Back in Time

Wow! Where did the time go? I blinked, and my first year-and-a-half as a pensioner flew by. Before you start laughing about my use of the term “pensioner,” I’m aware that in many parts of the world, “old age” comes in front of the word “pensioner.” However, since I’m only in my mid-40s, I’m not ready for the Old Man Grumpus moniker just yet. Let’s just agree that pensioner describes someone who receives defined benefit pension payments, like me, for the past 18 months.

I’m not the first personal finance or Financial Independence Retire Early (FIRE) blogger to write about the lessons from their first X number of months in retirement. In fact, it’s a popular topic. That said, none of the articles specifically address pension-related lessons learned. This article fills that void. So, I’ll put aside my usually verbose introduction and reveal six pension-related lessons that I’ve learned during my first 18 months as a pensioner.

Lesson #1: Fixed Income is Peace of Mind and Flexibility

As a pensioner, can you guess what I didn’t worry about in March 2020? If you answered the COVID-19 pandemic-induced stock-market drop, then have a beer on me. As you’re about to find out, I’m good for it. Although the stock market drop proved short-lived, the volatility that followed was not. For retirees who rely entirely on investment withdrawals to pay for their monthly and annual expenses, I bet that volatility was stomach-churning. If that’s you, I’m sorry you had to go through such a ride.

Why didn’t I worry? Well, the fixed income from my pension annuities covers my family’s entire retirement budget. So, I didn’t need withdrawals from my investments. As a result, I ignored the “this time is different” argument and definitely did not sell my stock holdings just to save what was left of my nest egg’s value. I also knew that as a U.S. Federal pensioner, the stock market’s performance would not impact the future fiscal safety of my pension plan.

Lesson #1 Takeaways

The pension annuities gave me peace of mind, for which I felt lucky, grateful, and humble. Knowing the annuities covered everything allowed me to concentrate on other problems, of which there were many. My family and I had just moved to New Zealand (NZ). We were facing a pandemic lockdown of indeterminant length without our household goods, no social support network, and all while navigating online classes for me (master’s student) and my two children (primary school) at our new schools. We were also facing upheaval in our well-made immigration plans, which required a job at certain pay levels for permanent residence (PR). Mrs. G. started looking for a PR qualifying job just as the NZ borders closed, tourism vanished, and the bottom fell out of the local job market. Fun times.

However, since the fixed income also provided flexibility, we quickly altered our immigration plans. Since we didn’t need to work for money, we decided Mrs. G would wait to job hunt until after the pandemic subsided and/or the job market recovered. If that took us longer than my master’s course, then we would apply for a three-year post-study work visa that I was eligible for. After that, she could start looking again.

Now, contrast that set of circumstances with retirees and working families worldwide who suddenly struggled just to meet basic needs. When viewed through that lens, my decision to gut out my last few years in the military for the pension seemed like a quaint First-world problem. That holds true even when compared to the additive medical issues that I incurred from that decision.

Lesson #2: Immediate Fixed-Income Greatly Eases Retirement Budgeting Concerns

Monitoring your retirement income and spending ensures that you don’t outspend your savings and run out of money in retirement. This is true for pensioners and non-pensioners alike. The usual way most retirees monitor their retirement’s fiscal status is through the creation of a retirement budget (or spending plan). Retirees then compare actual retirement income and spending to projected retirement income and spending. While this sounds relatively simple, the complexities of withdrawing money from retirement investments without running out of money too soon mean an entire financial industry exists to assist retirees with this task.

In the FIRE community, most people plan and make the withdrawal themselves. Numerous blog posts, podcasts, and books help them with this task. For what it’s worth, Darrow Kirkpatrick’s retirement withdrawal strategies articles at his Can I Retire Yet? blog are a great resource if you’re looking for methods. Also, if you’re looking for input on which money tracking tools to use, check out my articles in the resources section. If you want to learn how to build a plan, check out my planning section.

Much like I talked about in my book, retirement budgeting for pensioners is much easier, especially if your pension pays out immediately. I also discussed this in my gap number and retirement planning articles. Monthly fixed income allows a pensioner to offset many, if not all, of their fixed spending categories against it. What type of fixed expenses am I talking about? Rent (or mortgage), phone, electricity, water, gas, insurance, etc. Assuming those costs don’t fluctuate too much annually, then a pensioner can eliminate the need to closely track them. Doing this allows the pensioner to pay more attention to discretionary spending categories like groceries, dining out, and entertainment expenses.

Lesson #2 Takeaways

Ideally, a pensioner’s annuity will cover some portion of their discretionary spending categories as well as their fixed spending. However, that’s not always possible. Thus, many pensioners must rely on withdrawals from their savings and/or investments to make up the difference. That said, the amount of money they need is much reduced compared to retirees without pensions, which de-pressurizes the entire process of withdrawing money from savings or investments.

