This is a substantive revision to the original Pension Series Part 19 article I published on 23 June 2019. I updated this article because I have a new method for calculating the Total Dollar Value (TDV) of pensions that do not possess a Cost of Living Adjustment (COLA). The new method is far more accurate than the old method, so I am updating all articles in which I used the old method.
I notified BrewDog (the subject of this article) and provided him with updated Master Pension Calculator spreadsheets that utilize my new method. I did this because the TDV of his no COLA pension changed significantly when I used the new formula. As a result, I also updated the two spreadsheets embedded in this article and some of the text. If you downloaded the old spreadsheets, delete them, and download the new spreadsheets with the new formula. The text changes are noted in blue below and include strike throughs of the original article’s verbiage when needed. I kept the italicized format for the verbiage cut and pasted from newer emails between BrewDog and myself.
My apologies for any inconvenience this update may cause, or already has caused. I’m well aware that the updated version of this article no longer reads as clean and easy as the original post. However, I’m committed to ensuring the information shared on this blog is accurate. As a result, when new circumstances alter the accuracy of an old post, I feel obliged to update it, even at the expense of readability.
If you want more information on why I updated the TDV formula for no COLA pensions, you can go to Part 4 of the Pension Series for the abridged version. That is the source article for all my TDV calculations, and as such I updated it first. If you’d rather read a more in-depth explanation about the impacts of inflation, and the correct way to incorporate it into TDV calculations, then you’ll need to wait for my book, “The Golden Albatross: How To Determine If Your Pension Is Worth It“. It’s currently scheduled to be published in early 2020 by ChooseFI publishing.
One great thing about taking a break from blogging is that once you start publishing again, people who missed your regular updates contact you with words of thanks and encouragement. Such was the recent case with BrewDog. You might remember him from Pension Series Part 19, in which I helped him analyze his annuity vs. lump-sum options connected to a small defined benefit pension from a previous employer. He recently sent me a note thanking me again for the help I lent him nearly five years ago (wow, how time flies)! In his polite email, BrewDog also provided an update on his lump-sum decision. Spoiler alert, he took the cash and forwent the annuity.
BrewDog taking the lump sum wasn’t a big surprise. He was leaning in that direction when I initially helped him. However, the ultimate reason why he took the lump-sum and some of the lessons he’s learned since are worth considering. They include the importance of:
making a correct survivorship decision if you take a pension annuity
directing your lump sum into a tax-efficient investment vehicle
having a clear investment strategy for a lump-sum
If nothing else, I encourage everyone to read the first lesson learned. It’s an important one for any pensionable worker who decides to take an annuity over a lump sum because sometimes life intervenes in unfortunate ways. As for the rest of the lessons, they will help guide anyone who’s got a lump-sum decision similar to BrewDog’s. Regardless of whether you take the lump sum, internalizing the points stemming from his choice will help you make a well-informed decision. And, as I’ve pointed out numerous times, helping you make well-informed pension decisions is what this blog is all about!
Background
To (re)familiarize everyone with BrewDog’s situation, he had a decision to make by age 55. That decision was to take a cash lump sum for a small pension from a previous employer or let it convert to an annuity that would pay $617 monthly starting at age 55. There was no Cost-of-Living Adjustment (COLA) connected to the pension, which means it would have been subject to the devaluation that inflation brings.
By way of an update, BrewDog informed me that prior to 55, he experienced a family tragedy. His father-in-law died unexpectedly. Why does that matter? Well, in BrewDog’s words, while “he wasn’t wealthy by any stretch, he did have a healthy teacher’s pension that, for whatever reason, he didn’t have survivorship on.” Unfortunately, this left his mother in a financial pinch when the pension checks stopped. Again, in his words:
So, we basically squeeze as much as we can from her social security and cash flow from her investment assets. She’s not eating cat food, but it crimps things a bit, particularly with the medical-related expenses creeping up.
