Over the years, I’ve helped many clients figure out how to get their pensions and savings working together to create a financial plan that allows them to retire early and sleep well at night.
That’s exactly why I’m making this video today – to show you whether $730,000 plus a pension is enough to retire at 59 through a story of a client I worked with.
In this article, I’ll show you how they pulled this off, including:
- How we figured out how much they could sustainably spend,
- Why we went against conventional wisdom for their Social Security, and
- Why we did something unusual with their investment mix to better complement their pension income.
So, if you have a pension, congrats! They’re becoming rarer these days. Now, let’s figure out how you can get the most out of yours.
The Details
To start, let me tell you more about these clients. Now, full disclosure, I’ve changed some of the details to protect everyone’s privacy, but the framework of how to tackle this problem is the same.
Fred and his wife, Amy, are 59 years old and are interested in retiring early. They’ve done a great job saving and have $730,000 in total saved in their 403(b)s. Their investments are both in a “moderate” fund, which ends up being around 60% in stocks and 40% in bonds. So, basically, your typical 60/40 portfolio.
Fred and Amy also have pensions from 30 years working as a city planner and a teacher, respectively. They’ve calculated that, if they retire this year, Fred can expect around $5,500 per month in pension benefits, and Amy can expect around $3,250 per month.
They’ve both reached pension eligibility, but they’re struggling to understand when they should take their benefits and how they should use their savings to supplement what their pensions won’t cover.
Unlike most private sector workers, Fred and Amy have a unique advantage of predictable, guaranteed monthly pension payments coming in for the rest of their lives.
But they aren’t sure if what they’ve saved will be enough to supplement their pensions, especially if they retire early at age 59. After all, healthcare costs are a concern, especially before they’re eligible for Medicare at age 65.
Can their pensions and savings support them if they retire early?
Or should they keep working for a few more years, just in case?
And even then, how do they know if their pensions and savings are working together in the most efficient way to allow them to do all the things they want to do in retirement?
Now, if you feel like you are in a similar situation to the client I’m talking about in this video, where you don’t know if you are able to retire in your situation, click the link below to book a call where I’ll personally analyze your situation and give you optimal advice for planning your dream retirement.
So, unsure of whether they have enough saved, Fred and Amy just… kept working, despite being eligible to take their pension benefits.
But as the weeks passed, they kept wondering if they were letting some of their best years go by. After all, they’re in great physical shape now, but how long will they be able to take some of those trips that they’ve been putting off for so long?
Until they figured out a way to understand how their pensions and retirement savings can work together to provide long-term security, they just weren’t confident enough to retire.
So, they just keep working with no real finish line in mind.
Now that you’ve seen how this was truly impacting them, this next piece is extremely important because I’m going to show you if these clients are able to retire with their $730k and pensions, and how you can implement this into your retirement plan.
Rather than putting off their retirement another year… and still wondering if they would have enough, they decided they would ask for help and got in touch with me.
But rather than coming at this problem from the usual perspective of reviewing their spending and budget, we did something a little different.
Calculating Sustainable Income
Instead, we started with calculating the total, sustainable income that’s available to them annually if they retired today.
Now, the first part of this was easy enough. If they retired today, their pensions would provide them with $8,750 a month, or $105,000 per year in pre-tax income.
Income Sources
Pensions: $105,000
Investments: $38,690
Pre-Tax Total: $143,690
Less: Taxes: ($17,690)
After-Tax Total: $126,000
But what about their investments? How much can they withdraw without burning through it too quickly?
For this, we started with the Guardrails method for sustainable withdrawals. This way, we’re not being overly-conservative with their withdrawals since they have guaranteed pension income. If you want to know more about the Guardrails strategy and how it works, I created a video about it, so I’ll include a link to it in the description.
Their initial withdrawal rate would be 5.3%. That equates to $38,690 per year in sustainable withdrawals that’s available from their investments.
With their pensions, that gives them $143,690 in sustainable, pre-tax income in year 1 of retirement at age 59.
After taxes, this looks more like $126,000 per year, or $10,500 a month.
And, of course, this is where Fred and Amy got really excited. $10,500 was actually a little bit more than what they were already spending on a month-to-month basis.
But this is when Amy got a little concerned. What about health insurance? After all, they’d need to pay for insurance out-of-pocket, and Medicare was over five years away.
Of course, she made a great point. Their healthcare expenses would jump if they retired early, drop again when they hit Medicare age, and finally go back up later in life when they needed in-home care, assisted living, or a nursing home.
