Early Retirement with a Delayed Pension

This shows what happens if you have a pension (or Social Security) ten years after you retire. I used my Expanded Allocator. Once again, I have taken the Morningstar Dividend Investor newsletter income estimates at face value.

Taken At Face Value

Conditions

I assumed an initial balance of $500000 and a delayed income stream of $10000 (plus inflation) starting in Year 10. I used a TIPS account to manage cash flows, providing income during the early years while waiting for the other investments to grow. My goal was the highest consistent income stream possible. In all instances, the income stream was growing after 20 years or so.

I used the current yield of the Morningstar Dividend Investor newsletter Builder portfolio (3.5%) and Harvest portfolio (6.1%) along with their estimated growth rates (8% to 10% and 2% to 4%, respectively).

Summary

Original Balance (total): $500000.
Social Security: $10000 per year (plus inflation) starting in Year 10.
TIPS: 2% real interest rate.
Inflation: 3% per year (annualized).

Investment A: 3.5% yield with 8.0% per year nominal growth.
Investment B: 6.1% yield with 2.0% per year nominal growth.
Investment C: 3.5% yield with 10.0% per year nominal growth.
Investment D: 6.1% yield with 4.0% per year nominal growth.

Conservative Outlook:

TIPS Balance (original): $200000.
Investments A and B (original): $300000 total.
Investment A: 50%.
Investment B: 50%.
Withdrawal Amount: $33230.

Conservative Outlook (optimized):

TIPS Balance (original): $200000.
Investments A and B (original): $300000 total.
Investment A: 70%.
Investment B: 30%.
Withdrawal Amount: $33380.

Optimistic Outlook:

TIPS Balance (original): $200000.
Investments C and D (original): $300000 total.
Investment C: 50%.
Investment D: 50%.
Withdrawal Amount: $36625.

Optimistic Outlook (optimized):

TIPS Balance (original): $200000.
Investments C and D (original): $300000 total.
Investment C: 30%.
Investment D: 70%.
Withdrawal Amount: $36760.

TIPS amount varied. No improvement.

Mixed A-D:

TIPS Balance (original): $200000.
Investments A and B (original): $300000 total.
Investment A: 50%.
Investment D: 50%.
Withdrawal Amount: $34990.

Mixed B-C:

TIPS Balance (original): $200000.
Investments A and B (original): $300000 total.
Investment B: 50%.
Investment C: 50%.
Withdrawal Amount: $35200.

Conclusions

Continuing Withdrawal Rates varied from 6.64% to 7.35% (plus inflation).

Optimal allocations varied slightly about 50%-50% high yield-high growth investments (A through D). The maximum variations were 30%-70% and 70%-30%. Optimization produced only minor gains.

Comments

This is meant to offer encouragement to those who wish to retire before their Social Security and/or pension begins.

Do not be overly concerned that the continuing withdrawal rate exceeds the long term return of the stock market. Remember that the pension provides a good portion of this (2% out of 6.64% to 7.35% after the first ten years).

Have fun.

John Walter Russell
May 16, 2007