Rich Girl Roundup: How Does A Pension Affect My Retirement Goals?

We're ready everybody. Pension intention, you know. I've got a passion for pensions. Welcome back Rich Family to the Rich Girl Roundup weekly discussion of the Money with Katie Show. As always I'm your host Katie Tossan and every Monday, Hannah and I are going to dive into an interesting money question. But before we do, here's a quick message from the sponsors of this segment you get a lot of notifications, but this one's got to be the best. That's the sound of business dreams becoming reality with another sale on Shopify. With their commerce platform Shopify, let's entrepreneur simplify selling online and in person. So whether you're creating content or cosmetics, you can focus on growing your business knowing every sales channel is covered. What's really special about Shopify is that they're able to seamlessly scale with your business no matter how big it grows. Explore your options by signing up for a $1 per month trial period at shopify.com slash money with Katie all over case that's shopify.com slash money with Katie shopify.com slash money with Katie this week's upcoming main Wednesday episode is about the multi billion dollar creator economy and we're going inside the lives of career influencers. We are inviting a YouTuber who has three million followers on the show to talk about exactly how he makes money. He's going to break down how much he earns his business strategy. It is going to be super interesting. So make sure you tune in for that on Wednesday and in the meantime, Hannah, tell me which body part would you sacrifice for a pension? I think I would give at least a kidney maybe up to maybe up to a finger because I'm trying to think of non-vital organs, but what about you? There you go. Yeah, I like where your heads at with that. I mean, I, man, I'd give a lot for a pension. I think that the degradation of the pension system is probably to blame for a lot of the financial hardship that people feel these days. So I'm excited to talk about this very sexy and fascinating topic. I think that it's kind of a sin, right? That we don't have it as much. So for everyone listening, I'm going to unionize that money with Katie. I'm going to fight for a pension. Stay tuned. Hey, you want one too, okay? It's a win-win for everybody. I can read today's question if you'd like. It is from Rachel Kay. They said, I'm a state worker and my husband is a public school teacher. We will both have pensions. How do we factor this in when saving and planning for retirement? And to that, I say, I am so jealous that I could cry. So while I'm sobbing, I will like really talk a little bit about pensions. So planning for retirement in the simplest terms, I think we can think about this like we're really just constructing other sources of income. So most of the time for most people, Allah, me and Hanna, the primary source of income is going to be your own investments in the form of retirement accounts or brokerage accounts or savings accounts. Maybe you're going to get hooked up with that CD ladder like Graham Magin, shout out last week's episode. Go back and listen to our episode about CDs. But you might have real estate income if you have cash flowing, real estate properties. We also rarely talk about it, but you're probably going to have social security unless something really goes awry, which wouldn't put it past our government. But you know, I don't like to plan for it. We'll put it that way. So I like to think of it as kind of bonus funds later, rather than something I'm going to surprise really hang my hat on. And last, you have pensions. Pensions used to be more popular than they are now, but they are very expensive for corporations to maintain. So it's really no surprise that they've fallen out of favor, but they used to play a really significant role in providing retirement income for people. Yeah, talk to me for a second. What is the difference between the 401k and like retirement strategies people are using today versus the pension that used to be more available? Why is it such a baller account? It breaks down to the difference between defined contribution plans, which is in the name contribution, you as the employer contributing. This is the 401k, right? And to find benefit plans where the benefit that you're going to receive is the part that's defined like a pension. So it's really shifting the responsibility from the employer to the employee to plan for these things. And so for most people when they're calculating how much they need to save, they're probably just going to look at how much income they need to produce for themselves in retirement. And we have talked about ways that you can do that. You can look at your current spending. You can do projections for the future, but you're effectively looking at what your income in retirement needs to be. And then you're back tracking into, okay, how large does my portfolio need to be then in order to produce that amount of money? But for people with pensions, you have a semi-guaranteed source of income. We're going to come back to the word guaranteed in a second that can supplement how much you've saved. So it means that in order to calculate how this is going to change your investment goals and your savings goals, you need to know how much of your future spending is going to be covered by the amount that the pension is going to pay you. And of course things like how long you're going to stay in the job, totally matter. I remember when my dad was ending his career, he worked the same company the entire time. He was one of the last employees that started in the 1980s that had a pension and was at that point 30 years in where every incremental year you stayed, that pension went up by a not insignificant amount of money. So it becomes this tradeoff of, okay, I'm already x years in, should I stay and try to get that pension or should I go and try to make more money elsewhere? For him, it made sense to stay. But everyone is going to have to ask that question. Now Papa Gattie is like living the rich lifestyle with that pension, right? He is. He's living it up. He's golfing all the time. He's