DDD Drawdown plan part 1- Living with a pension

I am joining the chain with my drawdown plan. This is a post started by Physician On Fire and taken and catapulted by Fritz at The Retirement Manifesto. There are now 14 people on the chain, and I will make lucky number 15. 

Mine is unlike the others, and here is why. I have a job with a sweet pension. A really sweet pension. The golden handcuffs as my colleagues joke. If I work at least 60% of the time until I am 60 years old (23 years from now) then I get free healthcare for life and a nice monthly pension check.  What does this do to me?

Well it makes me really reconsider early retirement and consider part time work as the balance to a good life. It decreases my burn to save aggressively (though my annual savings rate has been 20 – 40% traditionally of my after-tax income). So I have 2 drawdown strategies on both extremes of my retirement capability.

First is if I decide to retire with my full pension at age 60. That is the topic of today’s post. The second is if I aim for being vested in the pension and retiring at age 48 (11 years from now) which I discuss here.

Both assume I work full time for 5 years (until I am 41) and then to go down to 80% part time work, because why wait until retirement to enjoy your life. I also figure with 80% work, I will have more longevity in my career.

I have broken this post down to 2 parts due to the length of it. Here is part 1 and check out part 2 here!

Getting my money out for retirement.

Retire at age 60 with a full PENSION

So how good is the pension? It pays 2% of income per year for the first 20 years of service and then 1% afterwards. For me the goal has always been to maximize to 20 years of service. Currently I am 37 with 1 year of service. That leaves me with 23 years left if they don’t change the rules on us (man that sounds like a long time).

If I am able to maximize the 20 years, then I should be fine in retirement (this is an understatement, I will be golden with this pension.). I will have an annual pension income before taxes of $114,000 (40% of the IRS mandated maximum salary of $285,000 for pensions which will likely increase over time) and free health care until I die.

Pretty sweet right! That is assuming they don’t change anything along the way. In reality, I expect that the retirement age will increase. Maybe to 65.

Okay, 23 years and 60 years old seems like a long, long time. By that time my son will be 25 years old and well out of college (he better be out of college considering I was graduating medical school at 25).

So how can I manage to work that long? Part time work!

Part time work!

Here is what I assume. I will work 5 years full time (41 years old with my son being 7). By then I will be vested in my 401k plan and have 19 years until retirement. Then I can start the trend to part time work.

How can I maximize my pension?
  • 5 years full time = 5 years vested. 19 years of work to reach 60 years old.
  • If I work at 60% full time for the remainder of the time time then it equals 11.4 years (0.6 x 19 years) giving me a total of 16.4 years (not hitting my 20 year goal) and $93,480 annual pension income. Not too shabby actually.  Of note it also takes 10 years to be fully vested in our retirement plan. So at 60% I will be fully invested at 14 years (5 years at 100% + 9 years at 60%) when I am 50 years old.
  • If I work at 70% full time for the remainder of the time then I will have 18.3 years of total service and $104,310 in annual pension income. I will be fully vested at age 49 in case I want to peace out early.
  • If I work at 80% full time for the remainder of the time then I will have 20.2 years total service and hitting my goal! Annual pension income will be $114,000. I will be fully vested at the age of 48 years old.
  • Looking at this calculation there is no reason to go to 90% part time. In 5 years (2021) I should at minimum go to 80% and enjoy a day off a week.

Drawdown Funds

So in this pension scenario, my draw down really does not matter.

  • I will have a pre-tax income of between $93,480 to $114,000 a year.
  • My IRA (expected contributions over a 28 year career of $308,000) will grow to $507,000 at 5% growth by age 60. With no other contributions after retirement this will grow to $756,000 by age 70. 
  • My 401K (expected contributions over a 28 year career of just north of $1 million) will grow to $1.63 million at a 5% growth by age 60). This will grow to $2.4 million at age 70 with no other contributions after I retire. 
  • Additionally, I will hopefully have Social Security starting at 70 (if the government doesn’t take it away). This will be approximately $3,000 a month for me (not to mention my wife’s).
  • So as you can see, I am  going to be flush with cash and drawdown is really unimportant in this scenario. I will definitely be debt free in 2040 if not way sooner.

Thanks Physician on Fire for your great compound interest calculator used to make those calculations. You can find his calculator here.

Drawdown plan

As I do not plan on leaving large amounts of money for my child and grandchildren I am pretty wide open with my money. So at this point my drawdown plan with be:

  • Live off my pension and social security income. Based on any of the above part time work I will be just fine in retirement.
  • All other funds can go to charity or my grandchildren’s (if we have any) education.
    • Withdraw from my 401K at government mandated 70.5 years old ($2.4 million).
    • Withdraw Social Security at government mandated 70 years old ($3,000 a month).
    • Continue growing my IRAs tax free ($756,000 at age 70). I can use that money as I wish upon retirement penalty free. I can use it for charitable givings, to pay for grandchildren’s education, or to buy a boat. Who wouldn’t want to own a boat!
I’m on a boat! Actually that is not me, but you get the point.

