Permanence and Pension Money

Greetings, long-lost readers! It’s been over a year since I published my last post about my return to work to qualify for a New Zealand residence visa. A lot happened over that time, so much so that a separate update is warranted. However, for this article, the easiest thing to say is that my return-to-work plan … worked! My family and I obtained NZ residence based on my employment in April 2023, I transitioned to part-time work in August 2023, and we bought and moved into a house in December 2023. It was a hectic but ultimately successful year, with few setbacks and much growth. As a result, my family and I feel truly blessed when we wake up to the stunning views each morning at our New Zealand home and are comforted by the permanence it provides. Couple that with the financial stability afforded through our monthly defined benefit (DB) pension money, and we are sitting well indeed.

The remainder of this post is about some of the concepts I put into action to purchase our house and achieve that permanence. As you may have deduced from the play-on-words in my title, the money from my DB pension played, and will continue to play, a key role in making that happen. As such, there are potential lessons to be learned for anyone with a DB pension playing a central role in their retirement who might also wish to purchase a house.

Caveats

First, nothing in this article should be interpreted as bragging or advice. My main goal is to share the mental hoops I jumped through to determine if a home purchase plan that forced greater reliance on my pension income could work. In this article, I describe my decision to concentrate risk at a level that may make some people uncomfortable. Indeed, such concentration of risk may prove unsuitable or unworkable for anyone else since my family’s circumstances as an expat military-retiree family are relatively unique. That said, I explore some interesting concepts for those with pension money in retirement.

Second, as stated in my previous post from roughly a year ago, I am not a natural homeowner. Moving around the world every 2-3 years in the military conditioned me to rent and forced me to concentrate on building wealth through savings and investments. However, the financial scar left by our only other homeownership adventure really put me off of the idea. It was the most significant money mistake I’ve yet to make from an opportunity-cost perspective. Long-time readers should remember this story, given the $750,000 price tag, but if you’re new or your memory falters, you can read about it here.

The same sentiment does not apply to Mrs. Grumpus, who, as I pointed out in my year-ago post, views homeownership as a means of achieving permanence. Therefore, the “happy wife, happy life” philosophy led me to make buying a house in New Zealand a central part of our retirement plan 2.0. I should also point out that just because I’m not naturally inclined towards homeownership, it did not prevent guest author Chris Pascale from effectively arguing in favor of it from a “worth vs. worth it” perspective elsewhere on The Golden Albatross site. It was an argument which obviously resonated with many of my readers since it remains in the top ten most-read articles.

The final caveat is that we paid cash for our house by selling a lot of US-based investments. How’s that for burying the lead? In some ways, paying cash was an inefficient use of financial resources that might have otherwise been better served by remaining invested in the world’s most robust stock market. However, as US citizens with New Zealand residence who fall under the US-NZ Dual Tax Agreement, NZ tax laws, and US international tax laws, there were some compelling reasons why transferring US-based liquid wealth into NZ-based illiquid wealth made a lot of sense. The international tax implications are probably worthy of their own post; I’ll add it to my “to-write” list.

Life Planning Side Note

As a quick but important aside, there was also an end-of-life planning argument to be made for buying a house in cash. It leaves Grumpus Familias on more secure financial footing should I kick the bucket early, especially since my military pension payments to my survivors are reduced by 45% on death. Upon an early demise, and without a mortgage payment, they could take my life insurance and the reduced pension money and live well. Specifically, Mrs. G would only need to work part-time.

That’s not an idle thought, either. According to this study from the US National Institute for Health, as a 100% permanently disabled rated male US veteran, my life expectancy is 11% shorter than the US general population. If I were female, that drop in life expectancy would jump to 22% on average. As a prudent planner who was conditioned to mitigate risk throughout his military career, statistics like these are hard to ignore.

Concept 1: Liquidity Risk

OK, I’ve already mentioned one pertinent financial concept that my pension allowed me to navigate around in order to make this home purchase happen, liquidity risk. Liquid investments include anything like stocks and money market accounts, which can quickly be sold and converted into cash with little impact on their market price. Illiquid investments, like property or private equity, cannot be sold nearly as quickly and often depend on market pricing conditions, legal agreements, and a myriad of other factors to convert back into cash.

