single person (food, medical). But the mortgage, property taxes, and utilities will stay the same.

The bottom line is that spouses rarely die at the same time, and it is important to plan for that.

Getting to your original question, pensions that are financially sound are a boon for retirees. Especially those with a good-sized nest egg in addition, like you have.

[wolf359]

Do the expenses include income taxes? Because you’ll be paying some.

Have you run numbers as what to expenses and income will be for the surviving spouse when the first of you dies? Sometimes numbers that work fine when you are both alive become a problem when one spouse is gone.

For instance, some expenses obviously go down for a single person (food, medical). But the mortgage, property taxes, and utilities will stay the same.

The bottom line is that spouses rarely die at the same time, and it is important to plan for that.

Getting to your original question, pensions that are financially sound are a boon for retirees. Especially those with a good-sized nest egg in addition, like you have.

Good point. Check the survivorship rules for each of the pensions, annuities, and social security after one spouse passes (particularly the spouse whose name is one the pension -- does the survivor get to keep collecting the same amount?)

What are the survivor benefits on the annuities? How much would social security reduce?

[Artful Dodger]

You might want to look at some SPIA calculators. I did a quick check of Fidelity's and you would receive both a greater payment ($33,108 vs the $32,000 and the survivor would continue receiving 100% of the benefit. In addition, if you and she die before receiving the full $487K, the balance would go to your heirs. They also illustrated an annuity with a yearly 2% increase. Your beginning amount would be lower ($27,240), but will hit the $32K range in eight years and keep on increasing, again with the 100% survivor benefit. There are other calculators, so maybe take a look.

[Kingghoti]

Everyone, thank you for your comments up thread! You have given me much to consider

Some responses: no follow up expected

Artful Dodger : Good tip on other SPIA vendors and products. I'll certainly recheck what my employer's defined benefit plan has to offer versus say Fidelity's.

delamer: Yup, I modeled current Fed and state taxes into the expenses. and yes, I have done some survivor's modeling. DW income stream would be my SS ($50k), her $3k / yr pension, and any new pension annuity survivor's portion, should I go that route. Thanks for pointing this aspect out! Also the change in expenses. Housing would be one that I'd see changing, yes?

wolf359: Unfortunately, the current pension income is small and they are all single life. For DW, after I die, hers is $3k/yr. The big question remains $487k Lump Sum Invested, OR used to buy a better SPIA (thanks and a hat tip to Artful D.), or take the company annuity if data shows it's competitive.

WoodSpinner: thanks I totally agree. I have very small risk appetite and the idea of needing a small WD and having an income floor close to expenses is very attractive. I just have to quell the inflation worry.

I'll try to answer more. I especially thank those that said more or less "go for it" since, as noted, I am very risk averse.

[secondopinion]

I would take the annuity.

Even if inflation might eat the value of the annuity payment, inflation would eat the value of the mortgage payment. $20k of that $32k is going directly to pay for the mortgage, a fixed expense. This means only that the net $12k is really the only portion subject to inflation. The other $14k from other annuities place the amount to $26k of income that is unhedged to inflation (since Social Security is hedged). Making $111k in total with all sources, that means effectively (111-26)/111 = 76.58% of your income is immune to inflation. In theory, you could buying a separate annuity to cover the $9k now (with some of the retirement money, say 20%-25% of it); there might be tax rules here that could make a partial rollover into an annuity work in your favor) and then about 70% of fully annuitized income is inflation protected. You can easily cover the inflation increases of that 30% that is not inflation-protected from the rest of the portfolio.

[jharkin]

Op,

I would take the Pension and comfortably retire!

Having faced this decision a few years ago, I underestimated the psychological benefit of the pension in funding my expenses.

You will still have significant investment for growth but much more assured income.

My $.02

WoodSpinner

+1. Take the pension annuity. That would leave not $10k deficit to take from the 700k IRA.. or 1.4%. You could put the IRA in all money market and treasuries and never run out.

[Kingghoti]

I would take the annuity.

Even if inflation might eat the value of the annuity payment, inflation would eat the value of the mortgage payment. $20k of that $32k is going directly to pay for the mortgage, a fixed expense. This means only that the net $12k is really the only portion subject to inflation. The other $14k from other annuities place the amount to $26k of income that is unhedged to inflation (since Social Security is hedged). Making $111k in total with all sources, that means effectively (111-26)/111 = 76.58% of your income is immune to inflation. In theory, you could buying a separate annuity to cover the $9k now (with some of the retirement money, say 20%-25% of it); there might be tax rules here that could make a partial rollover into an annuity work in your favor) and then about 70% of fully annuitized income is inflation protected. You can easily cover the inflation increases of that 30% that is not inflation-protected from the rest of the portfolio.

Very good insight. Thanks. Took me a minute to puzzle this out. Rather than viewing fixed dollar mortgage P&I as a dampening influence on the overall inflation of total expenses, it does help to explicitly assign an equivalent fixed dollar income stream to match it. This splits the picture into two components: part 1, P&I is covered with no inflation risk by a fixed dollar income source, and part 2, All Other expense and attendant inflation is now funded by the remaining income. Of which a sizable portion is supported by SS’s COLA.

