Should I take my company pension early?

[clarksvilleal]

Hi - I have just taken the plunge and retired at 60. I am currently wrestling with whether to take my (traditional defined benefit) pension early, or live off of my (regular taxable) IRA until I am 65. If I take the pension now, I lose about 27% of the full retirement age pension. But I think if I can keep more of my IRA money invested by taking the pension early, and get 8% or more return on the IRAs (which I expect to based on my experience for a number of years), I may be better off taking the pension early. How do I decide which is better? I have enough in the IRA to live on, but would prefer to leave as much there as possible for now, for various reasons.

One factor to consider is that while my crystal ball isn't telling me how long I have to live, both my parents had long-lived families, with several aunts/uncles on each side living into their 90's, and a couple to 99. (Dad died of lung cancer early - heavy smoker; Mom lived to be 87 even though she had a serious heart problem from a childhood strep infection.)

I'd be most grateful for any insights. Thanks much,

[wilkens21]

A couple of questions...as this is a tough (and important) question with no right answer.

Do you have enough in the bank/savings to actually make it to 65 w/o touching either the IRA or the pension? Also how are you handling things like health insurance? Do you have private or is your firm going to cover you til 65?

[TickTock]

clarksvilleal,

You can plug in different assumptions regarding expected age of death, rate of return, inflation, and volatility of investments to arrive at the "proper" answer.

For a simplified example, if you assume inflation at 3% per year and your pension is $100k per year (round number chosen for convenience), then if you take the pension now, the present value is:

73 + 73/(1.03) + 73/(1.03^2) + 73/(1.03^3) + ... + 73/(1.03^n) in year n

And the present value if you wait is:

100/(1.03^5) + 100/(1.03^6) + 100/(1.03^7) + ... + 100/(1.03^[n+5])

Find out where they cross, estimate whether you're likely to live longer, and voila! the correct choice emerges.


However, I offer a different perspective: Take the pension now.

The money you collect is yours; no one can take it away. Who knows what will happen to the company in 5, 10, 20 years? There is an impossible to quantify but real risk that you won't receive the money you're promised in the future.


See my sig...

[travelover]

Quote:

Originally Posted by TickTock ...............However, I offer a different perspective: Take the pension now. The money you collect is yours; no one can take it away. Who knows what will happen to the company in 5, 10, 20 years? There is an impossible to quantify but real risk that you won't receive the money you're promised in the future.....................

I second this, especially if the pension is not government funded.

[RetireeRobert]

So you have 5 years to go till you would get "full" pension. If you take it now at age 60, you get 27% less than at age 65.

Now in those 5 years, can you likely earn more than 27% on your IRA funds? I think very likely. You only need to earn 6% a year for 5 years on your IRA to exceed what you "lose" on the pension. And those IRA earnings are tax deferred.

AND, you don't really "lose" all of that 27% cut on your pension by taking it now. You get an additional 5 years of pension payments you would not get otherwise. if you live an average lifespan, you come out even "acyuarially" whether you take your pension reduced at age 60, or full amount at age 65.

The plus is, you can let your IRA ride and compound and earn those 5 years extra. So even if you liove longer than "average actuarial lifespan" I think the IRA's extra 5 years compounding gets you ahead.

I'd say, take the pension now at age 60. Leave your IRA to compound tax-deferred.

[haha]

If you think that it can ever be good idea to take SS early, then it is a better idea to take this pension early. The SS annuity increases 32% from age 66 to age 70-and that is just the starting payment. Remember that SS comes with COLA, and survivor and spousal benfits that are more generous than almost all private pensions.

ha

[Darryl]

I third if it is not a government pension take it now.

