When to take pension?

[jjquantz]

Two purposes to this post - 1) to see if my analysis makes sense, and 2) to hear other's opinions on the best options.

Based on my 15 year stint as a teacher I am entitled to a non-COLAd pension. The amount will not make me rich but amounts to slightly more than pocket change. The key characteristics of the pension are:

1) no COLA
2) very sound pension management, but still?
3) "Full" benefit at age 65,
4) 3% reduction per year for each year before 65 that one starts collecting.
5) 100% survivor benefit for DW is available at ~7% haircut to benefit.

So, in round numbers, One could collect $1000/month at age 65 or $700 per month at age 55, $730 per month at age 56, etc.

A straightforward calculation shows that the break-even point in nominal dollars is age 85. However, if I assume even a modest inflation rate of 2%, it takes to age 100 to break even in inflation-adjusted dollars. This ignores any effect that investing the proceeds might have on the total. Of course, if taxes will be lower at age 65 than at 55, this will have some effect, but only on the first 10 years, and it is entirely possible that RMDs could lead to a higher tax rate later in retirement.

So, on the numbers it looks like one should take the money now unless one expects one's tax rate to drop later in retirement. Even then, one would need to look at the specifics to be sure.

Of course, if you look at this as longevity insurance, the higher payouts later in life might be worth leaving some money on the table.

Does this analysis make sense?

 

[Senator]

Is the $1000 per month, today's dollars, or future dollars? i.e., as long as you do not start collecting, is it earning enough to offset inflation?

Do you actually need it to live a decent life?

I am going through the same decision, 56 or 65. I am planning on waiting until 65 to let it grow.

It doesn't make sense to wait for the larger amount at 65, unless the fixed amount increases if you do not take the pension.

 

[jjquantz]

Is the $1000 per month, today's dollars, or future dollars? i.e., as long as you do not start collecting, is it earning enough to offset inflation?

Do you actually need it to live a decent life?

I am going through the same decision, 56 or 65. I am planning on waiting until 65 to let it grow.

It doesn't make sense to wait for the larger amount at 65, unless the fixed amount increases if you do not take the pension.

If I understand you correctly, it is in future dollars that will be worth less than today's dollar. So if inflation runs at 3%, the expected value of the monthly income will have the same purchasing power at 65 as it does at 55, but one would lose 10 years of income. But one would have a stream of income that was [-]30% larger[/-] (actually 42% larger).

Another way to frame it is: If one starts collecting at 55 and doesn't start spending until 65, there would be $84,000 in the bank and a guaranteed income of $700/month. If one waited until age 65 to collect, the income stream would be $1000/month, but there would be nothing in the bank.

Pulling the $300/month difference out of the bank would make up the difference for over 23 years.

This ignores inflation and investment returns.

Of course, if one is just going to spend it, then this new scenario is irrelevant.

The difference between taking it early or later is not going to change our lifestyle. It's just another optimization problem. Retirement seems to be full of them.

 

[Chuckanut]

Are there any other considerations?

For example, I needed to take my pension ASAP because that was required to buy into a very favorable group medical insurance plan. One had to be collecting a pension to buy into the plan. (There was no ACA at that time so medical insurance would have been hard to get and very, very expensive. )

I pay 100% of the premiums, but the monthly premium is well below what I would pay for a less desirable plan even with ACA.

How secure are your pension benefits? Will you get SS or were you exempt from contributing to it? After Detroit, these are questions that must be asked and, hopefully, answered.

 

[jjquantz]

Are there any other considerations?

For example, I needed to take my pension ASAP because that was required to buy into a very favorable group medical insurance plan. One had to be collecting a pension to buy into the plan. (There was no ACA at that time so medical insurance would have been hard to get and very, very expensive. )

I pay 100% of the premiums, but the monthly premium is well below what I would pay for a less desirable plan even with ACA.

How secure are your pension benefits? Will you get SS or were you exempt from contributing to it? After Detroit, these are questions that must be asked and, hopefully, answered.

The plan is well-managed and is nearly fully funded. The state has taken steps to make sure that it will be fully funded in the near future. These steps do not involve cutting existing benefits, so I don't have any significant worries on that front.

There are no other considerations, the question is just do I take it now or wait for later. I am eligible for SS. The pension has no effect on the SS benefit nor does SS have any effect on the pension.

 

[Chuckanut]

The plan is well-managed and is nearly fully funded.

<snip>

There are no other considerations, the question is just do I take it now or wait for later. I am eligible for SS. The pension has no effect on the SS benefit nor does SS have any effect on the pension.

So your are in a good position. You only have to decide which chicken to pluck.

 

[Shawn]

Does this analysis make sense?

Yes, assuming your math is correct. It appears that you're considering the key variables (e.g., inflation, potential investment returns, taxes, pension stability). It's a common retirement question.

I go through the same sort of calculations myself. I ask, "if I retire today at age 55, should I start my pension payments now or should I wait to receive larger payments beginning at age 60?"

I consider factors like medical insurance, too. If I delay my pension until age 60, my low income between 55-60 will qualify me for fully-subsidized ACA coverage (as opposed to paying the premium for retiree medical benefits through my employer). Also, I consider the benefit of rolling some pre-tax money into a Roth IRA if I delay my pension until age 60. My income would be low from 55-60 so I could do this without significant tax consequence.

However, for the vast majority of cases, the optimal approach for me is to start my pension payments as soon as I retire. The breakeven age for delaying in many cases is usually quite high - sometimes infinity. The biggest exception is in an environment of very low investment returns.

The jury is still out but I'll probably begin my pension payments as soon as I retire. That said, I look at the longevity insurance aspects if I delay. Seeing larger dollar signs in the future has some appeal even if it is not the optimal financial approach.

