{"id":950,"date":"2012-05-07T01:46:50","date_gmt":"2012-05-07T09:46:50","guid":{"rendered":"http:\/\/www.cultofmoney.com\/?p=950"},"modified":"2012-05-06T20:04:30","modified_gmt":"2012-05-07T04:04:30","slug":"how-to-retire-on-a-pension","status":"publish","type":"post","link":"https:\/\/www.cultofmoney.com\/how-to-retire-on-a-pension\/","title":{"rendered":"How to retire on a pension?"},"content":{"rendered":"
\"Don't<\/a>
Don't put all your eggs in one basket, even the pension backet.<\/figcaption><\/figure>\n

What is a pension?<\/h3>\n

A pension, also called a defined benefits plan (which provides a defined monthly payment or benefit versus a 401k which employers contribute to, thus a defined contribution plan), provides a set of cash flows over a period of time.\u00a0 Most pensions pay money on a monthly basis, and is funded by employers and employees to differing degrees.\u00a0 This type of arrangement is also called an annuity if you pay the cash value for the future stream of monthly (or annual) payments.<\/p>\n

The differences between an annuity and a pension is usually in who is the primary funder of the monthly cash flows and whether or not you (or your heirs) have access to only the cash flows or the entire amount.\u00a0 Generally a pension only provides monthly payments during your lifetime, whereas some annuities and insurance products will have some left over cash that can be used or inherited (call residual value).\u00a0 It is possible for married couples (and usually domestic partners)<\/a> to have what is called a survivor option that allows the payments to continue for the life of the spouse as well, but the monthly payments over the entire time period (both for you and your spouse) are lower because of the math that at least one of you will live for a significant amount of time.<\/p>\n

\"No<\/a>
No pension? Make your own!<\/figcaption><\/figure>\n

How do you create your own pension?<\/h3>\n

As mentioned above, a pension is just another name for a defined benefits plan and also for an annuity.\u00a0 An annuity is usually the term for a payment now for a series of cash payments in the future.\u00a0 In the most simple terms, the value of an annuity is equal to the discounted future cash flows.\u00a0 What this means is that there is a price now for a series of payments in the future, because of inflation each future cash flow is assumed to be worth less, so eventually that future cash flow doesn\u2019t change the price of an annuity much.\u00a0 Think of the last payment of your mortgage<\/a>.\u00a0 In 30 years, it hopefully won\u2019t seem nearly as much because of your additional earning, and specifically because of inflation making the value of each dollar worth less.\u00a0 You can purchase these from insurance companies and other firms that specialize in annuities.\u00a0 For more money now, you can also inflation protect your future cash flows.\u00a0 Many pensions have this feature built in automatically (much like social security in the US and various state pension plans both in the US and in the United Kingdom and other various parts of Europe).<\/p>\n

Some alternative methods to create a very pension-like set of cash flows in the future are via dividend paying stocks, bonds or other lending (such as person-to-person lending<\/a>), and rental properties.\u00a0 All these have the exact same set of features as a pension plan, however they generally are not government insured or guaranteed like pensions are.\u00a0 Dividend paying stocks generally have an inflation protection mechanism built in, as many companies increase the dividend they pay each year.\u00a0 Sometime this will be greater than inflation, and other times not.\u00a0 Finally, rental properties, either residential or commercial, have the same properties.\u00a0 Rental increases generally keep pace (at least) with inflation.\u00a0 All of these, rental real estate, lending or bonds, and dividend paying stocks, require an investment now in order to produce those future cash flows.<\/p>\n

\"What<\/a>
What to retire early? How?<\/figcaption><\/figure>\n

How to retire early?<\/h3>\n

The most basic answer to this is that you can retire when your expenses are fully covered by all the interest payments you receive, pension or annuity income received, and draw-down in investment accounts.\u00a0 The trick to this is knowing exactly how many payments you\u2019ll need (basically how long you\u2019ll live) and knowing how much return you\u2019ll receive via interest and capital appreciation.<\/p>\n

The best we can do when planning for retirement and knowing whether or not we can retire early is to estimate each of the areas above, and then make sure we have a large enough margin of safety to account for our errors in the planning process such as faulty assumptions, things happening that were unexpected, and the expected average happening in a sequence that we can\u2019t withstand.<\/p>\n

    \n
  1. When we say margin of safety for error, this means being conservative overall when we are building our plan.\u00a0 Think that 8% returns are the historic norm and will apply going forward, maybe use 6% instead.\u00a0 Think that you can get by on 60% of your current expenses?\u00a0 You should probably try 80% or 90%.\u00a0 Think that you\u2019ll build your nest egg big enough saving 10% of your paycheck?\u00a0 Be conservative and try for 15%.\u00a0 These type of planning ideas will keep you from eating cat food (and your cat) when your old and out of cash.<\/li>\n
  2. In addition to being conservative, having a cushion for the unexpected will help immensely.\u00a0 Thinking back over the last 15 years, the market has fallen by 50% twice.\u00a0 Those types of declines aren\u2019t supposed to happen in a market that follows a normal distribution curve.\u00a0 Plan for the unexpected to happen, just like the boy scouts.<\/li>\n
  3. Finally, as mentioned above the market has fallen 50% twice in the last 15 years.\u00a0 If you choose to retire in the year 1999, then simply because of luck (or lack thereof) your retirement accounts likely didn\u2019t provide you any capital appreciation in the last decade.\u00a0 Even if the next 40 years provide the \u201caverage\u201d return, because of the sequencing of those actual returns, you\u2019ll likely need to go back to work as a Wal-Mart greeter.<\/li>\n<\/ol>\n
    \"Retirement<\/a>
    Retirement of your dreams, or nightmares?<\/figcaption><\/figure>\n

    Follow the above recommendations and you too can retire early, whether you\u2019re receiving a state pension, a federal pension, or a pension of your own making.\u00a0 Hopefully you\u2019re one of the lucky ones that still has access to a pension.\u00a0 If you\u2019re looking for an employer that still offers defined benefits, you\u2019d be wise to look for employment in various types of government<\/a>.\u00a0 This includes federal, state, county, city, and various utilities and transportation providers.\u00a0 Some private companies still offer these as well.\u00a0 The question for both however, is whether or not those pension plans are well funded.\u00a0 Many are not, so even if you do the best you can right now, the future is still uncertain and as such, a pension should not be your only source of retirement income.<\/p>\n

     <\/p>\n

    Readers, what are your thoughts on pensions?\u00a0 Do you have one?\u00a0 Do your parents?\u00a0 Are you planning conservatively for retirement or do things need to work out perfectly?<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

    What is a pension? A pension, also called a defined benefits plan (which provides a defined monthly payment or benefit versus a 401k which employers contribute to, thus a defined contribution plan), provides a set of cash flows over a period of time.\u00a0 Most pensions pay money on a monthly basis, and is funded by […]<\/p>\n","protected":false},"author":1,"featured_media":955,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[9,13],"tags":[20,32],"acf":[],"_links":{"self":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/posts\/950"}],"collection":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/comments?post=950"}],"version-history":[{"count":0,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/posts\/950\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/media\/955"}],"wp:attachment":[{"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/media?parent=950"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/categories?post=950"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cultofmoney.com\/wp-json\/wp\/v2\/tags?post=950"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}