And what about other one-time expenses like replacing the car or fixing the air conditioner when it inevitably breaks in the middle of July?
So, we mapped all of this out in their financial plan and reviewed their Monte Carlo probability of not having to adjust their lifestyle.
As it turns out, their odds came in around 85%. That’s actually really good! First off, I reminded them that these Monte Carlo analyses are just a tool in the toolbox. They do tend to drive people to be overly conservative.
And I like to tell my clients that this isn’t a test you want to get an “A” on. Somewhere between 70% and 90% is where you want to be. Over 90%, and there’s a good chance you won’t enjoy everything you’ve worked so hard to save for over all these years.
Social Security
But there was one more thing that Fred and Amy hadn’t brought up yet: Social Security. They’d have to wait until at least age 62 to apply. So, they’ll need to lean on their investments a little more, at least early on.
But should they apply early? Would it not be better for them to delay Social Security until age 70 and let their benefits keep increasing?
On the surface, assuming they live into their 90s, the math says that they should delay for as long as possible.
But how does that affect their plan? Would they be better off getting cash flow from Social Security earlier and letting their investments grow more over time?
As it turns out, delaying didn’t benefit them as much as you’d think. If they delayed Social Security until age 70, they would probably receive more in benefits, but their Monte Carlo odds barely moved. They went up from 85% to 86% – but they’d end up leaving less to the kids.
In the end, they decided that the peace of mind that came with earlier benefits outweighed increasing their Monte Carlo score by 1%. It went against the conventional wisdom of delaying as long as possible. And, in my opinion, that was the right thing for them to do.
But here’s the great part about being in this situation: both their pensions and their Social Security increase annually for inflation.
This allowed them to do a couple of things.
First, it allowed them to retire early while still maintaining the kind of spending that they were used to. It’s what makes this whole plan work.
And while not everyone’s pension has a cost-of-living adjustment, Social Security does. That’s why it’s important to zoom out and think about how all of these retirement cash flows work together before you make any decisions.
Optimizing Their Investments
Another way their pensions benefited Fred and Amy is that they gave them an opportunity to optimize their investments within the context of their entire plan.
When we thought about the sources of their cash flows, once they reach age 63 and their first full year of Social Security kicks in, it would look something like this:
- Roughly half of their income will come from their pensions,
- Roughly one quarter will come from their Social Security, and
- The remaining quarter will come from their investments.
So, let’s think this through for a minute. Their pensions and Social Security are essentially bonds – regular income payments from a safe – if not guaranteed – source. And these income sources represent three quarters of their income.
Even if Fred and Amy decide to move their investments 100% into stocks, when you think about it in this context of their sources of income, that puts them at 25% stocks and 75% bonds, overall. That’s a fairly conservative allocation.
Now, this gives them the freedom to move up to 70%, maybe even 80% in stocks for their investment portfolio. If they stick to the Guardrails withdrawal strategy, a down year won’t affect their lifestyle much at all. But it will give them more chances to grow their savings over what we expect will be a 30-year retirement.
Of course, there’s a value in sleeping well at night, so if you’re one who stresses about the market, maybe going all-in on stocks in this situation isn’t right for you.
Fred and Amy decided that they would move to an allocation of 70% stocks and 30% bonds portfolio once they retired. When we re-ran their numbers with this new allocation, the extra growth increased their Monte Carlo odds 85% to 88%.
So, did Fred and Amy retire after this?
They were a little nervous about health insurance, but the benefits of retiring early more than outweighed their fears. And, after pricing it out, the added premiums looked like they’d easily fit into their projected cash flow.
We even drew up a “worst case scenario” to see what things would look like if they only lived on their pensions and Social Security. As it turned out, just these would cover most of their necessities.
So, after considering everything, Fred decided to retire at the end of the year and Amy decided to keep working through the end of the current school year. This would put them both over age 59-1/2 and allow them to easily access their retirement funds, as needed.
And these days, they’re happily retired, they continue to travel, and they haven’t regretted it for a moment.
Now that you’ve seen how retiring at 59 with $730k and a pension can work, you can better evaluate whether this combination provides enough security for your own early retirement.
If you need help figuring out the best way to get your pension and savings working together, then click on the link in the description to book a complimentary call.
I’ll see you in the next one.
If you’re relying on one of these in your retirement and would like a second opinion, 
to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.