How so? Well, at the end of the day, would you rather monitor spending across 20 categories or 10? And, would you rather require $500 or $5000 of monthly income from your investments? That’s the type of depressurization I’m referring to. Over the past 18 months, I’ve learned that pension annuities minimize complexity and simplify retirement budgeting.

Lesson #3: Two Annuity Checks Are Better Than One

As a pensioner, the easiest way to budget for retirement is to ensure your retirement living expenses are modest enough that your pension covers everything. That’s what happened in my case, although it wasn’t necessarily planned. The end result, though, is that as long as my wife and I don’t overspend on a monthly or annual basis, we can just monitor our overall cash flow. If more money comes in than what goes out, there’s less need to track it daily or weekly.

Besides learning to live frugally as we worked towards Financial Independence, how did we get so lucky? Well, I ended up earning two annuities based on my military service. The Department of Defense (DOD) pays one annuity, which is my official pension. I earned it through no less than 20 years of service. 20-years is the cliff vesting point all active-duty military members must reach if they want to qualify for a retirement annuity. The annuity starts immediately upon retirement and is inflation-protected, so it retains its purchasing power throughout my lifetime. As I noted in my book and elsewhere on this blog, both of those features mean this pension is highly valuable when compared to other pension plans.

Disability

The Department of Veteran Affairs (VA) provides the other annuity. It is a disability payment. I “earned” the disability annuity by incurring a substantial number of medical issues and injuries throughout my career. The VA rated these injuries and issues as permanent, meaning they will plague me for the rest of my life. As such, the VA deemed that if I ever wanted to work full-time again, the injuries would interfere with my ability to do so. As a result, the VA compensates me for potential lost wages with another immediate payout and inflation-protected annuity.

Check out the post that Friend of Grumpus Maximus (FOGM) wrote a few years ago if you want to learn more about why the VA provides this service and how it works.

Let’s be clear, I’m not particularly happy that I racked up so many permanent medical issues as to rate permanent monetary compensation from the VA. I would much rather have a healthy mind and body. That said, I feel incredibly fortunate that such compensation exists. As I found out during the stress and strain of my 15-month master’s program, some of my issues did not wait for old age to manifest and already impact my quality of life. A few problems are genuinely debilitating, such as an inability to type for long periods at a keyboard — which SUCKS if you are a blogger and an author! Thus, I view the disability money as a means to offset the costs I’ll incur from those injuries throughout my life as a pensioner.

Lesson #3 Takeaways

I realize that few pensioners have access to a disability system like U.S. veterans. However, some, like first-responders, might. Some other pensioners worked more than one pensionable job. Yet other pensioners might have a pensionable partner or spouse. And, in the U.S., at least, let’s not forget about social security (another inflation-protected annuity) that kicks in unreduced at around 67 years of age. Therefore, many pensioners may also find themselves with more annuity income than living expenses at some point in their retirement. Congratulations if that’s you! I can honestly tell you that your fiscal-related retirement issues will be less complicated than most retirees.

Lesson #4: For FIRE’d Pensioners, Taxable Investment and Roth Retirement Accounts Are Key

Maybe as a pensioner, you want to realize the true FIRE dream and retire at a substantially younger age than average retirees. Assuming that your pension doesn’t cover all your retirement expenses, or doesn’t kick in right away, means that you will need a taxable investment account. In the U.S. specifically, a large amount of principal in your Roth accounts could also provide the same option. Why? Well, in the U.S., at least, the age at which withdrawals can start penalty-free from traditional tax-deferred retirement accounts like a 401K is 59.5 years old. There are a few loopholes, but they’re complicated, so I won’t address them here.

Withdrawing funds from taxable accounts, or your principal from Roth accounts, does not incur those same penalties. As a result, most pensioners who FIRE will need access to a taxable savings/investment account and/or a Roth account with enough principal to make it to 59.5 years old. For more about why Roth accounts are typically the better option for pensioners, please see my article here!

Scenarios

Let me provide an example by pretending I haven’t retired yet and my VA disability doesn’t exist. Let’s also say my original retirement budget projected that I’d need $75K total but that my pension was only projected to pay $50K. Moreover, say I intended to retire at 45. As a result, we would have needed enough money in our taxable accounts, or principal in our Roth accounts, to support annual withdrawals of $25K for 14.5 years. My calculations show that the starting sum would have needed to be over $300,000, assuming we would withdraw until zero. At that point, our gains in our Roth IRAs and all funds in our traditional retirement accounts would be accessible without penalties because we’d be older than 59.5. That money would have taken us through to the start of social security payments at 67.5 years old etc. etc.

