Need sanity check on when to take pension

[DayDreaming]

Hi, I'm looking for a sanity check to see if my thinking on this is correct:

I've been FIREed since 2008 and living off of my savings + a small income from a hobby of mine. Thanks to the market rebound, my total savings are greater now than they were in 2008.

I'll be 55 soon and can start collecting a non-COLA pension which would give me $43,556/year. Or I could get a lump sum of $703,293.

At 55 my pension is reduced. I could wait until age 60 to get the full pension value of $54,445/year (or $804,364 lump sum).

1st decision: I think should start collecting my pension at age 55 instead of 60. Even though it is reduced, collecting that money for 5 more years more than makes up for the reduced amount. Age 79 is the break even point if I figured that correctly, where I might have been better off if I had stared the pension at 60.

2nd decision: Since I'm doing fine living off my savings now, I really don't need the income from the pension right now. So if I delay taking it for a few more years, I have some tax advantages of having a pretty low income - bigger ACA subsidy, and reduced property tax. But passing up $43,556/year just to save a bit on taxes doesn't make too much sense to me. Seems I may as well take it, invest some, and start giving more to charity. Or start living large, although that's never been my style.

Basically, I'm in good shape financially and I know that's great problem to have - I'm just hesitant to start taking the pension at 55 because once I do that there's no going back and I just want to see if I'm missing anything here. Any comments or critiques are more than welcome.

 

[Walt34]

I guess basically it boils down to "How lucky do you feel?" If you're pretty sure you'll make it to 79+, wait. If not, take it now.

 

[jim584672]

Nice pension. No easy answer on early vs. late, each has its own advantages. Do you have relatives who lived a very long time? How is your health? I will have to grapple with this issue in 5-10 years as well.

 

[travelover]

Have you taken into consideration taxes on RMDs? It might be advantageous to bleed down tax deferred accounts and maybe even do Roth conversions now, then take pension later.

 

[phil1ben]

I am 55 also. Enjoy the money while you are relatively young. No one knows what the future will bring. Although you may live well beyond 79, travel and other plans become more difficult........Said another way "stuff happens".

Just my two cents.

 

[DayDreaming]

My father and grandparents all lived into their 90's. Mom is still around, in her mid-80s and doing well. I am in very good health.

I've been doing Roth conversions for a few years but probably should have been more aggressive with those. If I hold off on the pension so that I can do more Roth conversions now, my RMDs would be smaller when that time comes, but I'm not sure that offsets the fact of not having that pension income for a few years. This is where it gets too complicated to wrap my head around.

 

[pb4uski]

What tax bracket are you in now? If you start your pension, what tax bracket will you be in? Once you start your pension and SS, what tax bracket will you be in? Taxcaster can help you answer these questions.

If your tax bracket once your pension and SS start is really high, given your good health and family longevity, it might be better to wait until 60 and take advantage of doing more aggressive Roth conversions at low tax rates.

 

[Running_Man]

It seems to me that this is "bonus" money for you in that it is not needed for retirement spending. As such if you look at tax angles this could be a case where taking the lump sum payout and rolling into IRA and then minimizing taxes would be best decision. It sounds to me as if your income needs are not that great so saving money for a later date in case of
Major medical issues would be best idea.


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[DayDreaming]

What tax bracket are you in now? If you start your pension, what tax bracket will you be in? Once you start your pension and SS, what tax bracket will you be in? Taxcaster can help you answer these questions.

If your tax bracket once your pension and SS start is really high, given your good health and family longevity, it might be better to wait until 60 and take advantage of doing more aggressive Roth conversions at low tax rates.

Now 15%
Pension puts in me the 25% bracket
+ SS would put me near the top of the 25% bracket.

If I delay the pension until age 60 so that I can do more Roth conversions now, that's $217,780 pension that I'm not collecting over those 5 years, and I have a hard time seeing which option is better in the long run.

 

[Which Roger]

A question you need to answer for yourself before deciding: Is your primary goal to maximize the expected payout, or minimizing your chances of outliving your money?

 

[pb4uski]

Now 15%
Pension puts in me the 25% bracket
+ SS would put me near the top of the 25% bracket.

If I delay the pension until age 60 so that I can do more Roth conversions now, that's $217,780 pension that I'm not collecting over those 5 years, and I have a hard time seeing which option is better in the long run.