 

[GrayHare]

I did not see anyone mention that at least some pensions go *poof* if you die before starting them, and even a surviving spouse would get nothing. You might check if your pension is one of these.

 

[pb4uski]

.....A straightforward calculation shows that the break-even point in nominal dollars is age 85. However, if I assume even a modest inflation rate of 2%, it takes to age 100 to break even in inflation-adjusted dollars. This ignores any effect that investing the proceeds might have on the total. ....

......Does this analysis make sense?

No, it makes no sense at all to include inflation but exclude investment returns. Either include neither or both. The base for interest returns would be the inflation rate. That is why you get a silly result when you use inflation adjusted dollars.

 

[pb4uski]

I did not see anyone mention that at least some pensions go *poof* if you die before starting them, and even a surviving spouse would get nothing. You might check if your pension is one of these.

Not mine... if I pass before I start collecting she steps into my shoes. I think it would be unusual for it to just go "poof".

 

[jim584672]

Based on your numbers it seems like you should take it earlier. Just make sure you don't knock yourself out of benefits by doing so.

My pension is as follows...
Percent increase per year in monthly benefit:
55
56 5.80%
57 5.48%
58 5.19%
59 4.94%
60 5.88%
61 5.56%
62 5.26%
63 1.09%
64 7.61%
65 6.59%

 

[jjquantz]

I did not see anyone mention that at least some pensions go *poof* if you die before starting them, and even a surviving spouse would get nothing. You might check if your pension is one of these.

That is actually the question that got me started thinking on this. I was afraid that if I would go "poof", DW would be left with a small lump sum payment. After investigating, I now know that she could elect any of my pension options, even after my demise. She has a limited time window to do that, however.

 

[jjquantz]

No, it makes no sense at all to include inflation but exclude investment returns. Either include neither or both. The base for interest returns would be the inflation rate. That is why you get a silly result when you use inflation adjusted dollars.

Back to the spreadsheet! I'm guessing that it still won't make the late option attractive because several years of investment gains from the early option will just make the differential worse. But I'll check it out.

 

[jjquantz]

Based on your numbers it seems like you should take it earlier. Just make sure you don't knock yourself out of benefits by doing so.

My pension is as follows...
Percent increase per year in monthly benefit:
55
56 5.80%
57 5.48%
58 5.19%
59 4.94%
60 5.88%
61 5.56%
62 5.26%
63 1.09%
64 7.61%
65 6.59%

That's an interesting quirk around 63-65 for you. Given that yours is running over 5% per year, I might wait in your case, but it would be close. A quick calculation shows that your benefit at 65 is 68% larger than at 55. Mine is 42% larger.

If I build the same table for mine, I get:

55
56 4.29%
57 4.10%
58 3.95%
59 3.80%
60 3.66%
61 3.53%
62 3.41%
63 3.30%
64 3.19%
65 3.09%
66+ 0%

Amazing how a couple of percent per year changes things. The power of compounding.

 

[jim584672]

In my case the drop at 63 was questioned by many people. The answer was that the plan was designed like this on purpose. Age 62 is the preferred age in the plan.

 

[jjquantz]

In my case the drop at 63 was questioned by many people. The answer was that the plan was designed like this on purpose. Age 62 is the preferred age in the plan.

But the three years from 63-65 still give an average of just over 5%, consistent with the rest of the years. I would have thought that if they really wanted people out at 62 they would have done something more like what my plan does at 65 - you get NOTHING if you stay around, so why stay around.

 

[NW-Bound]

1) no COLA
4) 3% reduction per year for each year before 65 that one starts collecting.

A straightforward calculation shows that the break-even point in nominal dollars is age 85. However, if I assume even a modest inflation rate of 2%, it takes to age 100 to break even in inflation-adjusted dollars.

If inflation is exactly 3%, then you never catch up if you delay. This is assuming that you are going to spend it and not invest it.

Historical inflation runs 3.22% from 1913-2013. Recently, it has been lower, being 3.16% in 2011, 2.07% in 2012, and 1.47% in 2013. It may stay low in the next few years, but the difference between inflation and the 3% is small.

I would take it early.

 

[zinger1457]

If you take your state pension early do you still get a COLA for all the years before reaching 65? I retired early and plan on deferring my federal pension until I'm 62, one reason being I don't need it. If I did take it before turning 62 there's a 5%/year reduction and the COLA doesn't kick in until 62.

 

[jjquantz]

If inflation is exactly 3%, then you never catch up if you delay. This is assuming that you are going to spend it and not invest it.

Historical inflation runs 3.22% from 1913-2013. Recently, it has been lower, being 3.16% in 2011, 2.07% in 2012, and 1.47% in 2013. It may stay low in the next few years, but the difference between inflation and the 3% is small.

I would take it early.

Thanks, everyone. I am definitely inclined to take it early. After I finish the taxes this year I'll run some scenarios through the tax software and see if I can get a good feel for the tax implications in the short run. If this would bump us up a bracket then I might decide to delay. However, as long as DW is working I could divert a big chunk of it into a spousal IRA and essentially avoid taxes, right?. That's one of the things that will depend on the details of the tax review.

 

[jjquantz]

If you take your state pension early do you still get a COLA for all the years before reaching 65? I retired early and plan on deferring my federal pension until I'm 62, one reason being I don't need it. If I did take it before turning 62 there's a 5%/year reduction and the COLA doesn't kick in until 62.

No COLA at all on this pension, so it's just the reduction for taking it early.

 

[zinger1457]

No COLA at all on this pension, so it's just the reduction for taking it early.

I should have spotted that.