Pension
After 30+
years with the same company, my defined contribution pension plan was about 40%
of my pre-retirement salary. The only
decision to make here was to take a slightly lesser amount but with a 50%
continuation for my wife if I pass away before her. Since women usually outlive men, this is a
good decision to make.
Social Security
It was a question
in our email group about social security that started the whole
discussion. You have probably seen many
articles in the online news or other Internet sources about financial advisors
suggesting that you delay taking withdrawals from social security for as long
as possible. However, while it is true
that the longer you delay (up to age 70), the higher your payments will be, the
truth is that that does not factor in the number of payments you are likely to
get. The truth is that the system is
designed so that the average person will get the same amount of total from
social security no matter whether they begin taking payments at age 62, age 66,
or age 70. The totals from all those
starting points will be about the same by about age 80. So, if you die before age 80, then you will
have more income by starting earlier, and if you live longer than age 80, you
will have more income in your later years.
But that’s
just the financial side of things. I
considered two factors in making my decision to start social security at age
62. First, I considered my own life
expectancy. My parents and all their
siblings, except my mother’s youngest sister who is still living, passed away at an average age of
84. My own life expectancy, given that I
had a major heart attack at age 56, is about the same. So the financial equation is not significant
to me. What is more significant is that
I’d rather have the money now, when I can use it, than later when it would just
be more money available to pay a nursing home.
My grandchildren are young enough now that we can spend time with them. My wife and I are healthy enough that we can
do things now. But neither of these may
be true when we’re in our 80’s.
IRA
I initially
just rolled my 401K into an IRA, since it was going to be a year before I could
take any withdrawals without a substantial penalty. Then I considered what I wanted to do with
it. I don’t believe the goal in life is
to just have a lot of money left around to leave to your
children/grandchildren. Certainly they
will be the recipients of at least some of our assets when my wife and I are
gone, but that was probably a couple of decades away at that point.
In the end I
decided to split it into two pieces. One
third I put into a mixed basket of mutual funds, some stock-based and others
bond-based, with a portion in cash-equivalents.
I balanced the risk of the entire pool of funds to be about 60% stocks,
30% bonds, and 10% cash. That is just
sitting there, not being touched in the short-term. While the percentage split changed during the
recent economic downturn, the whole basket weathered it nicely and it’s
continuing to build in value. If I never
have to touch it, that’s fine, but otherwise it will be the place I turn to in
my later years. The fact that this is a
long-term asset is why I can be somewhat more aggressive in the stock-to-bond
ratio than if it was my primary source of near-term income.
The other
part of my IRA was used to purchase a variable annuity that generated a
continuous stream of income that was guaranteed for as long as either my wife
or I were still living. Since I purchased
it at a relatively young age, and before the recent market turndown, I have a
guaranteed withdrawal rate higher than I might otherwise.
Expenses
I also put
some thought into my expenses during retirement. While many of them would not change such as
food, others such as gasoline would be reduced since I was no longer commuting
to work every day. And some, such as
home maintenance would probably increase as our house got older.
In the end,
I had a budget with sufficient income to meet all our expected expenses. While I did not have income from my IRA until
age 59-1/2 and income from social security until age 62, those few years of
reduced income and having to use some of our accumulated savings were not a
major factor.
Chief Learnings
There are a
lot of things to consider when you retire – getting professional advice is
useful
Balance the
level of risk you are willing to take to match your circumstances
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