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Take this pension as soon as eligible?
Old 09-26-2006, 11:27 AM   #1
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Take this pension as soon as eligible?

At 55, I will be eligible for a very small fixed pension. I can start it at any time between age 55 and 62. To get 100% unreduced payout, I would have to wait till I'm 62.

Taking it at 55, the payments are 76.3% of the unreduced age 62 amount. I have a reduction table, that has from age 55 to age 62 in one month increments. From that table, I have worked out the following year-over-year payment "increase" I would get if I delayed taking it by a year at each step:

56 over 55, 3.7%
57 over 56, 3.8%
58 over 57, 3.9%
59 over 58, 3.9%
60 over 59, 4%
61 over 60, 4.1%
62 over 61, 4.2%* Full payment

As the year to year increase is near, at, or could be less than the inflation rate, it seems to me to be a no-brainer to start it in a few years at age 55 . To grab it as soon as I can. Inflation has been chipping away at the purchasing power of this pension for the last 20 years or so.

Is it a no-brainer? Or am I overlooking something?
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Re: Take this pension as soon as eligible?
Old 09-26-2006, 11:50 AM   #2
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Re: Take this pension as soon as eligible?

Many older DB plans "subsidize" early retirement benefits to encourage more senior (read higher pay due to longevity) employees to retire. This means that the benefit at age 55 is better than the "actuarial equivalent". Just "eyeballing" it seems that the reduction applied is "better than the actuarial equivalent" and thus it is subsidized. You should probably take it early. Just understand that, if you are married, this could reduce your spouse's survivor income too.
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Re: Take this pension as soon as eligible?
Old 09-26-2006, 12:23 PM   #3
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Re: Take this pension as soon as eligible?

Quote:
very small fixed pension
How much annually @62?

Since you do not seem to require the funds to live on, I assume that when you receive the monthly benefit that you would invest it or spend it. If your plan is to invest it, taking the distribution early could work out well for you.

OTOH, since the annual increases from 55-62 seem to be a bit higher than inflation rates (my guess), it may be beneficial to delay receiving it until age 62. As this does not seem to be COLAd, delaying it will insure that if you live a long time, that you will receive the max. amount.

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Re: Take this pension as soon as eligible?
Old 09-26-2006, 12:29 PM   #4
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Re: Take this pension as soon as eligible?

Quote:
Originally Posted by mickeyd
OTOH, since the annual increases from 55-62 seem to be a bit higher than inflation rates (my guess), it may be beneficial to delay receiving it until age 62.
It is not that simple. You have to account for the money that will be received between 55 and 62 and account for the time-value of that money.

Otherwise you grossly underestimate the net present value of the pension.

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Re: Take this pension as soon as eligible?
Old 09-26-2006, 12:44 PM   #5
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Re: Take this pension as soon as eligible?

Quote:
Originally Posted by Telly
At 55, I will be eligible for a very small fixed pension. I can start it at any time between age 55 and 62. To get 100% As the year to year increase is near, at, or could be less than the inflation rate, it seems to me to be a no-brainer to start it in a few years at age 55 . To grab it as soon as I can. Inflation has been chipping away at the purchasing power of this pension for the last 20 years or so.

Is it a no-brainer? Or am I overlooking something?
Which way to go depends on the discount rate you use, which in turn depends on your assumptions about other returns available to you. You could model it in Excel, or using a financial calculator with different discount rates. It looks to me that except at the lowest discount rates, you will be better off taking it now.

Take your current and future tax situation into account.

Last, if this pension could be useful in allowing you to delay taking SS, that might be its most important use. Because you get way more bump per year by delaying SS than you are being offered here.

Ha
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Re: Take this pension as soon as eligible?
Old 09-26-2006, 12:55 PM   #6
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Re: Take this pension as soon as eligible?

OK getting back to the value of a payment stream.

So for example, if you get a payment of $100 a month at 62 or $76.3 at 55,* expect to live to be 85, and the prevailing interest rate less inflation is 3 percent then using the following calculator

http://www.4cdg.com/cgi-bin/calculators/missing.cgi

I get that the $76.3 payment stream over your 30 year lifespan starting at 55 is worth $18097 net (in todays dollars) <Corrected to account for lower payment starting at 55>

I get that the $100 payment stream over your 23 year lifespan starting at 62 is worth $19920 net

however the second stream starts 7 years later so it must be adjusted for the seven years of inflation
to be only $16,196 (in todays dollars). I used this calculator for the adjustment http://www.moneychimp.com/calculator...calculator.htm

Therefore per my calculation, and my numbers, the stream starting at 55 is worth about 11 percent more than the payment stream starting at 62.

- Use your own numbers and come to your own conclusion though
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Re: Take this pension as soon as eligible?
Old 09-26-2006, 04:03 PM   #7
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Re: Take this pension as soon as eligible?

Quote:
Originally Posted by HaHa
Which way to go depends on the discount rate you use, which in turn depends on your assumptions about other returns available to you. You could model it in Excel, or using a financial calculator with different discount rates. It looks to me that except at the lowest discount rates, you will be better off taking it now.
If the OP will tell me when he intends to die, and what the inflation rate will be between now and then, I would be glad to give him a definitive answer!!!

Seriously, I have a similar situation, except the benefit goes up from .70 to 1.0 from age 50-55 (0.5% per month). OP's situation clearly is more favourable as far as taking it early.

What I have done is put it into Excel with different inflation values, and calculated at what age the present value of the payment streams crosses. It doesn't give an answer, but does put it in a form a little easier to understand.

My guess is that with 3 or 4% inflation, you'll be well into your 80s before delaying the pension works out but I have not run the numbers.
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Re: Take this pension as soon as eligible?
Old 09-27-2006, 09:11 AM   #8
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Re: Take this pension as soon as eligible?

I'm ER'd, so the pension payments would be used to displace some of the draw down on my funds.

I will use the Single-Life payout, as any survivor benefit just reduces the very small pension down to very-very small!

A few days ago I figured out how to use Excel's PV function. I just wanted to see the equivalent PV of the pension starting at age 55. I assumed KTB (Kick The Bucket* ) at age 85. I really didn't know what interest rate to use, but played with it.

I went over to immediateannuity.com to see what they would come up with.* I have no idea what KTB they used.* But if I took their PV amount, and fed it back to my calculations, a 6.15% interest rate would make the two the same.

I guess the reason I was interested in the PV amount, was to get an idea how much the pension will be skewing my actual equities/fixed income allocation. I thank this board for educating me on that concept!

Years ago, I used to joke that by the time I finally got to take this pension, intervening inflation would have reduced it so much that I could put a month's payment into a gumball machine, but wouldn't be able to chew the gumballs!

Well... its a lot closer now, and I can still chew! Even though its a small pension, anything that displaces withdrawals helps!

Thanks for all the comments.
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