These events taught BrewDog to look at his pension differently and gave him the final push toward taking the lump sum. In his eyes, the sooner he could convert the pension into an asset rather than a source of retirement income that could stop if he journeyed “to the Elysian Fields,” the better. Thus, he took the lump sum even earlier than the mandatory age 55 decision and deposited it into a separate Individual Retirement Account (IRA). He then started pursuing a cash-flow and a dividend-growth type of investment strategy.
What Is an Asset?
By labeling his lump sum as an asset, I believe BrewDog means financial asset. Investopedia defines a financial asset as:
A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all examples of financial assets.
BrewDog is correct in that pension annuities are not financial assets, primarily because they are not liquid. I point out this fact in my Gap Number Method in Action article, in which I quote financial experts who advise retirees not to treat their pension annuity like a bond. One main reason? You can’t sell a pension annuity in a pinch like you can with a bond and convert it into cash.
While pension annuities come with contractual rights or ownership claims, once the annuity starts, there typically isn’t a way to liquidate them for a lump sum. That’s not always the case, but in general terms, that’s how they usually work. Thus, once you start the pension annuity, it only stops once you die. That’s when survivorship comes, and it determines whether or not those annuity payments continue.
Lesson #1: Getting Survivorship Right
Survivorship is the option to transfer some or all of the value of the monthly annuity payment to a spouse, or in some cases, underage children, when a pensioner dies. It’s crucial to understand this option, as it basically acts like insurance, and like insurance, there is a cost in terms of a reduced monthly annuity value. In the US, the law states that all defined benefit pensions must offer a survivorship option on the annuity as the default. If married, declining survivorship requires the signature of the pensioner and the spouse before the annuity starts.
Why would a married couple decline the survivorship option? Assuming they knew what they were signing, there are several legitimate reasons. Poor health of the spouse, a longer life expectancy for the pensioner, or the ability to insure the value of the pension for less through the life insurance market instantly spring to my mind. However, it’s important to note that waiving survivorship also puts more money in the pensioner’s pocket monthly. On the other hand, if a married couple doesn’t fully understand what they’re signing, or if they are unprepared at the time of the decision, they could be making a tragic mistake.
Is misunderstanding a possibility? Heck yeah, it is. In case you’ve never seen a final pension summary of benefits with all the offers for various forms of survivorship, I’ve inserted a picture of one below. That picture is from a reasonably well-structured summary that actually breaks out how much a survivor would get per survivorship option. I’ve seen ones that are not nearly explanative.
That said, you can see that the titles of many of the options in the picture are not all descriptive. Thus, many pension plans also have a cheat sheet explaining what each option actually does. Now, just imagine getting all this information as part of a larger retirement package, with all the paperwork that needs signing. You can probably imagine how things may get lost, set aside, or overlooked.
Let Me Be Direct
I don’t know what went on in BrewDog’s father-in-law’s circumstances. Still, the result was probably not what anyone wanted or expected. This is why I wrote in my survivorship article that survivorship is one of the few pension decisions a pensioner could absolutely get wrong. In that article, I point out that forgoing survivorship without the backup plan of life insurance puts the survivor at risk. In the meantime, the primary decision maker (i.e., pensioner) is dead and doesn’t get to deal with the consequences. That’s what happened in BrewDog’s mother’s case. She was left to pick up those pieces.
If you’re a pensionable worker approaching the end of your career or just doing some retirement planning and you still need to research all your survivorship and pension payment options, then you should. Once you’ve done so, read my survivorship article. In it, I provide several methods to ensure that pensioners make the right survivorship decision. I consider this one of the few imperatives on my blog.
Finally, if after all that, you’re still confused, want help, or just a second set of eyes, then take a look at my Services page and consider contacting me. Analyzing pension benefits options, especially against the alternative of taking a lump sum, is the bread and butter of my paid work. Since my move to a pay-for-analysis model, two-thirds of my clients have had questions about the supportability of various payment and survivorship options connected to their specific pension plan. Based on the enormity of their decision and the fact that most pension payment decisions cannot be undone, they felt the small amount they paid was worth it.