Appreciate your thought that having 70% of income as inflation-shielded (meaning either COLA or absorbed by a non-inflating expense) is not alarming. (120-35)/120 = 70.8%. I think it could be at 78% if I wanted to buy a 2% “COLA” adjusted annuity for the $9k expense gap. (120-26)/120 = 78%. Fidelity SPIA calculator says that cost is $163k though. That sounds like too much for the marginal utility of going from 70% inflation resilience to 78%. I have to accept some inflation risk! That’s why the nest egg exists

I really appreciate everyone’s comments I will chew on these alternatives much between now and submitting pension paperwork in the coming months.

Thanks to all!

[financemadesimple]

Greetings, Long time lurker/learner and mostly new poster here with a request for feedback on the "Can I Retire" question.
I am the poster child for financial "don't do's" - mostly I never learned to live below my means until the last 10-12 years.
So, here I am, at 70. I am planning to retire this fall when I'm 71. Slow-go years, here we come!
I would appreciate any feedback both as to financial risk and around my pension payout choice (lump sum vs annuity).

Age:
DW and I are are both 71 this year.

Annual expenses in retirement. Income tax included in All other exp.
20k - Mortgage P&I (28 years left @ 3.125%)
10k - Residence property taxes & HO insurance
15k - Medical
15k - LTC (100% benefit, no elim. period. unlimited lifetime benefit, in-home and domiciliary care)
60k - All other expenses
=====
$120k

Home equity = maybe $150k
Based on supposed market value $550k.
No debt other than mortgage.

Income in Retirement
$65k - SS
$14k - No-COLA annuities from prior jobs
====
$79k

Income deficit: $41K

Investments
Cash: HYSA $40k
IRA/401(k): $700k today 45/55 stock/bond

Pension 12/1/22 and payout choice to make:
$487k lump sum or $32k/yr annuity, no-COLA, 75% survivorship benefit.

Lump sum
Funding the deficit takes 3.4% Withdrawal rate. $41k/($700k+$487k).
Pretty much we'd be "living off our RMDs."

Annuity
If I take the $32k pension annuity the WD rate goes to ($41k-$32k)/$700k, or 1.3%. In year one.

I’m going to disagree here with the other posters and say your retirement plan has significant risk.
You have assumed non-COLA annuities to reduce income deficit but that will get eaten away. In reality, you need to plan for -50k if funding shortfall which puts you at higher than 4% withdrawal rate.

I would recommend getting your expenses down. 120k is way too high. I don’t know about LTC usefulness but if you can’t get that out then you need to get that mortgage down by possibly downsizing from a 550k home.

I will run your numbers through my personal excel file but you can try firecalc or FRP.
Sorry to be the negative Nelly here.

[smectym]

Greetings, Long time lurker/learner and mostly new poster here with a request for feedback on the "Can I Retire" question.
I am the poster child for financial "don't do's" - mostly I never learned to live below my means until the last 10-12 years.
So, here I am, at 70. I am planning to retire this fall when I'm 71. Slow-go years, here we come!
I would appreciate any feedback both as to financial risk and around my pension payout choice (lump sum vs annuity).

Age:
DW and I are are both 71 this year.

Annual expenses in retirement. Income tax included in All other exp.
20k - Mortgage P&I (28 years left @ 3.125%)
10k - Residence property taxes & HO insurance
15k - Medical
15k - LTC (100% benefit, no elim. period. unlimited lifetime benefit, in-home and domiciliary care)
60k - All other expenses
=====
$120k

Home equity = maybe $150k
Based on supposed market value $550k.
No debt other than mortgage.

Income in Retirement
$65k - SS
$14k - No-COLA annuities from prior jobs
====
$79k

Income deficit: $41K

Investments
Cash: HYSA $40k
IRA/401(k): $700k today 45/55 stock/bond

Pension 12/1/22 and payout choice to make:
$487k lump sum or $32k/yr annuity, no-COLA, 75% survivorship benefit.

Lump sum
Funding the deficit takes 3.4% Withdrawal rate. $41k/($700k+$487k).
Pretty much we'd be "living off our RMDs."

Annuity
If I take the $32k pension annuity the WD rate goes to ($41k-$32k)/$700k, or 1.3%. In year one.

I’m going to disagree here with the other posters and say your retirement plan has significant risk.
You have assumed non-COLA annuities to reduce income deficit but that will get eaten away. In reality, you need to plan for -50k if funding shortfall which puts you at higher than 4% withdrawal rate.

I would recommend getting your expenses down. 120k is way too high. I don’t know about LTC usefulness but if you can’t get that out then you need to get that mortgage down by possibly downsizing from a 550k home.

I will run your numbers through my personal excel file but you can try firecalc or FRP.
Sorry to be the negative Nelly here.

I think downsizing the home is probably unnecessary, and any new mortgage may carry a higher interest rate, but otherwise agree w “negative Nelly.”