looking at a boat. My man's is living large. I'm very happy for him because he was not in love with his work. We'll put it that way. He worked hard for that pension. Fun fact, people listening, is our, our dad's actually used to work at the same company at one point for a small period of time, but a small world. But when we talk about pensions, you said you wanted to mention that something about the guaranteed, the semi guaranteed source of income. Yeah. I don't want to be a doomer, but I do think it's important to state broadly as kind of background context for everything we're talking about. That pensions can fail. There have been articles for years stating that public pensions are underfunded. There was a couple pension failures in the early arts, think United Airlines, Delta Airlines. I don't know why I can only think of the airlines. We'll put a list in the show notes where pensions that were supposed to pay out significantly more didn't. And that is a possibility. So I think when we think through these answers, it's always just keeping that element of risk in the assumption that, okay, I should get this, but there's always a chance I won't. So I want to make sure that I'm not putting all my eggs in this basket. So kind of referring to it as social security is like a supplemental bonus, a nice surprise, kind of looking at it that way. So you and I have talked about this. My husband has a pension, which when I said earlier that I would give my kidney 41, I have given my marriage to one to basically say, this is the world's longest con to see if I will benefit from this pension. And I also is trying to look up for our own retirement. How do you calculate what you're actually going to get in the math? That's Rachel's question as well for her and her husband. So how do you do the math? The short and simple answer is you basically are going to use the 4% rule or an inverse of the 4% rule. So if you know the monthly amount that they are going to pay you, typically you're either going to be told, hey, the pension is worth this much in a lump sum or you're going to be paid out extra dollars per month. There's also typically, for example, I know when we were looking at your husbands, there are decisions about death benefits and survivor benefits. And so it's kind of this constant cost benefit analysis of which path you want to choose. And I don't think every single one is going to work that way, but that is typically the mindset you're taking into it. So if you know the monthly amount that they're going to pay you, you can subtract it from your existing spending numbers. And then because your portfolio needs to cover the rest, you multiply what's left over by 12 to figure out what that's going to be annually. And then multiply that number by between 25 and 33 depending on your preferred safe withdrawal rate. So if you're cool with a 4% safe withdrawal rate, you're going to multiply by 25. If you're looking more at between 2 and 3%, you'll multiply by 33. But effectively, you're just trying to figure out what is the pension not going to cover on a monthly basis that I am going to be responsible for self funding. So for example, if the pension is going to pay you $2,000 per month, or maybe you're going to get $2,000 between you, but you know that your monthly expenses are $5,000, we need to calculate how big our portfolio needs to be to produce the other $3,000 per month in income. And the answer to that question is about $900,000. Now, if we had to provide the entirety of our $5,000, our portfolio would have to be $1.5 million. So in that case, the pension is filling what is roughly a $600,000 gap. So that's kind of how I like to think about it in the terms of messy long term planning. And obviously, you can get super in the weeds. And there's very sophisticated projection software that you can use. And I know that a lot of CFPs can help you nail this down. But if you're doing the back of the napkin math and you're just trying to understand how much it's going to offset what you have to save for yourself, then that is an easy way to do it. Yeah, that's actually really helpful. So now I can at least sit and do the math and figure out for myself and my husband, since this is a long con for the next 30-something years, how much do we need to plan to save between the two of us? So on behalf of Rachel and me and our partners, thank you. Absolutely. I think a couple of last things to think about is, does the pension adjust for inflation? Are they going to give you more over time as the purchasing power of that money goes down? Are there options like the lump sum or death benefits? Are there things that you're having to decide? Because if so, you probably want to take a more serious approach to determining what that's really going to mean for you and what option is the best. And these are all just variables that you can tweak slightly. But I kind of think about it like a game of probabilities really. And I like to be conservative as in I probably would when planning estimate smaller amounts than I'm being told just in case because you don't want to hit retirement and then be like, oh crap, I don't have enough because this pension is not as much as I thought I was or I left that job earlier than I thought I was going to or market returns are bad. So my portfolio is smaller. You just never know. So I like to overshoot and then hope for the best. That makes sense. I guess in this situation do you recommend it may be working with an hourly fee CFP or CFA and running the math in the different scenarios? Yes, certainly as you get closer. I think if you're in your 20s and you're a couple years into work and you're just trying to figure out what your save rate should be, I don't know that it's necessary to involve a professional and pay for their time. But I definitely think as you're getting closer and you're getting more serious about retirement planning and wanting to really make sure you're on track, absolutely. Cool. Well, thank you. Absolutely. That is all for this week's Rich Girl Roundup. We will see you on Wednesday to talk all things creator, economy and influencers. Thanks for listening. Bye.