Another scenario for which a pensioner might need a taxable investment account is if their pension does not have a Cost of Living Adjustment (COLA) that fights inflation. In that case, a pensioner may want to build their own COLA, like I discussed in part 7 of the Pension Series. If this sounds similar to your intentions, then you’ll need a taxable investment account in which your COLA money grows and from which to make penalty-free withdrawals before 59.5.

Even Mrs. G and I might need access to our taxable investments and Roth principal, despite my pension annuities covering all of our annual expenses. With the tourism industry dormant in New Zealand due to the pandemic, Mrs. Grumpus may not find a full-time job that meets the immigration requirements for a permanent resident visa. And, since I’d rather not work due to my VA-related health issues, then applying for an Investor Visa may be our only option. The funds in our taxable accounts and principal in our Roth accounts will play a significant role if we need to enact that plan.

Lesson #4 Takeaways

Taxable investments and Roth accounts provide a certain amount of flexibility for pensioners that traditional retirement accounts (in the U.S. at least) can not. Having that flexibility in retirement is great because who knows what life will throw your way? In all cases, though, please note that amassing the sum required for flexibility won’t happen overnight, so plan accordingly!

Lesson #5: Pension Subsidized Healthcare Lives Up to the Hype

Many pensioners qualify for subsidized healthcare from their former employer when they qualify for full pension benefits. In some cases, healthcare is directly subsidized by the pension fund. Still, in most cases, it is funded from a separate trust fund or possibly even directly by the employer. Technically, the correct way to view employer-subsidized healthcare for pensioners is as part of a bundle of defined benefits. In practice, though, most pensioners probably view healthcare coverage as an inextricably linked pension benefit.

When I conducted a scientific survey of current and former U.S. pensionable workers and pensioners for my master’s thesis, pension subsidized healthcare was the one feature that influenced respondents the most towards staying at their pensionable job during their Golden Albatross (i.e., stay or go) decision. Subsidized healthcare for life was also one of the three main reasons I considered staying for my military pension.

Lesson #5 Takeaways

Now, after 18 months as a pensioner, I can say that pension subsidized healthcare coverage lives up to the hype. I slept well during the global pandemic because I knew that if anyone in my family contracted the disease and ended up in the hospital, that sizeable medical bill would be covered. Knowing that my retirement plans will not be irretrievably damaged by an unforeseen medical calamity provides me another “butt ton” of peace of mind. That applies even in faraway New Zealand. While we pay for medical expenses out of pocket, we get to claim the majority of it back through TRICARE or the VA, depending on the issue.

I cannot necessarily say that for the dental coverage we get through FEDVIP, though. As one of my projects this year, I intend to examine if it would be more cost-effective to pay as we go. I suspect it will be, and it has to do with how little dental insurance actually covers compared to the premiums and co-pays.

Lesson #6: Pension Quality Matters

By this point in the article, you may have noticed that I’ve mentioned several pension features that make a U.S. military pension valuable. Those features are immediate pension payouts, inflation protection, pension safety, and healthcare. I’ve written about these features in the past, so if you’re unfamiliar with them, click on the links because I’m not going to cover old ground.

The features mentioned above are all lucrative for pensioners but expensive for organizations to provide. As a result, many pension plans don’t offer all of them or even some of them. This means the less your pension looks like mine, the less likely your outcomes will look like mine. So, take warning, because I’ve not said all pensions provide the same outcomes as the six lessons discussed above!

Conclusion

I didn’t expect to learn so many pension-related lessons in just 18 months as a pensioner. Of course, the COVID-19 pandemic forced some of those lessons, while other lessons resulted from moving overseas. That said, I had to limit my lessons to just six major ones to save this post from breaking the 3000-word barrier. That means there are many minor lessons I’ll try to convey in future articles. In any case, I hope you learned something from my experience so far.

I further hope that I didn’t sound like I was bragging in this article. I fully admit that the dual edge-sword of VA disability simplified my life as a pensioner from a financial perspective. For that, I am grateful. It means, however, that my medical life as a retiree will be far more complicated.

What I was trying to convey when talking about my multiple annuities is that the larger the percentage of your retirement budget that your pension annuity/annuities cover(s), the better off you will be as a pensioner. There are numerous ways to make that happen, including living frugally or working longer. Still, only you can determine what is right for you.

One other thing I’d say is that none of this works without a retirement spending plan or a budget! Even though that spending plan will inevitably change, it will form a departure point to judge how well you are doing from a cash flow perspective as a pensioner. Bottom line, when everything is said and done, I hope your first 18-months as a pensioner prove just as rewarding as mine.

If you’ve already gone through your first 18 months as a pensioner, send me your lesson learned at grumpusmaximus@grumpusmaximus.com. Or, leave a comment below to let me know what lessons you took away. It would be cool to write a part 2 for this article based on reader experiences.