Pension reduction tradeoffs ?

[Delawaredave5]

Megacorp has "un-reduced" non-cola pension at 58.

Co-worker left at 52 - they can start their pension - but it is reduced by 5% per year - so 30% for starting 6 years early.

Financially, seems to make sense to not draw pension now (if don't need money) and get a larger amount in future.

If they take now, would need to grow 7% each year to equal what you'd get following year - and I think that's after tax. Couldn't do that at comparable risk.

Are there any reasons or conditions where they would want to take reduced pension now ?

1. I guess if the solvency of the pension was at stake and they wanted to "get all they could now".

2. Is there a survivor benefit risk ? If the person delaying the pension unexpectedly died before starting pension, I don't know how the surviving spouse would be affected.

Seems like the best decision is to defer starting pension.

Appreciate any thoughts !

 

[Running_Man]

The percentage reduction is not a very great risk to investment. 7 percent is a relatively high but not much higher than most non-cola annuities are presently paying on an invested amount. Additionally, taking now would entail allowing more of their present investments to remain to be invested in the future to cover inflation over time.

The main reason to take an early payment would be to minimize the withdrawl percentage from their portfolio and increase the likelihood of it lasting throughout their retirement.

Also if there is a clause where the pension is reduced for Social Security, as is common in many plans 6 years passing may increase the deduction of Social Security due to inflation. The plans I have seen personally have calculated the Social Security at the time of starting the pension.

 

[ziggy29]

Are there any reasons or conditions where they would want to take reduced pension now ?

I can think of two reasons:

1. Extreme concern about the solvency. (Even then, if that were the case, a lump sum cash-out would be a better option IF available.)

2. Being diagnosed with a terminal illness (or some other condition that creates a short life expectancy) when survivor benefits are provided and the surviving spouse would get nothing if the pensioner passes before they start collecting.

Other than that, it would seem better, if possible, to live off of other sources of income and wait until you're able to collect the full pension.

 

[Midpack]

I assume you are you talking about a monthly pension check vs a lump sum? If the latter, you'll want to know how it's calculated. You may have to consider the effect of the GATT rate and/or bond rates that are used to calculate the lump sum. If you think rates will increase, your lump sum will be reduced accordingly, and waiting may not be the best choice.

 

[Delawaredave5]

I assume you are you talking about a monthly pension check vs a lump sum?

Only annual payments are possible - no lump sum (should have included earlier, sorry)

Regarding SS: pension amounts above are separate from SS - no reductions when SS kicks in.

Guy is investigating implications on survivor benefits for starting now vs later.

Thanks for your help !

 

[bizlady]

Check the provisions carefully. Our plan we can draw on from starting at 55 BUT DH has to have a certain number of hours worked in each of the previous 3 years prior to starting the payout. No hours met--no pension.... A big reason not to wait since he will retire at 55.

 

[jdw_fire]

based on the data provided the break even point is at 72 y.o. not considering any interest or taxes. with good tax planing and investing that point could go further out. how long lived r u and how good is the company?

 

[Delawaredave5]

based on the data provided the break even point is at 72 y.o. not considering any interest or taxes. with good tax planing and investing that point could go further out. how long lived r u and how good is the company?

Thanks. I did a quick model, attached. I am surprised - including taxes and investment returns - looks like "start pension now" wins up until nearly 77 (and that's assuming 30% overall tax rate and 4% investment returns).

Can move he break even around a little by changing tax rate and investment return assumptions.

Maybe there's a math error. I thought that breakeven would be a lot lower.

If this analysis is correct, now looks like taking pension now would be better.

And there'd be less risk - starting pension now and putting money in diversified investments reduces pension default risk versus starting pension later.

 

[ERD50]

Even if the break-even is out to 72~78 YO, it is the later years that we are worried about when it comes to our portfolios and our own longevity.

I plan on delaying pension and SS as far out as I can - for me it's a bit of diversification of strategies, I'm essentially allocating more to "annuity-like" products, because I have no other annuities, and my pension isn't huge or COLA'd.

