Non-COLA pension decision in inflationary times

[JoeWras]

Friends, this is a math problem I can't see to get a grip on. Until inflation started heating, I didn't worry about it much.

Summary: take small non-COLA pension early or wait, during inflationary times.

Background: I left MegaCorp1 in 1995 and had a small pension waiting for me starting at age 62 to 65. At the time I joked that it would be worth dinner and golf once per month. Well, inflation cooled and it was actually holding value, but suddenly it seems it may not. Looks like dinner and golf may be the value at the rate we're going.

Parameters: must take between 62 and 65. Early activation reduces benefit. Benefit stops increasing beyond 65, so take it then (or before) or be a fool. A lump sum withdrawal is specifically NOT allowed. I'm close enough to 62 to think about this. For the purposes of this, let's say I'll be eligible soon, this year.

Numbers: take now at $385 per month, or take 3 years hence at $521. Assume inflation runs at 5% during this time, and 3% starting year 3 and beyond. Assume investments make 4% the entire time. Assume I save all the cash and invest it (at that 4%) during those 3 early years and act as an "endowment" that won't be removed. Beyond that, what comes out gets spent and not reinvested. Assume the pension is active for 23 years.

Will I come out ahead taking it early, considering inflation devaluing the pension?

I'm not even sure it matters on the "come ahead" part. This is not a huge pension anyway and it just may be best to "blow that dough," especially if I die early. So my gut is I will take it early, but I'm still trying to understand the math, and also wonder if it is especially different during inflationary times.

 

[target2019]

Just one option, monthly? How about a lump sum payout?

 

[FlaMariner]

Similar situation.....

Had a non-cola pension and started taking it a year ago and glad we did....With inflation cranking up, I figure it's worth less and less every year so the sooner I get the $$$ the more they will be worth/buy.

I also figure by spending that small amount of "free money" each month, that's less money I have to pull from "real investments".

As is with you, this was not a major part of the retirement income puzzle so whatever.

(I'll leave the math formula up to the mathematicians on here)

 

[JoeWras]

Just one option, monthly? How about a lump sum payout?

I'll edit and highlight that in my text. NO LUMP SUM OPTION. Just monthly.

 

[JoeWras]

Similar situation.....

Had a non-cola pension and started taking it a year ago and glad we did....With inflation cranking up, I figure it's worth less and less every year so the sooner I get the $$$ the more they will be worth/buy.

I also figure by spending that small amount of "free money" each month, that's less money I have to pull from "real investments".

As is with you, this was not a major part of the retirement income puzzle so whatever.

(I'll leave the math formula up to the mathematicians on here)

Yeah, it's almost like a psychological boost too, right? "Hey, I AM retired, this proves it."

Not unlike the math calculations in paying off a mortgage early. There's the element of joy of free and clear home ownership that doesn't translate on the spreadsheet.

 

[FlaMariner]

Yeah, it's almost like a psychological boost too, right? "Hey, I AM retired, this proves it."

Exactly. Plus we get to say YES and be apart of the "I have a pension" crowd! We also get to answer YES when the pension poll comes up again on these boards!

Enjoy it. We call it "free money"!

Enjoy the journey.....

 

[finnski1]

Friends, this is a math problem I can't see to get a grip on. Until inflation started heating, I didn't worry about it much.

Summary: take small non-COLA pension early or wait, during inflationary times.

Background: I left MegaCorp1 in 1995 and had a small pension waiting for me starting at age 62 to 65. At the time I joked that it would be worth dinner and golf once per month. Well, inflation cooled and it was actually holding value, but suddenly it seems it may not. Looks like dinner and golf may be the value at the rate we're going.

Parameters: must take between 62 and 65. Early activation reduces benefit. Benefit stops increasing beyond 65, so take it then (or before) or be a fool. A lump sum withdrawal is specifically not allowed. I'm close enough to 62 to think about this. For the purposes of this, let's say I'll be eligible soon, this year.

Numbers: take now at $385 per month, or take 3 years hence at $521. Assume inflation runs at 5% during this time, and 3% starting year 3 and beyond. Assume investments make 4% the entire time. Assume I save all the cash and invest it (at that 4%) during those 3 early years and act as an "endowment" that won't be removed. Beyond that, what comes out gets spent and not reinvested. Assume the pension is active for 23 years.

Will I come out ahead taking it early, considering inflation devaluing the pension?

I'm not even sure it matters on the "come ahead" part. This is not a huge pension anyway and it just may be best to "blow that dough," especially if I die early. So my gut is I will take it early, but I'm still trying to understand the math, and also wonder if it is especially different during inflationary times.

At 5% inflation for the next 3 years it would take $447/month to equal the buying power of $385 now. So waiting looks better.
If taking $385 now and investing at 4%/year you would end up with about $14,700 in 3 years.
Therefore in 144months(3 years invested plus 9 more years at $385/month) you would have $56280 accumulated.
At the same time if you waited 3 years and took the $521/ month in 9 years from that point(12 years total you would have the same $56280. So"break even" is at 12 years. If you expect 23 years of checks , I would wait to 65. You are getting a 35% increase for only waiting 3 years.

 

[target2019]

I'll edit and highlight that in my text. NO LUMP SUM OPTION. Just monthly.

$385 monthly now, or $521 monthly in 3 years?

I personally would forego all the math analysis. For us this amount would pay electric and gas bills, and maybe the phone. For us the cash flow amount is something, but not enough to sweat about.

In a year I might feel differently (or not be here), but I'd start at 62.

