I think a mixed approach will be good. I already have $500 per month of the retirement budget allocated for the next car. If I change some of my IRA money to fixed and distribute only that amount, my principal would not be touched. After I get hard numbers I could do an actual prediction of when a mix could be found to get to the original number and then I could change my investment allocation back to the original plan which is about 60/40, maybe 70/30. With the pension I theoretically could be much more aggressive with the IRA money.I think this is key... actuarial factors are averages, while you may have a better "guess" based on your specific family history. My parents lived to their mid-80s. Their parents only lived to their mid-60s to early 70s. I expect I could live to my early 90s based on a very weak pattern of my specific family history (I have no unmanaged chronic health issues that would shorten my life expectancy). If you have access to the specific actuarial tables that your pension plan uses (perhaps it's in the online literature or you can request such) then you can look up what their estimate is for your life-expectancy and what your own estimate is and use that to help inform your decision (if your estimate is shorter then take the higher payment and vice-versa). Of course, they've already used the actuarial table to come up with your alternative estimated initial payment.The initial reduction is based on your actuarial factors, such as your age at retirement and your sex.
It's always good to "live below your means" so if you would spend the entire higher amount in your annual budget of expenses, that suggests you would draw more from your portfolio if you took the lower amount to meet expenses. If you would NOT spend the entire higher amount, then the idea of investing that difference to get a greater than 2% nominal return might be the better play (you'd have 10 years of accumulation to the break-even period when you have to start to draw from this delta portfolio).
The difference is about $6.9K/yr, so if you invested the difference (starting from $0 initial balance) at 60/40 for 10 years, the 10th percentile result is about $73.8K which supports a 4.5% initial draw of $3.3K (up from the 4% rule because your remaining life expectancy to age 95 is only 25y not 30y). That 10th percentile result for a bad sequence of returns is only an effective return rate of 1.40%, which is below the 2% they're promising. However, the 50th percentile result is 8.26%, so it's pretty likely you'll have something higher than 2% (but less than 8%).
Results above from my Accumulation Monte Carlo below (linked below along with other MCs that don't need Excel).
Image may be NSFW.
Clik here to view.
Image may be NSFW.
Clik here to view.
Data and Models I use for Monte Carlo:
NYU Data Set 1928-2017 with Model Fits
Accumulation Monte Carlo <- images above
Withdrawal Monte Carlo
You'll need a MS Excel license; download to your local machine and enable macros (required for the 1,000 random trials and results aggregation).
I'm using my own model as I like to know what's under the hood, but there are other models I like that have public facing website interfaces:
Portfolio Visualizer's Monte Carlo (I like this one best),
FiCalc (probably easiest to use),
TPAW (probably most comprehensive),
Engaging Data: Rich, Broke, or Dead, (uses historical returns in a cycle for your retirement duration), and
FireCalc (also historical data, but lots more inputs to tailor to your situation).
Statistics: Posted by AlaskaTeach — Sat Feb 15, 2025 10:37 pm