It is funny how a pension makes retirement planning so much easier. It is servitude and time is money (Your money or your life!), but if you have a sweet pension then your future retirement plans are pretty set.

Okay, what if the pension idea does not work? What if I want to get out early. What else do we have to count on currently for retirement income? Check it out, my Part 2: Drawdown strategy to retire by age 48.

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Also published on Medium.

DadsDollarsDebts

I am a Dad and Doctor trying to find financial freedom by owning my dollars and debts. Helping dads with their finances so they can focus on the family.

25 thoughts on “DDD Drawdown plan part 1- Living with a pension

  • August 7, 2017 at 3:53 am
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    Great post. I am a military doc, never planned to stay in for 20 yrs (minimum to get a pension), but here I am a year away from 20. That gets me 50% of my base pay, with an additional 2.5% ever year after that up to 30 years of service or 75% of base pay. If I stayed in until the age of 58 (30 yrs) that would be 102k in today’s dollars (military retirement raises with inflation). I could exit in a year if we cut back quite a bit on spending, but my plans are to stick it out 7 more years until 54, that will be 65% or 88k in today’s dollars. That with over 2 million invested by then (markets willing, I use a more aggressive 8% growth), we should be able to retire at least as comfortably as we live now. If I get the mortgage paid off by then, we will actually be way more than set.

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    • August 7, 2017 at 7:14 am
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      MartDoc, that is definitely exciting. The benefits of a pension are quite amazing for those of us lucky enough to have them. 75% or even 65% take home pay is great. Does it start paying out immediately or do you have to wait until age 60+ to take home the pension?

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      • August 8, 2017 at 1:42 am
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        As soon as I retire, and remains indexed to inflation through COLA adjustments once I start taking it. Government is far from perfect, but hard to complain about the retirement pensions in today’s age where they are becoming a rarity.

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  • August 1, 2017 at 3:43 am
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    Sweet deal! I can related as I have a pension with a 1.6% of income/year service growth rate . I’m currently at 21 years in so already quite a nice little nut, but the benefits are reduced unless I make it to at least 50. That’s 6.5 years away for me. My employer is in the midst of a merger and likely spin back off so there is a definite possibility of the plan being frozen. I will admit there is a small piece of me that hopes they freeze it so these golden handcuffs can be taken off and I can FIRE without regret. I never thought I would feel that way, but having reached FI I’m really struggling with slugging it out longer.

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    • August 1, 2017 at 7:10 am
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      Isn’t it interesting how these items that seem amazing (pensions and the golden handcuffs) can then become a burden. 6.5 years is still a while away, but being 44 and financially independent is quite commendable. Nice work!

      If they do merge, I would be interested in hearing what they say about the pension. I assume my pension will be changed to age 65 at some point too (23 years away). There is no way I am doing this for 23 years.

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  • July 24, 2017 at 5:18 am
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    Hey Dad, welcome to The Chain Gain, with the first “Two Part Series” on the topic. I love your “Scenario 1 and 2” approach, and agree with many others above about the difficulty in waiting until you’re 60 “just” for that gorgeous pension.

    You’ve got time. Keep you options open, and see where things lead. Glad you have you in The Gang (you’re officially in as Link 15a and 15b!).

    Reply
    • July 24, 2017 at 6:35 am
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      Thanks Fritz! Appreciate the encouragement and for getting me to actually look at my options and write them down. It was actually quite refreshing to know I could theoretically retire at 48.

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  • July 22, 2017 at 4:57 pm
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    That pensions sounds great!

    I was totally for you killing yourself until 60 to get that pension! Then I realized one line in your post, “Currently I am 37 with 1 year of service.” (ed. Well 5 years total service, my bad that it was not clear in the post. 1 year at my pension providing job.)

    THAT is the killer right there. Think about it. You are one (ed. six) year into your service and you are thinking about retiring already! One’s writing shows EVERYTHING because writing is so intentional.

    Also, most people are super excited their first 10 years of work. So the fact you aren’t showing delusional enthusiasm is also telling. (ed. true dat, 6 years in and ready to get out in the next few years).

    I think you should work 10 years full-time and then the rest part-time. But, I will tell yah that at age 47, you will view work differently.

    I’ve scene the future! What type of doc are you again? Always good to have doctor buddies to send MRIs and get second opinions and stuff 🙂

    Sam

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    • July 22, 2017 at 5:28 pm
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      A cardiologist. So hit me up as I am only an hour north in wine country!