You can do a lot of analysis and it is a very important question. Tick Tock just laid out some formula's run them and be sure the discount for now is something you can live with. There are existing threads that can help guide you on current pension funding to help with current benchmarks of the funds solvency. you can look at the long term prospects for your company's industry and whether it will be there to continue pushing money in to the fund. Will your company be bought out and what will the acquirer position be on a funding level for your pension fund, the minimum required by law?? etc. etc. etc... the things that can go wrong are to numerous to list. If you don't need the money now that's good take it anyway and invest it for yourself in a diversified sustainable way.

That's my intention and I know I'll sleep better at night.

[ziggy29]

When it comes to things like pensions, Social Security and the like, I'm firmly in the camp of taking them as soon as you can in most cases. Get in before they can change the rules on you or before they become insolvent; the rules are almost never changed on people who are currently receiving monthly checks.

[clarksvilleal]

Thanks much, all those who replied. I am really happy I stumbled on this forum yesterday - I was a little floored by getting so many replies so quickly.

I think I have already made my decision based partly on your inputs, and partly on my own concerns about the future of my company's pension plan. It was listed as one of the most underfunded plans of major U.S. corporations. Up until 2000, I had high confidence in my company's survival and in its continuing to thrive in the long run. Unfortunately that confidence is now gone, due to major (IMO) management blunders, lack of strategic vision, etc. We got caught big time in the tech crash of 2000-2001 (although there were other unrelated mgmt missteps before and after that), and have not fully recovered yet, and at this rate we may never recover. On top of that we have a well-known corporate raider on our tail basically trying to get us to turn over the significant cash we still have to him. So it seems, as many of you have warned, that I should take it while I can, and keep more of my IRA money invested in the meantime, because it may not last. (My pension even taken early is well above the current cap of the PBGC on pension payouts for plans they take over.)

BTW, I am 60 but will turn 61 next month (December '07), so in reality I only have 4 years to my company's Full Retirement Age, but of course 5 years to the SSA FRA. And to answer Wilkens' question, yes, I have sufficient IRA assets to last well beyond 5 years if I needed to only use the IRA. But now I am convinced that with the potential uncertainty of the company pension's future, plus the lack of a COLA provision, I should go ahead and start it immediately - probably Jan 1. is the earliest I can do it now.

Our company also has retiree medical benefits, but they are fairly expensive - about $8500/year for family coverage (I am married and still have two dependent kids in college). But I did sign up for the plan and taking the pension early will help with that.

The last piece of the puzzle will be Social Security, and I just read an excellent paper published by the Pension Research Council - which I also found through this site, thankfully - entitled "Rethinking Social Security Claiming in a 401(k) World." After reading that article, which is somewhat technical but chock full of solid research, I expect I will delay taking Social Security until at least my FRA of 66, and possibly until I am 70, depending on my and my wife's health at age 66 (we are the same age).

In conclusion, many thanks to all who took the time to reply to a newbie and share your thoughts. This is a fantastic forum and I am sure I will be spending a lot more time here as I get into this retirement phase of my life.

[tightasadrum]

clarksvilleal,

It's interesting to read the slant on this thread. Everyone takes a VERY conservative position for taking the pension now. Maybe I need to rethink this whole issue myself, but I've always followed the John Bogle line of thinking on SS: if you need it, take it. If not, it's better to wait. Remember, with SS it's COLA'd, so the compounding starts at a higher level if you wait.

Whether you need it requires a personal definition of what "needing it" means. But once you turn on your pension, it's fixed. Other threads have gotten into the possibility of paying back early SS payments, but that's another issue.

I'm 61-1/2, and my plan has been to wait until 65. However, I do have income from rental property that helps pay the bills. That said, I will continue to study whether I should take it before 65. An alternative for you might be to split the difference, take it somewhere between 60 and 65 and get a little closer to the max. You'll have to judge the soundness of your company's pension.

By the way, welcome to this board. It's good to have another early-60-something to compare issues with.

