Oh—the days of those old people working for one company their whole career, then telling the personnel department they want their gold watch, and by the way, please deposit my monthly pension check into this account—those are so very rare these days.
In the very early 1980s, companies used the tax code to their favor by shifting the after-work longevity payment responsibility from the company to the employee.
Nowadays, the thought of receiving a monthly autopayment into your checking account (why is it still called “checking?” who writes checks?) seems like winning a lottery.
Most people under 50 don’t even think that Social Security—the system most workers have been forced to pay into for decades—will have any money for them. This fear is usually due to the scare tactics of the media repeatedly stating something to the effect of “Social Security will run out of money around 2035.” They don’t bother to use the descriptor “trust fund” but rather scare people that the entire system—including current workers—will not have any money in the yearly system.
I didn’t calculate our social security earnings into our FIRE budget planning scenario until a few years after we left our careers, and were in the 50s age range. At that age, things start to get real, age starts to get real, and SS claiming is only a decade or so away from the early claiming option if one were to choose to take a reduction.
Private Pension
What if there was a way to get a solid, stable, private pension payment each month? Would you want to know more? Would you feel better knowing that there would be a payment for you as long as you lived, even if you were 107? (based on the claims-paying ability of the company, and any state insurance program).
I know I love the idea of guaranteeing a payment to myself each month. I find this more appealing as I get older and don’t enjoy hassling with selling assets to fill cash-flow buckets and move money around. Even with plenty of automation, it still feels like a job, or at least a chore.
I was with some FI friends and they asked about a rumor that some of us (elders) were going to buy an “annuity.”
Yes, it is true. Some of us are considering a future annuity to ease the process of money handling while aging. They were shocked because they’d always heard that “annuities are a horrible ‘investment’ and avoid them.”
Quickly: I’m not talking about a Variable Annuity and “all its protections.” I’m talking about a future Single Premium Immediate Annuity, SPIA. We give the insurance company some money at XX age, they give us a fixed payment for life.
MDF/BGL/Needs
I stepped back one level explaining base life expenses (Minimum Dignity Floor/Base Great Life expenses). I talked about the strategy of taking a household’s assets (investment, use, home, etc.) and allocating those to expenses over phases of life—or more specifically, cash flow phases.
Decumulation is so HARD
This is the complicated “Retirement” planning. This is not the simplified “take 4% of your portfolio balance on year one to spend and increase with inflation, or worse 4% of your previous balance each year and spend it (way more after up years, less after down years—that’s actually the “guardrails” strategy).
Jim and Chris Methodology.
Jim and Chris have an excellent process that starts with your required spending (MDF). The spending required even if you have no money in any bank/financial institution.
Food, Utilities, Transportation, Housing, Healthcare.
Food in the house/household products, Utilities for your home and communications, one transportation method for the household to share, housing and its associated required costs including maintenance, and healthcare and everything it may encompass. These are for a good life, minimum dignity floor, base great life, but not eating out, entertainment, travel, 2nd car—none of that. Just surviving nicely.
These MDF items are priced from now through an extended End of Plan. Each category has its own inflation rate.
These costs will not go away until you do. These are required.
Everything else is optional, additional, wants/wishes level…even dream level.
Guaranteed Income/Social Capital
Hopefully, a household has social security, maybe a pension, and some savings/investments.
If a household is very, very lucky, this guaranteed income will cover base great life expenses and also wants, wishes, and dreams for the rest of their lives. Not likely in most households.
So how do you guarantee your base bills will be covered with safe income if your SS and no pension(s) is not enough for the rest of your life?
Oh, you use your 4% each year, right? Not the greatest plan because that amount might not be enough in the future (especially if you GoGo now when you’re young and shrink your principal). Or your 4% may be an unspendable amount in your early year because you’ve saved great and have a solid guaranteed income stream.
Many calculations of past market performance show that 4% is underspending while you’re young in order to keep a safe margin of protection for your future self. It is truly the “safe withdrawal rate” based on the max in the worst 30-year period. It’s quite possible that most 30-year periods ahead will be better than the worst case of the past.
Jim and Chris calculate a household’s guaranteed SS and pension income by year and match it against MDF/BGL. If there is a shortage of income, then current savings should be used to purchase some guaranteed income. That is the dreaded “annuity” or SPIA I mentioned. The goal is to guarantee your base needs are always covered with guaranteed income.
This shortage (costs to income) may be immediate when claiming SS, and/or at pension time, or may be a few years later as costs out-inflate your income streams.
To repeat; to have the safest approach to retirement expenses, these expenses need to be covered with guaranteed income. If SS and pension don’t cut it, more guaranteed income should come from a contract with an insurance company (counting on mortality credits) with a SPIA(s).
Drawbacks
Most SPIAs are not inflation-adjusted and each payment has less purchasing power than the month/year before. You can adjust for this by starting your payment amounts a little high, purchasing an inflation-protected annuity, or purchasing additional SPIAs every few years to add in new payments. This might be thought of as a SPIA ladder.
The HOGs get less. If you give your money to an insurance company for these annuity contracts, that money is no longer under your control and available for HOGs. That is unless you buy a guaranteed/period-certain option.
If EOP comes early, we lose. If you sign the contract and then head off to visit the national parks (as old people seem to love) and a wild animal happens to take you out, your life-period payments end immediately. If you have a joint life, then your spouse will get payments unless they lead to your demise—I assume. The goal, live long and get the mortality credits from other insurance company policyholders who EoP earlier.
One strategy is to fund your MDF/BGL with your assets pre-SS/pension phase. This is often suggested because the fixed guaranteed return on delaying your SS claiming is quite high, and guaranteed as I said. This will lower your asset base but increase your guaranteed social capital payments. If your assets are lower, then your available money to purchase your own pension/SPIA is lower.
Current interest rates determine what an insurance company will earn on the lump of money you pay them for your contract, which determines your monthly payment amount. Higher interests’ rates tend to lead to better payments. If you plan for a SPIA ladder and interest rate drop, the expected payout drops. But you will be older with less life expectancy, and fewer estimated average payments so each payment will be a little higher.
You will be older when you’re making these decisions and your cognitive ability will decline over time. You may be sharp and process the logic perfectly, or you may need help and have to trust your advisor (not a salesperson). Setting up this structure ahead of time in a retirement Plan of Record is a wise idea.
Don’t forget the Annuity is based on the claims-paying ability of the company, and any state insurance program.
Why?
A personal pension SPIA is possibly a later-in-life decision whereas Social Security contributions are forced along the way. The results may be similar on payments or may vary greatly.
If you have a Retirement Plan of Record to give you a guided path through your retirement, you can always adjust and modify along the way. If you have no, or a rough plan, the details will be hard to manage and you may have to put your FULL trust into someone else.
How much did you trust advisors along the way versus trusting your own guided plan with assistance?
Maybe now is the time to find someone (younger?) whose strategy matches your vision. Even, even, even if you are overfunded. This planning partner may help ease you into spending more of your assets in the GoGo, and SloGo years to avoid being frugal when unnecessary and ending up in a rest home with many unlived dreams you had well within your resources.
*** Nothing in this article is to be construed as financial advice. I am not a financial planner, nor do I pretend to be. You should always consult your own professional when seeking advice. This post is not a piece of literary mastery, just a random thought I had.