Lesson #2: Lump Sums and Tax-Deferred Accounts
Let’s move on from directives and sales pitches, shall we? Once BrewDog decided to take his lump sum, he directed it into a tax-deferred Individual Retirement Account (IRA). Why did he do this, and why is it so important? To avoid paying taxes upon receipt of the lump sum.
In the US, the value that a pensionable worker accumulates in their pension plan is often considered deferred compensation for tax purposes. This means the pensionable worker has yet to realize their benefits as income and, therefore, has not paid taxes on the money earned. They will only pay taxes once the pension payments start, or they take their pension as a lump sum. Not all defined benefit pensions are structured this way, so it’s essential to check if yours is. However, in most cases, this is how they work.
Some workers, especially those who stay at one employer while moving up the ranks and pay scales, can amass quite a significant value for their pension’s lump-sum offer. I recently helped someone whose lump-sum offer totaled over $1.5 million. Hypothetically, if that person had chosen the lump sum and not directed it into a tax-deferred account, then they would have found themselves paying tax at the highest marginal federal income tax rate in the US for this year, which is 37%. That doesn’t include state taxes, either.
Furthermore, lump-sum offers do not factor the need to pay taxes into their calculations. As a result, had that client taken the lump sum, the taxes would’ve theoretically cut the value of the lump sum, in comparison to what he could’ve made by taking an annuity, by 37%. This would’ve made the lump sum noncompetitive with the annuity options in terms of mathematical efficiency, assuming the money wasn’t directed into a tax-deferred account.
The Beauty and The Beast of Retirement Accounts
Now, the beauty of directing a lump sum into a tax-deferred retirement account like a traditional IRA, which is what BrewDog used, is that it allows the recipient to defer paying taxes on the money until it is withdrawn from the account. Thus, the money can grow and compound over time without an initial reduction in value due to taxes. And, since money can be withdrawn from an IRA in much smaller amounts than the lump sum’s total value, it makes the tax payments a lot more manageable once the money is finally withdrawn and “realized” as income. In fact, as the Mad Fientist famously addressed all the way back in 2013, using a tax-deferred account like a traditional IRA or 401K is the most efficient way to grow money for retirement, even for those who retire early.
Why does retiring early matter? One of the drawbacks of directing any money into an IRA, let alone a lump sum, is that it locks the money behind a 59- and 1/2-year age requirement for accessing the money penalty-free. Need it sooner than that, and it is typically going to cost you 10% more, in addition to the taxes, at least in the US. Thus, if you were planning on using your lump sum to finance a cruise around the world, then directing that money into a tax-deferred account may not be the best idea. Then again, what the hell are you using your lump sum money to buy a boat for anyway? It’s meant to sustain you in retirement, just like the pension annuity would’ve, not to have fun!
We all beast out like this over taxes.
Lesson #3: Have an Investment Strategy
Speaking of sustaining you in retirement, BrewDog’s plan was to direct the lump sum into an IRA, invest it using a cash-flow and dividend-growth strategy, and harvest the monthly equivalent (or more) than what his annuity would’ve paid ($617). Has it worked? So far, it has. Here are some results he provided me:
In 2021 (partial year), my average monthly dividend payments were $1058. 2022 was when the REIT (real estate investment trust) crashes started, and my monthly average fell to ~$900/month. In 2023, it ran ~$1200/month, so it came back pretty good. Already, I am above what the early pension monthly payments would have been ($617/month), so I’m happy with that.
Before I argue the finer points of a dividend-seeking investment strategy, let me just point out the importance of Brewdog having and implementing an investment plan. The discipline with which BrewDog developed and implemented his plan has obviously served him well. It means that his lump sum money is working as designed by providing income equivalent to or in excess of the original annuity’s monthly value.
This is only sometimes the case for retirees. In fact, as the most recent MetLife research shows, 33% of retirees who take a lump sum from their retirement plan deplete it within 5 years. This study analyzed people taking lump sums from their defined contribution (DC) retirement plans and not their defined benefits (DB) plans. As a result, the driving factors for taking lump sums may be different. However, this is the second study by MetLife, and it shows an increasing trend of people spending the entirety of their lump sums within roughly 5 years of retirement.
