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Rethinking pension options
Old 01-02-2016, 03:04 PM   #1
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Rethinking pension options

I had previously intended to take my non cola pension in 2017 at age 55 with joint survivor and payout of $2300/month or $2000/month plus 15% lump of 75,000. Now I am considering taking the social security adjustment option which would give us $3300/month until age 62 and then $1900month or $3000/month until age 62 and the $1500/month thereafter plus the $75,000 lump.

I am rethinking this based on the likelihood that we could be starting our 30 plus years of retirement in a down market. Since the pension is without cola I am thinking we would be getting more upfront while it is still worth more and it would lessen our need to dip into 403b/401k funds early on if the market is down. We will have about $800,000 in 403b/401k, approx. $150,000 in Roth and approx. $300,000 in house proceeds. We have already bought our downsized house and could pay that off when we sell the big house but I think we probably won't, as the interest rate on the new place is only 2.49% and having the money to invest post tax will give us more flexibility to manipulate our taxes. We will be trying to max Roth conversions in the 15% bracket while still getting some ACA subsidy until age 65. I can withdraw penalty free from 403b when I retire at 55. I would like to invest the lump sum in Wellington or Wellesley and look at that as what we will subsidize the drop in pension payout with when we hit the reduction at age 62. We don't plan on taking social security until 70 regardless. I am aware that the net payout from the pension is less when taking the social security adjusted payment, but am wondering if the net effect of keeping more of our money invested tax deferred for longer will still put us in a better position in the long run. I am especially concerned with sequence of return risk as we approach our final landing. We also plan on maxing HSA with catchup until age 65 so long as we stay healthy enough to be on a bronze plan. I am a little uncertain of our expenses once we downsize but I think we can get by comfortably on $50,000/year and possibly less. This would give us some room to do Roth conversions.

I would appreciate any ideas or input on this and can provide more details if needed. Or see my facts in my "Hello" post. Thanks for any help or insight!
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Old 01-03-2016, 08:07 AM   #2
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Another thought on this is that by taking a larger pension payout early on when we have fewer income streams and a smaller one after age 62, we would decrease the amount of taxable income when we start having RMDs on top of social security. This idea of taking the social security adjusted payout goes against my base instinct, which is to take the largest total dollar payout. I would really appreciate some feedback as I am uncertain which way to play this.
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Old 01-03-2016, 10:14 AM   #3
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Have you tried modeling both options in FIREcalc or another retirement calculator? That might give you some insight.
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Old 01-03-2016, 10:50 AM   #4
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GreenER, it seems like you have good options. Congratulations.

If it were me, I'd try to not answer this question until the last possible moment. If the S&P is still close to a record high, as it is now, I'd consider selling down the investments while the selling is good and take the non-SS option. However, if we have a "crash" between now and 2017 when you intend to retire, then definitely go for the SS option.

The thing that I would question, however, is once you commit to one option, are you stuck with that option? If so, then my inclination changes to going ahead with the SS option as you have about 7 years before you can get any SS. Then, if the markets stay high, you can delay SS and let it grow a bit more.
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Old 01-03-2016, 10:54 AM   #5
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A number of folks here have this "level income" or "accelerated income" option on their Megacorp pension, so this topic comes up periodically. The last time it did I posted some of my own modeling on the effects of inflation on the break even age.

The short answer is that for low levels of inflation like we've been experiencing one would do better taking the accelerated option up to one's mid-70's after which a standard single life annuity is superior. Once inflation exceeds 4% though, this break even age rapidly increases.

As my life expectancy is long and my inflation expectations low I do not intend to avail myself of this accelerated option in my own pension.

A related question for many pre-pensioners is when to commence the pension assuming it increases in payout for every year you delay. This turned out to be more potentially advantageous for me than the accelerated income option, but even so I determined that the best option for me was to delay by only one year and take a 5% larger pension at 56.
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Old 01-03-2016, 12:17 PM   #6
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Orcas, I don't have the choice of changing payout after initial election. I will have to make a decision and stick with it. I will of course wait until I pull the plug in 2017 but had previously not considered the possibility that it might be financially sound to opt for the larger social security adjusted payout for the short term.

Stepford, Thanks for that info and the link to that thread that also speaks to this dilemma.

MBAustin, I did just try modeling it in Firecalc. It is a little hard to discern the finer points but it appears I will survive either way.
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Old 01-03-2016, 01:32 PM   #7
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I'm taking this accelerated pension but it's very small pension. I only receive $1000 plus a month, non COLA so it's not worth stressing about. It has a steep drop at 62, but hopefully everything else will go up to compensate for the drop.


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