Judging by the average length it takes to sell a house in our little slice of New Zealand, it would take us 3 – 6 months to reconvert the house money to cash should we need it. Who knows what the value of the house would be at that point since the real estate market has slowed in NZ since the COVID-19 cost-of-living crisis kicked off. That lack of timeliness makes our house wealth illiquid and creates a liquidity risk for us. It’s important to note, though, that our wealth levels didn’t necessarily change through our house purchase, just our liquidity state. Like freezing water into ice, at the end of the day, it’s still H2O.

Now, depending on a client’s circumstances, financial advisors often loathe the idea of retirees locking up so much money in an illiquid investment after retirement. They primarily dislike this because it leaves retirees at risk of life events that may require generating large amounts of cash quickly, like a health crisis. It also leaves fewer investments from which to generate the annual income they’d need to live comfortably in retirement.

Dry Powder and Good Planning

To the first financial advisor point, my wife and I only sold about two-thirds of our investments from our taxable account. For reasons I explained here, our taxable investment account unintentionally became our primary retirement investment account during my career. And while I wasn’t the best investment manager, we did well enough to create a sizeable nest egg. As a result, only partially depleting it is important to us. Furthermore, we also have another decent nest egg of actual retirement accounts. These accounts remain untouched since we’ve yet to hit the penalty-free withdrawal age. Finally, we also have 529s for the kids, so the majority of their university expenses will be paid for. In other words, we have a lot of dry powder.

Of course, the cheaper cost of housing in our slice of New Zealand and a strong exchange rate in favor of the US dollar helped, too. As a result, we have more money in the bank than we otherwise might have if we had moved and bought somewhere else in either New Zealand or the world. Chalk that up as another benefit of the excellent planning we did prior to our Kiwi-arbitrage move. Good job, team Grumpus Familias!

A Pension-Based Rebuttal

As to the second point that Financial Advisors make about needing annual income from our investments for living expenses, that’s where my DB pension(s) come in. As explained in several prior posts, my family and I are good at living within our means. More importantly, though, the means by which my military and veteran’s pensions allow us to live is excellent. We manage to stretch the pension money, and it covers all of our fixed expenses with plenty left over for discretionary spending.

Again, some of that is due to geoarbitraging to somewhere the cost of living is relatively cheap. Most of it, though, is due to the savings discipline my wife and I learned during our primary working years and early marriage. As a result, in most months, we earn more from my pensions than we spend. That doesn’t even include the money we bring in from part-time work. Thus, we have no immediate need for our investments to generate income to supplement our NZ retirement 2.0 lifestyle. This spending discipline mitigates a lot of the liquidity risk we took on with the cash purchase of our home. Such is the beauty of frugality combined with steady and reliable income in retirement.

Furthermore, with our fixed expenses now lower than ever (because of no rent or mortgage payment), living below our means will allow us to rebuild our investment reserve if we so choose. We could do this by redirecting our monthly savings into our taxable investment account. But whether or not we decide to do this remains to be seen. Our house was in great shape when we moved in, but it could be better. A renovation is on the horizon in the next few years. In the meantime, the remaining one-third of investments in our taxable account won’t be needed anytime soon, which means it will grow on its own.

Concept 2: Future Rich

Another way to think about what I just described is that DB pension money can make you “future rich” if you can live within your means. By rich, I mean something similar to this definition from Merriam-Webster.com:

RICH implies having more than enough to gratify normal needs or desires.

Of course, what constitutes “normal needs or desires” in retirement is a matter of personal interpretation. However, as I described in the post where I calculated and tested our retirement budget, our level of normality was predicated on maintaining our pre-retirement standard of living. This included the ability to travel internationally annually.

So far, we’ve proven that we can live at those standards and still come in under budget. That means we have “more than enough” pension money coming in, which makes us rich from the pensions alone. Assuming lifestyle creep doesn’t set in now that we bought a house, and we can stay on or under budget, then we are “future rich.” That excess again opens the options I discussed above, like regrowing the size of our taxable investment account.

A Future Rich Alternative

Granted, a lot of this is mental gymnastics. Specifically, it’s the rationalization I used to feel more comfortable about transferring our wealth from one liquidity state to another. But I could’ve used the same gymnastics to convince myself to take on a small mortgage instead. In other words, I could’ve replaced the amount we were paying each month in rent with a mortgage payment for the same value. This would’ve allowed us to keep more money invested, reduced the potential opportunity cost of selling those investments, and let a bank eat the inflation risk on the loan. Assuming the rate of return on our investments beat inflation and the loan’s interest rate, it would’ve been a more efficient use of our money.