[ziggy29]

Quote:

Originally Posted by clarksvilleal The last piece of the puzzle will be Social Security, and I just read an excellent paper published by the Pension Research Council - which I also found through this site, thankfully - entitled "Rethinking Social Security Claiming in a 401(k) World." After reading that article, which is somewhat technical but chock full of solid research, I expect I will delay taking Social Security until at least my FRA of 66, and possibly until I am 70, depending on my and my wife's health at age 66 (we are the same age).

Are you aware of the Social Security "loophole" which allows you to take SS early (say at 62) but have the option to "give back" everything they have paid you, *without interest*, and wipe the slate clean as if you never took it at 62?

So if you don't need the income at 62 but want to hedge your bets (it would be a shame to wait until 66 to take SS if you unexpectedly died at 65, for example), you can take it at 62, put every cent they pay you in an interest-bearing savings account, keep the interest and give back what they paid you over the course of four years (or how ever long you waited)...and then apply to start taking it at age 66+ with a higher benefit level.

[RetireeRobert]

Quote:

Originally Posted by clarksvilleal Our company also has retiree medical benefits, but they are fairly expensive - about $8500/year for family coverage (I am married and still have two dependent kids in college). But I did sign up for the plan and taking the pension early will help with that.

That $8500 year for medical is actually kind of a good deal for family coverage in my opinion. That is $708 month. We are paying $868 a month for family of four coverage. I think you have a good deal there.

Welcome to the board, and please continue either questions or contributions posts.

[clarksvilleal]

Hey, Drum, good to hear from another early 60's guy. (I was going to say "boomer", but I guess technically you were born a bit too soon to be a boomer, eh?)

Well, I just did a little more digging and found the item below that reinforces my decision. My company pension uses the exact percentage reductions cited there, with the additional detail that our payout percentage increases 6.6% a year (actually prorated on a monthly basis) from age 60 to 65. So at the end of this year, when I turn 61, it will be at 26.4% reduction from the max, to be precise. So actuarially I am better off taking it early, according to this source, which given who they are presumably are a reliable authority on actuarial matters.

Ziggy - I didn't know about the Social Security "loophole" you mentioned. I'll definitely look into that, but so far my research seems to indicate waiting until 70 for me, and perhaps having my wife take hers early, may be the best approach for SS.

"31 A common early retirement reduction in a plan with age 65 as the normal retirement age reduces the benefit 20% at age 62, 33% at age 60, and 50% at age 55. An actuarial reduction using 6% interest and CAM 94 mortality would reduce the benefit 25%, 37%, and 58%, respectively. The common early retirement reduction provides benefits more valuable (with a lower reduction) than an actuarial reduction and is referred to as subsidized early retirement. (Issues for implementing phased retirement in defined benefit plans, North American Actuarial Journal, Jul 2003 by Forman, Jonathan Barry, Scahill, Patricia L)"

[tightasadrum]

clarksvilleal,

From what I understand from my pension people, my pension takes a deeper cut than the 25% your article suggests at 62. I do need to get what it really is in writing though in case I decide to turn it on.

BTW, you may be younger than me by a few seconds, but I'm still labeled a boomer, the first year of it, not that it gives me any breaks on my LTC insurance.

[chinaco]

clarksvilleal,

As others have stated (in so many words)... the answer to your question lies in the assets (including pensions) you own that will generate an income stream and your expected inflation adjusted expenses (including health care)... for your expected life span.

If you think your company is at risk and you are depending on them for health care and pension... use a worst case a worst scenario for the calculation. That would be what the PBGC would cover for your pension and you paying for full health care insurance until you reach 65. PBGC will show what they cover. You can get a rough quote for health insurance from AARP.

You need to break out the spreadsheet and do some analysis. Take your time doing that analysis... no need to rush things at this point.

Of course, if your company is as bad off as you say... the decision could be made for you.

[clarksvilleal]

OK, fellow boomer Tight - I stand corrected.

