Take pension payments early

[sealions218]

Hi! New here, and been trying to search and find information on this.

My husband will be 58, in a month. He is working full time with a pension and 401K, I work full time with a pension and 401K. I am 51 years old.

My husband has a previous pension from old job, and he can take it with reduced benefits. The pension has been in critical status. I think currently it is out of it, not sure. So I have been trying to persuade him to go for it, as who knows if it will be there in the future. I want him to take all, without a spousal benefit. Our state does not require income tax on pensions.

So, my thought is to do this if it is allowable and possible. Take the pension now on a reduced rate, will owe fed tax but not state tax. $13,091 estimated annually at age 58, or $22,572 at age 65. If die before taking at age 65, spouse can get 50% for life possibly. So doing it now, and take the current payroll he works and increase the contribution to the 401K (to a secure investment-maybe savings) by the amount of the pension for pre-tax contribution, that will not be subject to federal or state. (Looks like at his age with catch up, can do the full amount). I say get the money now while you can and not risk it to wait for higher amount and not get anything. Side note, we have significant debt. Our current annual income together, quite low it seems compared to others on here, is $130,000.

The pension is a 6% deduct for each year before age 65. But I figure with investing it we come out ahead, and for sure he will have to live 10 years after age 65 to make up the amount already earned prior to age 65. He would pass it at age 75, starting at age 65, the total earned will be $3000 more. Of course risking and hoping to live to 75.

How can I get him to see my way of thinking, and does anyone see anything wrong with my thinking? I think he fears we will just spend it vs. saving it.

Thanks for any advice, or direction to other forums and links that may cover similar scenario's.

Sealions

 

[ERD50]

The pension has been in critical status. ... who knows if it will be there in the future. ... I say get the money now while you can and not risk it to wait for higher amount and not get anything. ...

Isn't this pension insured by the PBGC?

The pension is a 6% deduct for each year before age 65. But I figure with investing it we come out ahead

That's a BIG assumption.

I'd also run the numbers on that Fed Tax - adding pension income to your job income will cause it to all be taxed at your marginal rate.

And when do you plan to retire? You didn't mention expenses or other savings versus 'significant debt'? I sure would not consider $130,000 combined income to be considered 'quite low' here - there are a wide range of people posting here. My income was generally less than that (cap gains and/or bonus might push it over) when I retired.

-ERD50

 

[sealions218]

I think it would be insured by PBGC, but I had thought that may mean you may get only a portion of what was suppose to be. So my thought is you wait for the higher payment, only to get a lesser amount if the PBGC took it over. Take the money now while you can.

Ok, also, I am being simple. The investment I mean is not counting on it getting any real gains as it will be in a 401K in a savings account with virtually no risk, but no gains really. The value it is worth is just the amount drawn prior to waiting to the older age.

The tax, we would pay would only be Federal. My thought was I would sort of double dip since I would not pay state income tax. I would turn around and have the money received matched by payroll deduction pre-tax to the 401K plan. Therefore offsetting taxes. Figuring not paying state taxes on the pre-tax, or the amount received from the pension.

The plan on retirement is up in the air. Not sure it will be early. Most likely have to wait till over 65 or so.

Thanks!

 

[gauss]

So, my thought is to do this if it is allowable and possible. Take the pension now on a reduced rate, will owe fed tax but not state tax. $13,091 estimated annually at age 58, or $22,572 at age 65. If die before taking at age 65, spouse can get 50% for life possibly.

Assuming that those are annual figures (not monthly), then they should both be well below the PBGC guarantee maximum. This is under current law.

I would keep an eye on the pension funding status and pay attention to any changes effecting pension law at the federal level. If PBGC limits were changed by law, I would expect to see an active discussion of it on this board.

-gauss

 

[pb4uski]

The pension will be permanently reduced based on speculation/suspicion that the pension plan is in trouble even though the pension is well below the PBGC limit. Not a good idea to take it now IMO.

I would agree that the federal tax implications could be mitigated by adding an equal amount to 401k contributions so taxes isn't a concern.

Still not a great idea IMO. Like gauss suggests, monitor the pension plan solvency. What is the current funding status of the plan?