Can the results of studies by an insurance company with a vested interest in selling insurance annuities to retirees through their DC retirement plans be trusted? While I think there is a conflict of interest, the results of their two studies speak for themselves. It’s the same conclusion I came to when citing the original report for my academic examination of lump sum offers for part 21 of the Pension Series. What’s more, I continue to see articles like this one from Wharton Business School, which discuss how hard it is for retirees who take lump sums from their DB pensions to generate the same returns as their pension plans. As a result, BrewDog’s strategy and discipline have helped him navigate around some severe hazards that other retirees have fallen afoul of.
The Dividend Investment Strategy
I’ll be the first to admit that using a dividend investment strategy as an alternative means of reproducing the same amount of cash from a lump sum that a pension annuity might produce has yet to be featured on my website. That said, guest author Chris Pascale summed up the general strategy well back in 2019 in his Golden Albatrosses Killed Your Golden Goose article. The primary reason I have yet to address the strategy, though, is the one major drawback that BrewDog himself points out when he mentions the REIT crash in 2022 — companies can cut dividend payouts in times of financial trouble.
Thus, dividends are less reliable than annuity payments from well-funded pension plans. Nor do they come with the legal guarantees that pension payments come with. In other words, companies are under no legal obligation to continue to give dividends in the future. History has plenty of examples of companies that went from paying significant dividends for decades to stopping them when times get tough. Check out the history of GE’s dividend payment post-2008’s Great Financial Crash if you don’t believe me.
Of course, I’m not trying to throw out the baby with the bath water. Despite the reliability issue, a dividend-based strategy for generating cash flow in retirement is a legitimate one used by millions of retirees (or their portfolio managers) to produce (at least some) of the money they need to live off of in retirement. Like with any investment strategy, though, it comes with a list of pros and cons that is well worth considering.
Conclusion
First, thank you to BrewDog for recontacting and updating me on his story and letting me use his update to create another article! As mentioned at the beginning, it’s always nice to hear how folks I’ve previously helped are doing. I’m glad to see that he is doing well and happy with his lump-sum decision. I also hope you found his update valuable.
Secondly, if you’re getting close to the end of your pensionable career, then definitely keep in mind the three lessons I gleaned from BrewDog’s update. The first was for those who decide to annuitize their pension; they need to understand the survivorship options and choose wisely. The second was a tax lesson for those taking a lump sum; they should ensure that it’s directed into a tax-deferred account. The third was also for those taking the lump sum; they should create and implement an investment strategy for when they receive the lump sum. Putting the applicable lessons to use will help pensionable workers achieve a successful defined benefit pension-based retirement.
Finally, if you have a question about any of the topics I covered in this post, feel free to reach out or leave a comment. Alternatively, if you would like some help with your pension situation, then there’s never been a better time to contact me (grumpusmaximus@grumpusmaximus.com). As BrewDog’s efforts to recontact me show, my work tends to stand the test of time.
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I made some subtle changes to The Golden Albatross webpage the other day. First, on the home (aka splash) page, I added three paragraphs under a subsection called “Services” that briefly describe the paid pension analysis services I now offer. Those paragraphs also quickly explain why I’m charging for services. Second, I created a permanent page called Pension Analysis Services, where I provide an in-depth explanation of the range of services on offer. I also explain the technicalities of how hiring my services works.
In case you don’t want to click away, here it is.
Since “what I offer” got a web page, I wanted to circle back with an article about “why.” By doing so, I will have a permanent explanation for anyone who asks, nested under the “what I offer” page. More importantly, I want to explain “why” because paying me pension analysis is a marked departure from the original intent for The Golden Albatross website. In all, I provide five solid reasons, which I list below. Continue reading →
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 view from our new back yard.
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.
Here’s an imaginary conversation that’s been playing in my head recently:
Almost non-existent long-term reader: “Hey Grumpus, I noticed you haven’t posted any new articles in a while. Is everything OK?”
Grumpus: “Thanks for asking, but unfortunately, no, everything is not OK. I’ve been mourning a personal loss.”