Well, Chinaco, your message was timely. I am now learning that I may lose my retiree health coverage very soon. So that is an immediate problem I already have to deal with. Is AARP a good place to go for health insurance? I started doing some internet searching, and United healthcare seems to have good rates - about the same as what I have been paying for retiree coverage. I guess I should have thought of AARP right off the bat, since I am a member.

Do any of you all have coverage with AARP, and if so roughly what is the cost?

[RetireeRobert]

Quote:

Originally Posted by clarksvilleal OK, fellow boomer Tight - I stand corrected. Well, Chinaco, your message was timely. I am now learning that I may lose my retiree health coverage very soon. So that is an immediate problem I already have to deal with. Is AARP a good place to go for health insurance? I started doing some internet searching, and United healthcare seems to have good rates - about the same as what I have been paying for retiree coverage. I guess I should have thought of AARP right off the bat, since I am a member. Do any of you all have coverage with AARP, and if so roughly what is the cost?

My own biased opinion is--Aarp is the last place I would go for any kind of insurance. I got quotes on car, home and LTC from Aarp's "paying sponsors", and was shocked at what bad deals and lousy terms they had compared to what I could find elsewhere. Basically, those insurers you see sporting the Aarp logo, pay Aarp for the privelege of getting that tie in. I think it is a big scam myself. On car insurance the Aarp-Hartford quote was hundreds higher than I have been paying with a national comapnay for the saem coverage. Their LTC plan from Met Life didn't have the LTC features I wanted and the premium rates weren't that great either.

For health insurance I would check into your Cobra rights. Would also inquire with your state Insurance Commissioner as to health insurance sources and options, and would check with the local Regence BCBS affiliate, and also, ehealthinsurance.com for quotes and availability from various companies in your area for individual policies.

[ziggy29]

Quote:

Originally Posted by RetireeRobert My own biased opinion is--Aarp is the last place I would go for any kind of insurance. I got quotes on car, home and LTC from Aarp's "paying sponsors", and was shocked at what bad deals and lousy terms they had compared to what I could find elsewhere.

Yeah, like when they had AARP Funds through Scudder and charged more than 0.40% for an S&P 500 index fund.

And even their new funds have a 0.20% 12b-1 fee. It's funny how they were so gung-ho against "personal accounts" in Social Security being a "giveaway to Wall Street" when they were taking about TSP-style funds with a 0.06% expense ratio. If they were putting their money where their mouths were, they'd just close up their AARP funds and tell their members to give the money to Vanguard instead.

[chinaco]

Quote:

Originally Posted by clarksvilleal Well, Chinaco, your message was timely. I am now learning that I may lose my retiree health coverage very soon. So that is an immediate problem I already have to deal with. Is AARP a good place to go for health insurance? I started doing some internet searching, and United healthcare seems to have good rates - about the same as what I have been paying for retiree coverage. I guess I should have thought of AARP right off the bat, since I am a member. Do any of you all have coverage with AARP, and if so roughly what is the cost?

No. I just referred to it because it can provide you a quote to analysis purposes to what-if in a spreadsheet.

If you are actually looking for coverage you will probably want to look at all options available to you. I would look at the AARP plans... But ultimately, your deal is with the Insurance Company. So you need to be comfortable with the company and the plan.

Good Luck. Keep us posted on your findings.

[clarksvilleal]

Interesting. I detect significant animosity to AARP from some of the posters.

I am no big fan of AARP either, esp. some of their political advocacy. I didn't agree with their vehement opposition of the "personal accounts" for social security, but didn't realize that one of their motives might have been as self-serving as Ziggy implied.

However, the one advantage I thought I might have with AARP is that you get a true group health insurance plan with Aetna through AARP, and, while I am far from expert in this area, I think there are some advantages and additional protections with group plans that you don't get with individual plans, in addition to possibly better rates. The rate quotes they had on the AARP site seemed at least competitive with some rate quotes I got at ehealthinsurance.com. Anyway, I've got to keep digging. I may have to act quickly.

Thanks to all for the feedback.