A substantial current expense deficit vs. relatively modest assets is a red flag. Cut expenses and run a tight ship. Potentially the current down market in both stocks and bonds may continue, and then where would all our balanced portfolios (including ours) be?

Perhaps the train wreck may not happen: but be prepared to survive a prolonged bear market in both equities and bonds.

[secondopinion]

Greetings, Long time lurker/learner and mostly new poster here with a request for feedback on the "Can I Retire" question.
I am the poster child for financial "don't do's" - mostly I never learned to live below my means until the last 10-12 years.
So, here I am, at 70. I am planning to retire this fall when I'm 71. Slow-go years, here we come!
I would appreciate any feedback both as to financial risk and around my pension payout choice (lump sum vs annuity).

Age:
DW and I are are both 71 this year.

Annual expenses in retirement. Income tax included in All other exp.
20k - Mortgage P&I (28 years left @ 3.125%)
10k - Residence property taxes & HO insurance
15k - Medical
15k - LTC (100% benefit, no elim. period. unlimited lifetime benefit, in-home and domiciliary care)
60k - All other expenses
=====
$120k

Home equity = maybe $150k
Based on supposed market value $550k.
No debt other than mortgage.

Income in Retirement
$65k - SS
$14k - No-COLA annuities from prior jobs
====
$79k

Income deficit: $41K

Investments
Cash: HYSA $40k
IRA/401(k): $700k today 45/55 stock/bond

Pension 12/1/22 and payout choice to make:
$487k lump sum or $32k/yr annuity, no-COLA, 75% survivorship benefit.

Lump sum
Funding the deficit takes 3.4% Withdrawal rate. $41k/($700k+$487k).
Pretty much we'd be "living off our RMDs."

Annuity
If I take the $32k pension annuity the WD rate goes to ($41k-$32k)/$700k, or 1.3%. In year one.

I’m going to disagree here with the other posters and say your retirement plan has significant risk.
You have assumed non-COLA annuities to reduce income deficit but that will get eaten away. In reality, you need to plan for -50k if funding shortfall which puts you at higher than 4% withdrawal rate.

I would recommend getting your expenses down. 120k is way too high. I don’t know about LTC usefulness but if you can’t get that out then you need to get that mortgage down by possibly downsizing from a 550k home.

I will run your numbers through my personal excel file but you can try firecalc or FRP.
Sorry to be the negative Nelly here.

Please note that $20k mortgage is a nominal expense and is not subject to inflation. The $14k of existing annuities hedge it mostly. Taking that and Social Security, we have $6k nominal expenses and $35k real expenses unhedged. If the OP takes the $32k annuity, then that becomes $35k real expenses unhedged versus $26k nominal income. The investment portfolio only has to handle $9k real expenses plus the inflation adjustments (not the base) on $26k. This is small against a $700k portfolio; we are very likely to never exhaust the portfolio with this demand (likely, it will be perpetual instead).

In short, not much is eaten away by inflation than you think. Unless the OP plans on potentially leaving a larger inheritance, I see no problem taking the annuity given how much income is already hedging expenses. The sequence of bad returns actually works better taking the annuity because we do not need much from the portfolio right away. I am not seeing how you get the $50k downfall.

Cutting expenses always works, but this would usually be real expenses. And if the portfolio did fail taking the annuity, then it will certainly do so with the lump sum.

[Kingghoti]

I appreciate the contrary comment and counsel! I really do, financemadesimple and smectym.

Assuming an extended bear market, inflation of my individual basket of costs that greatly outpaces SS COLA, reversion of tax rates, SS funding cuts, well, a bevy of black swans is not unthinkable.

Dropping the CCRC at-home care contract is an option and immediately throws out $15k exp. Selling house, moving to an apartment, freeing up some cash, and dropping total housing/maintenance spend, is another train wreck response. And to be honest I figure in another 10-15 years I'd be looking at downsizing anyway, in our early-mid-eighties by then.

As to the $60k generic spend (incl. taxes), it does have some contingency in it. Probably could squeeze $6k out if i had to (gifts, mostly) Sorry if that was misleading to readers. But I, for planning purposes, wanted to load the spend forecast just a bit so as to be over-conservative.

Back testing (FireCalc, FIcalc.app), Monte Carlo sims (FRP. MGP, Right Capital), even when ( if the model permits it) baking in events like a 25% market selloff, lumpy large expenses (new roof, e.g.) seem to produce low probabilities of ruin, in single digits. mostly. I also like the Delphi method to gather input and this board is magnificent for that.

Still have much work to do (planning for the second-to-die scenario, e.g.) but this convo. has helped me immensely. Perhaps it will also be informative to a future lurker, which is my usual m.o. around here.

Thanks!

[CaptainT]

Well 70 year old male life expectancy is 15 years
70 female it is 17.5 years. This is on average. You may have a sense of if you are healthier or less then average.

The 60k unclear expenses worries me. Will that go up or down when not working?

That said you are probably ok although would likely benifit from a budget so you know where your money is going