It sounds like you'll be paying 25% (or more) on your tax-deferred withdrawals if you start you pension now.

You're giving up $217,780 but you're also gaining in that you're saving 10% or more on your Roth conversions during those 5 years and then gaining $10,889 a year for the rest of your life. If you live long you'll be way ahead.

You can get an idea of how much you're saving by calculating your taxes with and without the Roth conversions to the top of the 15% tax bracket and look at the change in tax divided by the Roth conversion. just so you know if you go over the top of the 15% tax bracket and have a lot of qualified dividend income or LTCG then the taxes on any excess is quite high (generally 30%).

I think it would somewhat depend on how much you can do in Roth conversions and what the tax savings are compared to the $217,780 you would be foregoing.

 

[DayDreaming]

It seems to me that this is "bonus" money for you in that it is not needed for retirement spending. As such if you look at tax angles this could be a case where taking the lump sum payout and rolling into IRA and then minimizing taxes would be best decision. It sounds to me as if your income needs are not that great so saving money for a later date in case of
Major medical issues would be best idea.

I'd been thinking of it the other way around: when I start taking the pension, that would cover my expenses, so then my other savings would be sitting there (and growing) for any major expenses in the future. But I will give your idea some thought. Thanks!

 

[DayDreaming]

It sounds like you'll be paying 25% (or more) on your tax-deferred withdrawals if you start you pension now.

You're giving up $217,780 but you're also gaining in that you're saving 10% or more on your Roth conversions during those 5 years and then gaining $10,889 a year for the rest of your life. If you live long you'll be way ahead.

You can get an idea of how much you're saving by calculating your taxes with and without the Roth conversions to the top of the 15% tax bracket and look at the change in tax divided by the Roth conversion. just so you know if you go over the top of the 15% tax bracket and have a lot of qualified dividend income or LTCG then the taxes on any excess is quite high (generally 30%).

I think it would somewhat depend on how much you can do in Roth conversions and what the tax savings are compared to the $217,780 you would be foregoing.

OK, I obviously need to give this some more thought. And more math! Can I ask how you came up with the $10,889/year number?

Thanks!

 

[pb4uski]

$54,445 you would receive if you start your pension at 60 less the $43,556 you would receive if you start at 55.

By giving up $217,780 (5 years at $43,556 a year) you get $10,889 a year MORE for the rest of your life.

 

[Marketwatcher]

Have you calculated and the compared the present values of each option? Easily done in Excel.

I have the option of taking 82% of my full pension when I'm 52 next year, rather than taking 100% at age 65. Taking it sooner rather than later has a higher present value, so that's what I plan to do.

 

[nun]

Have you calculated and the compared the present values of each option? Easily done in Excel.

Yes let's do that assuming you are a man from your name. [edit....I'm refering to the OP "JoeDreaming']

Taken at 55 and assuming you live another 25 years, 43556/year for a lump sum of $703293 implies a payout rate of 6.2% and an IRR of 3.7%...I imagine the lump sum will be calculated using the IRS segmented tables.

If you wait to 60 and get $54,445/year for $804,364 lump sum and we assume you live 21 more years that is a payout rate of 6.8% and an IRR of 3.45%.

If this pension is your only source of safe income other than SS and taking it will allow you to cover expenses from 55 onwards so that you can leave more money invested and accumulating in other places I would take the pension asap. It's annoying to give up IRA to ROTH conversions now, but you will be reducing future RMDs.

 

[Marketwatcher]

Yes let's do that assuming you are a man from your name.

.

I'm a woman. Why does that matter?

 

[nun]

I'm a woman. Why does that matter?

I was referring to the OP, "JoeDreaming". Gender is important in annuity calculations because of the different life expectancies, of course other factors like general health are as important.

 

[Marketwatcher]

I was referring to the OP, "JoeDreaming". Gender is important in annuity calculations because of the different life expectancies, of course other factors like general health are as important.

Ah, yes now I see. Thanks for the explanation. And I agree with your conclusion from your calculation. Intuitively, it makes sense to take the pension sooner.

 

[PERSonalTime]

$54,445 you would receive if you start your pension at 60 less the $43,556 you would receive if you start at 55.

By giving up $217,780 (5 years at $43,556 a year) you get $10,889 a year MORE for the rest of your life.