      Very telling indeed and writing is very intentional. I enjoy work but not with exuberance. Some days are great. Other days are a slog (is that a word- it feels like this). Full time until 46 to be exact and then I will have 10 years. Check out tomorrows post- retire at 48, but maybe 47 is a better way to go about it.

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      • July 22, 2017 at 8:19 pm
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        Cool. Will definitely be great to catch up over a beer near wine country. I forgot there’s some famous winery near Petaluma.

        My good friend is a cardiologist too. Does stents, whoo hoo!

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  • July 22, 2017 at 8:44 am
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    If we had stayed in NY and Mr. Groovy remained with his govt job, retiring at the same age as he did (55) he’d have almost 4X the pension he’s now collecting and free healthcare for life. But we would have “lost” over 10 years of our lives. I hated commuting (people were seriously disturbed on our branch of the LIRR) and he HATED his job. He would not have become the man he is today.

    It all depends how much bondage and dysfunction you feel is involved in your job. If you can swing going part time without it sucking too much life out of you – I say go for the sweet pension. But I have a feeling I’m going to like part 2 much better.

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    • July 22, 2017 at 8:56 am
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      Ha ha. Yes part 2 is more creative for sure. Working until 48 at part time and then retiring. It is all about choices. My job is good but there are stressful parts like being called in at 1am because someone is dying or needs a pacemaker. While I do not mind coming into help someone who is dying (it is a privilege), it is nerve racking and not as easy on the body as I get older.

      Reply
  • July 22, 2017 at 8:30 am
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    That’s awesome that you get a pension!!! I feel like you are one of the lucky ones and I think having those “handcuffs” are going to be so worth it in the end!!!

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    • July 22, 2017 at 8:54 am
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      Oh yeah, pensions are great and if I stick with it, very lucrative. No real financial planning needed. Just gotta stick with it for 23 more years! I could go down to 60% in 4 years and then it would only take 14 years to be vested. Something to think about for sure in case I do decide on FIRE as discussed tomorrow. Golden handcuffs are the best kind though.

      Reply
  • July 22, 2017 at 7:17 am
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    Welcome to the chain gang Dr. Dad!

    Great job recognizing the value of a pension at your age. I walked away from one in my early 30’s without even a thought.

    I’m looking forward to tomorrow’s post as I hope you’ve come up with a way to stop working earlier. You only get this one beautiful life so you don’t want to be shackled to a job only for the pension.

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    • July 22, 2017 at 8:53 am
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      Agreed Liz. Having a pension is nice but being shackled to a job and location is a scary thought for someone who loves life and the idea of FIRE. Leaving a pension is tough but if made for the right decisions then it is worth it.

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  • July 22, 2017 at 6:32 am
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    Welcome to the chain gang. You have a solid plan. Having a defined benefit plan is nice to have. They are disappearing quickly.

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    • July 22, 2017 at 6:40 am
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      I feel fortunate for the pension but the thought of working to 60 years old makes me a bit anxious. I suspect part time work will make this more doable, but retiring early has always been a dream of mine and tomorrow I discuss how it may be possible.

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  • July 22, 2017 at 4:13 am
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    That pension does sound pretty sweet! They are rare birds these days, especially private pensions.

    If this is a government (VA) pension, you can be more certain it will be there in 23 years; I would be more leery of a private pension over that time period. I’m an optimist at heart, but I wouldn’t be banking my retirement on something like that.

    Is it possible to take a lump sum payment from the pension instead of an annuity? Usually some money is left on the table, but at least it’s in your pocket.

    Looking forward to seeing your other option tomorrow.

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    • July 22, 2017 at 5:56 am
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      It is a private pension, but we are the largest medical group in the country. You are absolutely correct that it could disappear by the time I am 60 or 65, but I think the odds are low. But really who knows. Just as the future of medical insurance is uncertain, the future of medical groups becomes uncertain.

      I have not looked into the lump sum options though I know there is one. There is also the option to retire early (not with a full pension) at age 55. That may be something to consider but still keeps me working another 19 years. So time will tell what I decide to do. I really can’t imagine working full time for that long.

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  • July 22, 2017 at 2:44 am
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    Congratulations on working at a hospital that offers a pension. There was little need for retirement planning when people has pensions and Social Security. I’m happy that you potentially will have both when you retire.

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    • July 22, 2017 at 5:53 am
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      It is pretty wild and part of my reason for moving across the country for this job.

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  • July 22, 2017 at 2:01 am
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    Based on what you wrote here, I will say that future looks good for you. But I want all people planning for retirement to not that life will be more expensive in the future than it is today. Therefore, it is good to find out the present value of the future retirement fund.

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    • July 22, 2017 at 6:42 am
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      That is a very good point. Inflation never stops and so living off of $50k today’s value will not be the same in the future. I did not account for this in my retirement drawdown strategy but should consider refining it. Thanks for the advice.

      Reply

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