For me, the survivor benefits for company pension work in favor of a delay. As long as I delay, they would provide 50% survivor if I pass before collecting (as if I took it on that date). But when I start collecting, I most likely will not take the reduced payout for surviving spouse benefits (DW must sign off on that) - if I cared to, I could probably buy insurance for less than the reduction - I might even do some "compartmentalizing" of accounts, and put the delta into a separate fund and label it "DWs survivor benefits fund". I'll do the math again as we approach that date (10 years from now).

-ERD50

 

[jdw_fire]

Even if the break-even is out to 72~78 YO, it is the later years that we are worried about when it comes to our portfolios and our own longevity.

-ERD50

actually the years you really worry about your portfolio are the years immediately after you retire. you want to avoid a big hit to your portfolio in these years cus if your portfolio remains healthy (or grows) during these early years chances are it will survive your lifetime. and having an income stream during these early years really helps preserve that porfolio.

the reason i brought up the break even point is that this pension is not COLAed so that payment is losing value as time marches on due to inflation. now i know that current estimates are that there will be low inflation over the next couple of years but with the debt the US gov is piling up how long do you think that will last. either we will have a sustained recovery that leads to inflation or we will have more ressession/depression which could threaten the life of the company. seems either case supports taking the pension asap.

I plan on delaying pension and SS as far out as I can - for me it's a bit of diversification of strategies, I'm essentially allocating more to "annuity-like" products, because I have no other annuities, and my pension isn't huge or COLA'd.

-ERD50

now if the pension we are discussing was COLAed and had the backing of the US gov, like SS, i would totally agree with you.

 

[Delawaredave5]

I plan on delaying pension and SS as far out as I can - for me it's a bit of diversification of strategies, I'm essentially allocating more to "annuity-like" products, because I have no other annuities, and my pension isn't huge or COLA'd.

This makes sense - but I still think there's generally more risk in Megacorp's DB pension longevity vs a diversified portfolio. Yes, a lot depends on the company, etc - but ask folks from US Steel, and Continental Airways if they thought their DB pensions were secure........

 

[ERD50]

actually the years you really worry about your portfolio are the years immediately after you retire.

....

now if the pension we are discussing was COLAed and had the backing of the US gov, like SS, i would totally agree with you.

In my particular case, that's mostly water under the bridge, so that might be affecting my thinking. In round #'s, I retired @50, can take 1/2 pension @ 55, or full pension at 65. I retired into a bull market, and at this point I'm slightly above my starting NW (DW has a part-time, part-year job which helps a bit). So I guess I dodged that bullet, but I'm not so sure that if I could take the pension early, it would make much diff. That early pension would only be ~ 1/4 of our annual spending. I just doubt that difference would mean we would need to take any serious dips into the equities to stay liquid.

This has me thinking, I don't believe I've entered those options into FIRECALC (I think I made the decision earlier, based on a more static spreadsheet analysis). I think that would be more telling.

This makes sense - but I still think there's generally more risk in Megacorp's DB pension longevity vs a diversified portfolio. Yes, a lot depends on the company, etc - but ask folks from US Steel, and Continental Airways if they thought their DB pensions were secure........

Yep, not sure how to deal with that. As I understand it, these smaller pensions are better protected by the fed program? I don't think my delayed pension would get into the "highly compensated" category, but I don't know. I guess if I had an idea what the feds would cover (say 80%?), I could plug that in down the line. Tough to say what effect it would have on the early/late decision? In your example, would a $25K pension be cut the same % as the later 36K pension? If so, the main benefit would be the extra years of collecting before the cut. That could be considerable, but it sure involves a lot of assumptions. Retirement is like that

I'm soon eligible for the early pension, I guess it is time for me to get serious about this decision, I had pretty much decided to delay, might need to think that over some - thanks for the points to think over.

-ERD50

 

[ERD50]

Partial answer to my own question:

Maximum monthly guarantee tables (PBGC.gov)

PBGC Maximum Monthly Guarantees for 2009*
Age 	2009 Straight-Life Annuity 	2009 Joint and 50% Survivor Annuity**
65 	$4,500.00                  	$4,050.00
55  	$2,025.00  	                $1,822.50

I'm under those maxes.


