What to Expect When You're Expecting a Pension
I decided to bring back my old "Ask the Blogger" personal finance feature for today, so readers can ask questions and your humble columnist can answer them.
I'm vested in the Kansas Public Employees Retirement System, with 18 years of service. I'm in my early forties and now work in the private sector. Should I just assume that I'll never get a dime from KPERS and make other plans for retirement?
Ah, state pension funds, a favorite topic of mine for a while. The outlook is not good, and it's not clear what happens if states genuinely can't pay what's owed. Eventually, presumably, taxpayers and pensioners are going to have to split the bill, and the worse the funding levels, the more retirees are probably going to have to take the hit.
That said, assuming no payout at all is pretty extreme. KPERS is far from the worst offender on this front, and its managers are taking steps to make up their funding gap (though politicians may toy with the idea of reversing some of those steps as they begin to crunch the budget). Even if the worst happens, pensioners will not get nothing; they just won't get as much as they were promised.
However, it's still a good idea to diversify. Open up some IRAs, traditional or Roths, and once you've maxed those out, a taxable mutual fund account. That will ensure that if cuts do come, you will not suddenly see your income expectations dramatically reduced just at the time when you are least able to absorb the blow. Shoot for 10 percent of your income in non-pension savings, and then if you get your full pension, you'll have that much more money for a fun retirement and spoiling your grandchildren.
We rent in the DC area and own our own vehicle. We have liquid savings and about $10k available to invest someplace where it can grow. I am considering an income property in Florida where I am from, I can get 4% on 90%LTV and that gives me a lot of options, but I also know in a couple of years we will need a new car. Is it wiser to buy the income property and when the time comes finance the car, use the $10k and buy a new car with it, or put the money elsewhere?
The first question is "how much liquid savings?" I'm assuming that this $10k is on top of an emergency fund of six months' to one year's worth of expenses, because if it's not, that's where this money needs to go.
However, assuming you're already well funded on the emergency front, this question actually breaks down into two considerations.
First, when do you expect to need another car? We of course both agree that you should pay cash for a car, because leveraged bets on assets that decline in value are a mistake. So if the answer is "before I can save another $10,000," then this is your car replacement fund, and should be in a safe, not-very-exciting place like a money market fund. On the other hand, if your car has five years left on it, and you can easily put away $2,000 a year, then you can invest this money in something that's riskier but carries a higher return.
Second, what should you invest in? My answer, you will probably be displeased to hear, is "not highly leveraged real estate deals in a place where you don't live." It's not the real estate market you know best, you have limited ability to supervise what is happening to your investment property, and if that's all the down payment you can afford, you will have no cushion if the place doesn't rent for a few months or if the tenant wrecks it. You'll have to pay someone to manage it. Put the money in index funds, and save your real estate investments for when you can afford to buy locally, and put more money down. It's not sexy, but it will save you a lot of headaches.
Count me as placing a request for a Megan-y commentary on the "Money Mustache" phenomenon and other early-retirement-religions (kidding only a little bit, and overall, I'm a fan of their attitude!).
I'm a big fan of Mr. Money Moustache's approach, loosely construed. Stuff makes you a lot less happy than you think, and Americans think too much about stuff and not enough about building a secure future. So they max themselves out on nine different kinds of loans to "live the American dream," and then get really surprised when their highly leveraged financial structure comes crashing down on their heads.
Here at Castle McSuderman, we bought less than half the house that we could have afforded, paid off our car and student loans, put the house on a 15-year mortgage, and are firmly resolved to never take on new non-housing debt. "Save now, consume later" is almost always excellent advice for almost everyone.
However, I don't want to retire early, so I'm not prepared to sacrifice a lot of consumption to make that possible. My family's saving is directed at a different goal: to make sure we're comfortable when I or the Official Blog Spouse can't work.
Which is a long way of saying that most Americans should focus a lot more on the future than they do; I advocate eschewing debt and saving a minimum of 15 percent of your income for retirement, and preferably raising that to 25 percent or more. But unless you actually want to retire at the age of 30, or 40, or whatever, it is probably not necessary to go quite as far as Mr. Money Moustache. If that's what you want, Mr. Money Moustache shows it's possible. But that's not what everyone wants, and that's okay too.
I'll add one small addendum: If you just hit 50 and realized that you didn't really get around to saving for retirement, Mr. Money Moustache is also a great way to ensure that you retire on time. It will pinch. But not as much as trying to live entirely off a Social Security check.
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Philip Gray at email@example.com