DDD Drawdown plan- 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). 

What if I decide to retire with my full pension at age 60 instead of working until 70. That is the topic of today's post.  

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.

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!
Screen Shot 2017 07 19 at 10.09.18 PM
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.

Now for the chain thread:

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