Plus I think 75 is his (OP) breakeven age...($43,556 x 5 yrs = $217,780. $217,780/$10,889= 20 yrs.).


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[PERSonalTime]

.

 

[nun]

I'm surprised there isn't an argument for the lump sum options...or is 3.7% (assuming an average life span) a good enough return given the guarantee? and has the OP considered how to offset inflation?

 

[DayDreaming]

$54,445 you would receive if you start your pension at 60 less the $43,556 you would receive if you start at 55.

By giving up $217,780 (5 years at $43,556 a year) you get $10,889 a year MORE for the rest of your life.

Yes, taking it at 60 gets me $10k more per year, but it then takes 20+ years to make up for not collecting the pension from age 55 to 60. The break-even point is around age 79.

FIRECalc show me coming out better in the long run with the pension at 55, but then FIRECalc doesn't consider Roth conversions and tax brackets. I've been playing with I-ORP but can't get it show Roth conversions - instead it has me withdrawing(?!) from my current Roth in the first year. Maybe I'm doing something wrong with this tool, so I need to explore that further.

Have you calculated and the compared the present values of each option? Easily done in Excel.

I have the option of taking 82% of my full pension when I'm 52 next year, rather than taking 100% at age 65. Taking it sooner rather than later has a higher present value, so that's what I plan to do.

Yes - my spreadsheet shows me breaking even at age 79. And that's not even considering that my other savings will grow even more when I'm no longer withdrawing from them.

Yes let's do that assuming you are a man from your name. [edit....I'm refering to the OP "JoeDreaming']

Taken at 55 and assuming you live another 25 years, 43556/year for a lump sum of $703293 implies a payout rate of 6.2% and an IRR of 3.7%...I imagine the lump sum will be calculated using the IRS segmented tables.

If you wait to 60 and get $54,445/year for $804,364 lump sum and we assume you live 21 more years that is a payout rate of 6.8% and an IRR of 3.45%.

If this pension is your only source of safe income other than SS and taking it will allow you to cover expenses from 55 onwards so that you can leave more money invested and accumulating in other places I would take the pension asap. It's annoying to give up IRA to ROTH conversions now, but you will be reducing future RMDs.

Yes I am male.

If I take the pension at 55 that will be my sole source of income and I'd stop withdrawing from my savings until inflation requires me to do so. Actually I should have a little excess income to add to my savings until cost of living catches up.

I don't understand your last sentence - giving up IRA to Roth conversions now would increase future RMDs, not reduce them - no?

I'm surprised there isn't an argument for the lump sum options...or is 3.7% (assuming an average life span) a good enough return given the guarantee? and has the OP considered how to offset inflation?

My current savings are already a pretty nice lump sum and will provide more than enough to offset inflation later.

Thanks for the comments, everyone, I have a lot to think about - especially tax brackets.

 

[rayinpenn]

Call me crazy
1. Take the lump sum and put it in IDV, DVY, EDOG split evenly .. You'll earn over 4% that will be taxed at a lower dividend rate
2. Dividend stocks aren't as volatile as the rest of the market - just learn to ignore market gyrations - who cares as long as they pay those dividends
3 . Live too 100 and those dividends will keep on chugging and growing

Too risky you say? Call me crazy but I say it's too risky not too... So exactly how much will a draft beer cost in 20 years? You don't know? Neither do I --Inflation is the enemy not risk.


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[harley]

Call me crazy
1. Take the lump sum and put it in IDV, DVY, EDOG split evenly .. You'll earn over 4% that will be taxed at a lower dividend rate
2. Dividend stocks aren't as volatile as the rest of the market - just learn to ignore market gyrations - who cares as long as they pay those dividends
3 . Live too 100 and those dividends will keep on chugging and growing

Too risky you say? Call me crazy but I say it's too risky not too... So exactly how much will a draft beer cost in 20 years? You don't know? Neither do I --Inflation is the enemy not risk.

A lump sum from a pension would have to be converted to an IRA, not after tax. That would completely negate the tax issues you were mentioning. Any income would be eventually taxed at his bracket when withdrawn. Plus the withdrawals would be forced by RMDs.

Having said that, I'm still in favor of taking the lump sum. Better control. more chance of keeping up with inflation, etc. Also, is there anyone you would like to leave money to? You could start gifting when you are forced to withdraw the RMDs. If not, maybe the pension is the better choice.