PBGC Announces Maximum Insurance Benefit for 2009

The overwhelming majority of the participants in plans taken over by the agency face no reduction in benefits due to the legal limits on coverage, PBGC research shows. The largest reductions occur in cases where participants earn pensions that 1) significantly exceed the maximum insurance benefit, or 2) provide generous early retirement subsidies.

-ERD50

 

[Helen]

I've been thinking about this too. If not offered an early out, I can start taking a Federal pension at age 56 with a 5% reduction for each year before the age of 62. Or I can postpone the pension until age 60 without the reduction.

I am not sure yet what I will do (I am 3.5 years away from 56), but one thought is to take the reduced pension and travel more while we are younger.

We will both probably get a sizeable inheritance down the road and we don't have kids to leave a pile of money to, so taking the reduced pension might be the right move.

 

[jdw_fire]

I've been thinking about this too. If not offered an early out, I can start taking a Federal pension at age 56 with a 5% reduction for each year before the age of 62. Or I can postpone the pension until age 60 without the reduction.

I am not sure yet what I will do (I am 3.5 years away from 56), but one thought is to take the reduced pension and travel more while we are younger.

We will both probably get a sizeable inheritance down the road and we don't have kids to leave a pile of money to, so taking the reduced pension might be the right move.

remember, if you leave fed service and dont immediately start collecting a pension you can not get health insurance via the fed plan.

 

[Helen]

remember, if you leave fed service and dont immediately start collecting a pension you can not get health insurance via the fed plan.

Yes, that is an important consideration. The other issue is that the COLA doesn't start untill I'm 62.

OTOH, I'm not getting any younger.

 

[chinaco]

I am in a similiar situation except our pension fund is solid (conservatively invested and fully funded).

If I go at 55, I will take a 50% reduction (non-COLA) compared to leaving at 65. The high reduction is partly due to the fact that I would have less than 30 years with the company (and taking ER) otherwise the reduction would be less for ER. Nevertheless, I have two options continue to w*rk and accrue years increase my pension by adding years of service and reducing the reduction or go early and begin ER.

The reduction is in part due to the fact that I will be drawing the pension longer than if I ER'd at 65. But I suspect that the company has it slanted a bit in their favor.

Our situation is that the reduced pension is an income stream that helps out. We have quite a bit of assets (investments not including the house). Our house is paid off (we are debt free). DW will take SS at 62, I will likely take SS at full retirement or later (COLA annuity for the survivor). We have retirement health care coverage (low cost... could increase with national health care... we will see). The numbers work for us to spend more on discretionary spending than we do today.

I would rather stop working than increase my pension.

The only thing that would delay my plan is if something about the economy further fractured our assets or other fundamental changes occurred that put us at risk financially (was apparent).

 

[W2R]

Is the pension all that is involved, or are there health benefits tied to the pension?

My pension will be reduced by about 2.5%, because I will be retiring about half a year before I turn 62. But it still makes sense to take an immediate pension, because my pension is miniscule and my health benefits are tied to my pension. For the 2.5% difference ($17/month difference, before taxes), I would rather just lock in the same lifetime medical coverage uninterrupted and as always. It is worth it to me to eliminate the worry and expense of dealing with a six month gap.

 

[jdw_fire]

Is the pension all that is involved, or are there health benefits tied to the pension?

My pension will be reduced by about 2.5%, because I will be retiring about half a year before I turn 62. But it still makes sense to take an immediate pension, because my pension is miniscule and my health benefits are tied to my pension. For the 2.5% difference ($17/month difference, before taxes), I would rather just lock in the same lifetime medical coverage uninterrupted and as always. It is worth it to me to eliminate the worry and expense of dealing with a six month gap.

at that cost ($17/mo) it would be worth it to anyone since if you didnt accept that reduction you would not get the health benefits and since you are accepting the reduction you get the feds to pay about 75% of your insurance premium (much more than $17/mo)

 

[W2R]

at that cost ($17/mo) it would be worth it to anyone since if you didnt accept that reduction you would not get the health benefits and since you are accepting the reduction you get the feds to pay about 75% of your insurance premium (much more than $17/mo)

My point is that if medical coverage is tied to the pension, that can affect the computations.