For quite awhile I've been watching guaranteed interest in an account at 3% and feeling mighty good about that. This year the feeling is much different.

 

[JoeWras]

At 5% inflation for the next 3 years it would take $447/month to equal the buying power of $385 now. So waiting looks better.
If taking $385 now and investing at 4%/year you would end up with about $14,700 in 3 years.
Therefore in 144months(3 years invested plus 9 more years at $385/month) you would have $56280 accumulated.
At the same time if you waited 3 years and took the $521/ month in 9 years from that point(12 years total you would have the same $56280. So"break even" is at 12 years. If you expect 23 years of checks , I would wait to 65. You are getting a 35% increase for only waiting 3 years.

Thanks! You make the math look easy. And my feeble attempts at calculating this came in the same ballpark, but I was so unsure.

I'm still going to consider taking it soon after having a hard look at my possible longevity, and the blow-that-dough factor. I will be delaying SS as long as possible, however. That's my longevity insurance.

BTW, there are other factors in play regarding DW, the type of survivor option we choose and so on, but I didn't want to complicate it with that. DW's possible longevity plays a part in that decision too.

 

[JoeWras]

$385 monthly now, or $521 monthly in 3 years?

I personally would forego all the math analysis. For us this amount would pay electric and gas bills, and maybe the phone. For us the cash flow amount is something, but not enough to sweat about.

In a year I might feel differently (or not be here), but I'd start at 62.

For quite awhile I've been watching guaranteed interest in an account at 3% and feeling mighty good about that. This year the feeling is much different.

Yep. The small numbers start making the decision look less ominous financially than the boost of having some fun money -- or bill money.

 

[Telly]

....... BTW, there are other factors in play regarding DW, the type of survivor option we choose and so on, but I didn't want to complicate it with that. DW's possible longevity plays a part in that decision too.

For chicken-feed pensions (I've got one too!) seriously consider going with the no-survivor option to maximize the take in the present, before inflation chips it away to fly-feed. DW will have to sign a form that she agrees with the no-survivor choice.

I had a previous fixed pension sitting out there for years. I used to joke that if it could still be found when the time came, that I could actually take it, I could buy some gumballs out of a gumball machine with it by then.

Could start it at age 55, each year I delayed starting it would increase the amount by 3%. After age 60, no more increases. At age 55, it was under $400 a month. I took it back at age 55, with no survivor. It would pay our real estate tax bill when I started it. It's been some years... now it's just a fraction of the RE bill. It DID seem nice every month to have some $ automatically added to the checking account. I have not regretted my decision to take it as soon as I turned 55.

 

[skyking1]

At 5% inflation for the next 3 years it would take $447/month to equal the buying power of $385 now. So waiting looks better.
If taking $385 now and investing at 4%/year you would end up with about $14,700 in 3 years.
Therefore in 144months(3 years invested plus 9 more years at $385/month) you would have $56280 accumulated.
At the same time if you waited 3 years and took the $521/ month in 9 years from that point(12 years total you would have the same $56280. So"break even" is at 12 years. If you expect 23 years of checks , I would wait to 65. You are getting a 35% increase for only waiting 3 years.

Thanks Finnski. I can apply your works to my little pension decision coming up at almost the same time as Joe's.
Mine goes up 8% per year, from 76% @62 to 100% @ 65.
Mine is even smaller potatoes, but it is still potatoes. Maybe a value menu order of fries

 

[SevenUp]

At 5% inflation for the next 3 years it would take $447/month to equal the buying power of $385 now. So waiting looks better.
If taking $385 now and investing at 4%/year you would end up with about $14,700 in 3 years.
Therefore in 144months(3 years invested plus 9 more years at $385/month) you would have $56280 accumulated.
At the same time if you waited 3 years and took the $521/ month in 9 years from that point(12 years total you would have the same $56280. So"break even" is at 12 years. If you expect 23 years of checks , I would wait to 65. You are getting a 35% increase for only waiting 3 years.

+1

The "Three ways to evaluate 'pension now' vs. 'pension later'" section (near row 80) of the 'Misc. calcs' tab in the case study spreadsheet can be used to replicate those results, and for analogous situations.

 

[JoeWras]

+1

The "Three ways to evaluate 'pension now' vs. 'pension later'" section (near row 80) of the 'Misc. calcs' tab in the case study spreadsheet can be used to replicate those results, and for analogous situations.

Thanks. Lots of interesting stuff that the MMMers put together.

 

[Chuckanut]

Could start it at age 55, each year I delayed starting it would increase the amount by 3%. After age 60, no more increases. At age 55, it was under $400 a month. I took it back at age 55, with no survivor. It would pay our real estate tax bill when I started it. It's been some years... now it's just a fraction of the RE bill. It DID seem nice every month to have some $ automatically added to the checking account. I have not regretted my decision to take it as soon as I turned 55.

Your pension situation above reminds me of these two ads I have seen for a fixed annuity. These ads are 11 years apart (50 and 1961). Note the 50% increase in funds needed to live the their fun in the sun lifestyle.

 

[pb4uski]

...take now at $385 per month, or take 3 years hence at $521...

$521 in 3 years in relation to $385 now is an over 10% annual increase... much better than the 6-7% that SS increases at those ages. I'd wait unless the increase if front-loaded to the first or second of the 3 years.

 

[Exchme]

I would use immediateannuities.com to see what the market thinks of the two options. I'm in a similar situation where I have a trivial pension coming from a long ago job but I want to get the most out of it.