Almost non-existent long-term reader: “Oh…I’m sorry for your loss. Who are you mourning?”
Grumpus:“Not who but what.”
Almost non-existent long-term reader: “OK … That’s strange … What are you mourning?”
Grumpus:“I’m mourning the death of my defined benefit pension-enabled Financial Independence Retire Early (FIRE) in New Zealand lifestyle. It died in October 2022, when I returned to full-time work.”
Almost non-existent long-term reader: “Oh, I’m sorry to hear that! However, I’m afraid I must report you to the Internet Retirement Police (IRP) that Mr. Money Mustache talks about.”
Grumpus: “I understand. I’m now a FIRE imposter. Tell the IRP that I’ll go willingly.”
(Moments later, as the IRP is dragging a defeated Grumpus into the police van)
Grumpus: “My first attempt at a FIRE in New Zealand lifestyle is dead. LONG LIVE MY SECOND FIRE IN NEW ZEALAND LIFESTYLE!”
The End of a Short Era
You read that imaginary conversation correctly. My defined benefit pension-enabled FIRE in New Zealand lifestyle only lasted 1 year, 4 months, & 23 days. By FIRE in New Zealand lifestyle, I mean the time I spent in retirement with no GI Bill-sponsored or other full-time work-related income. During that time, my family and I lived in New Zealand, relying solely on the income from my Department of Defense and Veteran’s Administration (VA) pensions. I must admit, with a small amount of pride, we did an excellent job of staying under those spending limits.
Why, then, did I return to full-time work? I did it because a defined benefit (DB) pension cannot buy a New Zealand residence-class visa. And without a resident visa, an immigrant family like mine cannot FIRE in New Zealand. That’s not to say that money can’t buy residence in New Zealand because it most certainly can through an investor visa. However, in the post-pandemic New Zealand immigration system, that potential visa pathway was moved beyond my family’s ability to achieve. As a result, even though I’m guaranteed to earn the same inflation-protected amount of money each month until the day that I die, it wasn’t enough. I found myself at the uncomfortable crossroads of a return-to-work decision around September 2022. Continue reading →
What do you think will be the Word of the Year for 2022?
My heart says it should be “Ukraine,” but my head says it will be “inflation.”
If I was a betting man, I’d bet with my head.
To be fair, one of the driving factors of 2022’s inflation is Russia’s illegal and immoral war in Ukraine. Specifically, it is the grain and gas shortages caused by the war and the international sanctions against Russia. However, that’s not the only cause of 2022’s inflation problem. It turns out that inflation’s rise in 2022 is a complicated story, one with many villains and few heroes, which also means it may be sticking around for some time. As a result, it’s an excellent time to analyze the vulnerabilities of a pension without an inflation-fighting mechanism. Continue reading →
I’m back with another edition of the Pension Couch. I produce Pension Couch articles from edited and sanitized exchanges with readers who ask me defined benefit (DB) pension questions. It’s a way for me to create posts with useful pension-related information without the additional work required to write one from scratch. In this edition, I answer a reader’s “what if” question about replacing lost pension income by taking a higher-paying non-pensionable job. As a question, it fits well with this blog’s stay-or-go Golden Albatross theme. Therefore, I believe it’s worth your time.
This article’s request came from a reader who I called Kai. He specifically asked how much he’d need to save and invest at a new non-pensionable job to replace lost annual pension income from his current pensionable job… if he decided to leave six years earlier than planned. On the face of it, that’s a straightforward question. The answer, however, required modeling his retirement savings and investment options and then determining if they could replace the potential lost pension income.