In my case, one can delay getting the lifetime medical covereage until the pension begins and then re-start it with exactly the same premiums as those who took it immediately. Some people do. I'd rather not, though. Too much chance for something to go wrong, and besides it would probably cost me a lot to get other medical coverage for the six months. Mostly it's a peace of mind issue for me.

 

[jdw_fire]

My point is that if medical coverage is tied to the pension, that can affect the computations.

In my case, one can delay getting the lifetime medical covereage until the pension begins and then re-start it with exactly the same premiums as those who took it immediately. Some people do. I'd rather not, though. Too much chance for something to go wrong, and besides it would probably cost me a lot to get other medical coverage for the six months. Mostly it's a peace of mind issue for me.

my understanding is that if you dont start collecting an annuity within 1 month of your separation you can no longer get it. Ensuring a Healthy Retirement (6/16/06) -- www.GovernmentExecutive.com

Of course, as with all other federal benefits, there are a series of rules related to FEHBP. To continue coverage into retirement, you must:

• Have retired on an immediate annuity (that is, an annuity that begins to accrue no later than one month after the date of your final separation).
• Have been continuously enrolled (or covered as a family member) in any FEHBP plan (not necessarily the same plan) for the five years of service immediately preceding retirement--or if less than five years, for all service since your first opportunity to enroll.

oops, i stand corrected. apparantly it is only required that you be eligable for the immediate annuity to ensure you can eventually get it

Let's look at a couple of examples: Suppose Alice is a 42-year-old FERS employee with 17 years of federal service. She's not eligible to retire with immediate benefits. But if she resigns, she may apply for a deferred annuity later. Under CSRS and FERS, the deferred benefit is payable at age 62. Alice could choose to take a reduced payment as early as her FERS minimum retirement age. But she would not be eligible to reinstate her FEHBP coverage.
Now let's take the case of Tony, who is 57 and has 15 years of service. He's eligible for an MRA+10 retirement under FERS. If he applies to receive this benefit immediately, he will be subject to a penalty of 5 percent for every year he is under age 62. To avoid the penalty, Tony postpones receiving the retirement until he's 62. He is eligible to reinstate his FEHBP when he begins receiving his postponed FERS retirement.

 

[W2R]

oops, i stand corrected. apparantly it is only required that you be eligable for the immediate annuity to ensure you can eventually get it

Federal retirement is extremely complex. But now that we have got that straightened out, I'd like to repeat my post from the previous page that inspired our digression so that it might be addressed.

Is the pension all that is involved, or are there health benefits tied to the pension?

My pension will be reduced by about 2.5%, because I will be retiring about half a year before I turn 62. But it still makes sense to take an immediate pension, because my pension is miniscule and my health benefits are tied to my pension. For the 2.5% difference ($17/month difference, before taxes), I would rather just lock in the same lifetime medical coverage uninterrupted and as always. It is worth it to me to eliminate the worry and expense of dealing with a six month gap.

 

[Delawaredave5]

I think there's more risk to corporate DB pensions than people think - they all think "Megacorp will be here forever".

Interesting article below how salaried folks are getting stuck at Delphi

http://www.nytimes.com/2009/10/27/b...=th&adxnnlx=1256639143-NwmrOrs4Aix1jOar4+4RdA

Mr. Beiter estimated that slightly fewer than half of Delphi’s white-collar retirees would have their pensions cut, by 30 to 70 percent. One woman in his area who had earned a pension of $2,925 a month checked with the Guaranty Corporation and was told her retirement check would be pared to $390. But others will have smaller losses, and some will not lose at all.

The wide-ranging losses occur because of the way Congress devised the pension insurance program. It gave the biggest protection to the elderly, so that in practice, people in their 50s take the biggest hits.