Those are two big “ifs” in a high-inflation and high-interest rate environment, though. Unlike the US, which is almost singular for allowing 15- and 30-year fixed-rate mortgages, New Zealand doesn’t fix rates for nearly as long. It’s 3-5 years at most, depending on the bank. And it’s only on long-term fixed-rate mortgages where the power of inflation works in the borrower’s favor. Plus, there were all those international tax issues I mentioned at the beginning of the article that prevented me from taking this route. As a result, even though I considered it, I didn’t do it.

That said, don’t let the reasons I chose to dismiss this option prevent you from considering it. If your pension is big enough and/or your discretionary spending is small enough to support a small mortgage in retirement, then the math is typically on your side in the US if you live long enough. The mechanism of a pension that makes you “future rich” (i.e., guaranteed steady future income) means you’ll always have incoming money to pay off that mortgage. What’s not to prevent you from trying?

Concept #3: Pension Safety

Well … there is one good reason that might prevent you from relying on your pension to help pay for a mortgage in retirement. In all honesty, it’s the same reason that made me consider not making such a large cash purchase and, therefore, coming to rely on my pension money so heavily in the future. It is the issue of pension safety.

Now, I’ve written several articles and a book chapter on this issue, so I won’t belabor the point here. But if your pension fund is not reliable, then you shouldn’t concentrate your risk by over-relying on your pension income during your retirement to finance a house purchase! And make no mistake, that is precisely what I’ve done by transferring so much of our liquid wealth into illiquid wealth. As someone who discusses, analyzes, and (sometimes) advocates for the positive power of pensions on retirement, I’ve well and truly put my pension money where my mouth is.

Did I have reservations? Yes, I did. That’s odd because US federal pension safety is considered to be ironclad since the US federal government always pays its bills. So, I shouldn’t have. However, I am risk-averse when it comes to personal finance issues. Not only that, but I’m overly analytical and always thinking through worst-case scenarios.

Probability, Not Commentary

I’m a student of history and can see the political and societal unrest unfolding in the US even though I no longer live there. Prior to making the house purchase, I felt compelled to answer whether or not the situation would ever get so bad that the US would stop paying its military retirees and veterans? “Possible but not probable” is the assessment I came up with. I say that wearing my risk analysis hat, which I did for many years in the military and do now as that aforementioned part-time job, not as a culture warrior – so don’t @ me. While I’m always happy to talk about my analytical methods, I’m not looking to engage in what passes for political discourse in my native lands.

Speaking of my risk analysis methods, my differentiation between possible and probable is essential. Based on my experience, “possible” refers to the smaller chance of something happening versus “probable,” denoting the greater likelihood that it may happen. In my mind, less than 25% chance equals possible, while greater than 66% equals probable.

This type of thinking is important when it comes to pension safety analysis because people often confuse the two terms. For example, the average funding level for the top 100 public pension funds in the US at the end of 2023 was apparently 78.2%. Meaning there is a 21.8% chance that the average fund in that group might not meet all its future obligations. A 21.8% chance of failure falls squarely in the realm of possibility as opposed to probability for me. Hopefully, this type of risk analysis thinking and language proves helpful when you come to rating your pension fund’s reliability. If you want to learn more about probability, I recommend the book The Signal and the Noise, which I review a portion of here.

What’s the probability that I stick this landing?

Conclusion

To sum up, life is great for Grumpus Familias in New Zealand, partly due to our new house purchase and the feeling of permanence it provides. My monthly pension money helped my family achieve that permanence. It specifically allowed me to manage my liquidity risk concerns through the lens of the “future rich” concept once I determined the probability that my pension remained safe.

In many ways, it may be best to consider my decisions in terms of bets, which is ironic since I’m not really a betting kind of guy. However, by transferring so much wealth from liquid investments into an illiquid asset, I’ve bet that my family and I won’t need that money anytime soon. By relying on the “future rich” concept, I’m betting that my family and I can continue to live within the means provided by my pensions, and we can regrow some of our liquid wealth. And, by assessing the probability that my pensions are safe, I’m betting that the pension money will be there reliably in the future.

The consistency of my monthly defined benefit (DB) pension income played a crucial role in my confidence to make these bets. Had we been financing this from our investments alone, I doubt I would have made the same decisions. But we weren’t, and so I did. When your pension-financed retirement rolls around, I hope you can use these concepts and do something similar if needed.

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