I read a few articles and posts about putting some money aside for retirement, but it was mostly for America/Canada where if I understand it right, you have to actively save your money in 401K/RRSP.

In France I am automatically deducted from my paycheck a certain amount by the government, and after working 42years I will touch a pension, which will be calculated as a percentage of my earnings during my career.

Also, if my readings are correct, if I put aside 25 times my annual spending, I should be able to retrieve 4% of the interest annually and be safe with my money. [link]

My question is how can I evaluate the value of the government pension? Say the pension is 25K€ per year, can I consider it to be equal to having 625K€ put aside, earning interests or does the math is different?


That's how the math works, mostly.

The 4% rule (not 4% of the interest, but an assumed 4% withdrawal based on first year value of a portfolio), suggests that $1M in assets would permit a $40K/yr withdrawal. When anyone analyses their retirement goal, it's typical to look at Social security or other pension money as part of the math.

Not needing to withdraw $40K from a retirement account multiplies up to a $1M balance that one doesn't need to save.

To be clear, a couple looks as earnings and spending, and decides $80K is their desired yearly number. Since their Social Security adds to $40k/yr, they only need to save to withdraw $40K from savings, and that multiplies to $1M needed.

The difference, if any, is that (a) the pension/SS will not flow to a beneficiary, it stops after the death of the worker (or spouse in some circumstances). And (b) the flow of cash is fixed. If I have an emergency, I can always withdraw a bit more in one year, and adjust withdrawals accordingly. No such flexibility with a pension.

  • Thank you for answering. Could you clarify not 4% of the interest, but an assumed 4% withdrawal based on first year value of a portfolio ? I I don't understand the difference between the two. – Julien Rousé May 1 '18 at 15:33
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    A retirement account worth $1M might have no interest or dividends at all, it may be invested in stocks whose return is all capital gains. The US S&P tends to return 10% per year, with only about 2% as dividends, 7-8% is growth, some of which is eaten by inflation. My objection to the word “interest” may be nit-picky, or a crucial distinction for investors. Depends how precise you’d like to be. – JTP - Apologise to Monica May 1 '18 at 16:10
  • Thanks for taking the time to explain that, I was not aware that no dividends was possible, I need to educate myself a lot more on this topic. – Julien Rousé May 1 '18 at 19:36
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    I know you are not in the US, but we have a famous Stock, Berkshire Hathaway, that was introduced in the early 1960s and is now worth well over $100,000, and they have never given out a dividend. If you own the stock and tried to take money from it you would simply have to sell a share each year. If you invest in a mutual fund, each year you might get distributions from dividends and distributed capital gains, and that might be enough cash to meet your 4% goal. Otherwise similarly you would be selling some shares each year. – JTP - Apologise to Monica May 1 '18 at 19:48

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