Readers ask me some form of the “replacing pension income” question a lot, which tells me two things. First, many readers have contemplated leaving their often lower-salaried pensionable jobs for higher salaried non-pensionable jobs. Second, many readers also understand these scenarios involve trade-offs connected to their pension’s ultimate value in retirement. But, as just mentioned, mathematically modeling these “what if” questions can be complicated. Fortunately, in this article, I demonstrate how to determine if replacing pension income is feasible without resorting to complex math formulas. Instead, I use a free website and free retirement planning software, which you can easily replicate, should you need to answer the same question. Continue reading →
This post is a direct continuation of Pension Series Part 30. In that article, I introduced my general framework for maximizing your defined benefit (DB) pension, which I call Grumpus Maximization. I also walked through the first two steps of Grumpus Maximization, which were (1) setting expectations and (2) orienting on yourself and your pension. These two steps are about understanding your retirement needs and your pension. In fact, step 2 required answering nine questions along those lines, not all of which were easy.
This article covers steps 3 through 5 of the Grumpus Maximization framework. As a preview, step 3 involves determining your Gap Number, which I discuss in detail below. Step 4 identifies tax minimization and investment maximization strategies that complement your pension’s steady earned income. Finally, step 5 discusses identifying other pension maximization opportunities. Continue reading →
Helping pensionable workers determine the value of their defined benefit (DB) pension to make well-informed Golden Albatross decisions is the raison d’être for this website. Thus, I write most of my articles for pensionable workers trying to determine whether staying for their DB pension is worth it. However, those aren’t the only articles I write. Although much smaller in number, I also publish articles for pensionable workers who decide to stay. If a unifying theme to those articles exists, it’s pension maximization.
What’s pension maximization? In practical terms, pension maximization ensures your pension’s positive impact in retirement is as significant as possible. You maximize your pension by taking active steps during your pensionable career. My Gap Number, Roth vs. Traditional, buying back years, and pension geoarbitrage articles provide examples of actionable steps pensioners can take. That said, unlike my Golden Albatross-themed articles, I never laid out a framework for pension maximization. In other words, after a worker decides to stay, I never answered the simple “now what?” question.
The remainder of this article, and its follow-on, layout my framework for answering “now what?” I call this framework Grumpus Maximization.
Yes, it’s a somewhat cheesy metaphor. But, Grumpus Maximization is a catchphrase designed to stick, much like the Golden Albatross. Who knows? It might even aid future marketing attempts like printing t-shirts with “Got Pension?” on the front and “Get Maximized @ grumpusmaximus.com” on the back …
That’s not helping, is it? Fine, I’ll sidebar the marketing discussion for now. Continue reading →
Not every blog post I publish stands the test of time. While I always aim to produce “evergreen” articles, meaning they stand on their merits regardless of age, I don’t always succeed. My original pension subsidized healthcare post was a great example of this shortcoming.
When I published the article, the US’s Affordable Care Act (ACA), also known as Obamacare, appeared on its way to the scrap heap due to domestic US politics. This made estimating the value of healthcare attached to a US-defined benefit (DB) pension even tougher. It also led me to rant about how overly complex and unfair the system was for those going through their Golden Albatross decision. As a result, I concluded that it was an invaluable benefit for those lucky enough to have healthcare attached to their pension, especially ifthey intended to retire before Medicare eligibility at age 65. Therefore, it should weigh heavily in their Golden Albatross decision.
That was it. I didn’t develop any complex formulas or provide helpful suggestions on accomplishing the seemingly impossible. Nor did I provide many links to others who had tried. So much for value-added, huh?
In Part 28 of the Pension Series, I stated that age, tenure, and (in some cases) gender mattered more than any singular pension design element during a pensionable worker’s Golden Albatross pension decision. I based that statement on the evidence from my master’s thesis research. For my thesis, I ran a survey for pensioners and pensionable workers which I called the Golden Albatross survey. To complete the thesis I statistically analyzed the results of the survey, which I discussed in Pension Series Part 28. This post expands on the gender portion of those findings by focusing on the impact of defined benefit pensions for women in retirement.
Much like Pension Series Part 24 (Black Pensions), for this article I examine if and how the Golden Albatross decision-making framework should be modified for a specific sub-set of pensionable workers. In this case, that sub-set is women. In doing so, I specifically focus on the disparities in retirement savings between men and women and the impact of defined benefit (DB) pensions on women’s retirement outcomes. I conclude that the Golden Albatross calculation is different for female versus male pensionable workers. Continue reading →
