Delay taking pension?

[ER Fireball]

I am able to retire from Megacorp at my discretion. If I retire before age 60, my pension will be calculated, then decreased 4% for each year. Today that would mean a 20% discount. As an alternate, I can wait to begin drawing my pension until age 60, and then draw the full amount. The golden handcuffs approach is to work 5 more years, increase the pension, and draw with no penalty.

I guess this is really similar to making the decision regarding when to draw SS- 62, FRA, or 70?

FIRECalc says that we have enough. Delaying the payments will increase future payments, so I guess you can calculate how many years it takes before the lines cross. Assuming you figure interest correctly, don't croak in the meantime, etc.

I would appreciate any thoughts!

 

[W2R]

It's a tough decision, and only you know what is right for you.

All I can think of to say, is that retirement is a lot better than I ever dreamed it would be. So, maybe take the improvement in your situation after retiring into consideration.

 

[Buckeye]

If you stay until at least 55, I believe you can begin penalty-free distributions from your current employer's 401(k) (if you have one) as soon as you retire.

If you croak before you start your pension, how much is paid to your spouse?

 

[martyb]

As a federal employee, I can retire in 18 months, at age 55. Or...I could keep working, thereby increasing my pension by 2% for each additional year. If I retire on time in 18 months, I'll get almost 70% of my high-3 average. In some ways, it's tempting. My wife will still have 3 yrs to work after I retire if I go out on time. I am expecting a military pension as well, but it won't begin until my 60th birthday. I expect very little SS, since I'm a govt. employee affected by the WEP. So...I do have some incentive to work a little beyond my first opportunity in 18 mos. But....I've thought about being able to retire on my 55th birthday for the last 10 yrs. Every day, I've daydreamed about it, calculated, re-calculated, talked about it to anybody who'd listen, and as soon as I could, I began trying to stash away as much as possible, to have a supplement to the pension. If I worked some additional time, sure....I'd have a bigger pension. I'd also have less time in retirement. None of us knows how long we'll be here, or how many years in good health we'll have to enjoy our non-working years. I'm confident we'll be in good enough shape for me to eject in 18 months, so unless hell freezes over, that's what I'll do. Technically, I could continue working as long as I want. In the scheme of things, I've got a decent job. Not getting rich, but decent pay and I find the work rewarding. I contribute directly to our warfighters efforts at defending us & our allies. They depend on what I do, and that makes me feel good. That said, I'm very much looking forward to calling my boss and telling him I've decided it's time to go. I figure I'll tell him about 3 months ahead of time, so he can get a vacancy announcement going, and maybe find someone to take my place. I'm not concerned too much with training my replacement, that can be somebody else's job. There are plenty of folks for that. Anyhow...just my 2 cents. I'm thinking that when you have enough, then it's time to consider getting on with the rest your life. At least that's the way I see it. When I can retire, I will retire. January 18th, 2013.

 

[GregLee]

FIRECalc says that we have enough.

Then retire, I say, unless you like your work. Life is short.

 

[ER Fireball]

<<If you stay until at least 55, I believe you can begin penalty-free distributions from your current employer's 401(k) (if you have one) as soon as you retire.>>

I didn't know that! I just turned 55. Investments are such that I would not need to tap any tax advantaged money for many years. If I delay drawing the pension, I will draw down some savings to replace the paycheck or pension cash.


<<If you croak before you start your pension, how much is paid to your spouse?>>

She will get 75% of whatever pension I lock in. She gets the health benefits also, even if I croak first. Pretty decent old-fashioned benefits.

 

[Buckeye]

Since your employer is a megacorp, I'm pretty sure your plan has the "start penalty-free withdrawls at 55" provision. I believe you must leave your money with them while taking the distributions. You don't get to roll the 401(k) out into an IRA and take penalty free withdrawls prior to 59.5 (unless you are doing a 72t).

Check with your benefits folks. I would also expect it is in your annual benefits book.

 

[arebelspy]

I have a similar situation, where I lose 4%/yr for each year before age 60. My pension is also COLA'd at 2% after 3 yard, then 2.5%, 3, etc all the way up to capped at 5% after yr 8.

So the earlier I start taking, the sooner I get to the 5%/yr growth, but I lose 4%/yr taking it early. Plus my situation is a bit more complicated in that I can buy up to 5 years of service.

I just made an excel spreadsheet that did time value of money calc on the money I'd spend to buy years, and made about 15 different graphs showing each distribution that calculates how much I'd get if I retired at age 50 (only 60% of my pension, but then starts COLAing) vs 55 vs 40 or 45,, versus buying 0 years vs 5 years, etc. Lots of graphs.

Given I live long enough, the best way was to hold off retiring until full 60 (that slightly surpassed the others in my late 80s IIRC). Basically some of the graphs started higher, but with a lower slope, others eventually caught up and passed, but at different ages, etc.

I've pretty much decided I'll start taking the pension at 50, as the sweet spot between not giving up too much pension, starting the cola earlier, etc. You may want to run similar calculations yourself to decide when it'd be best to take yours (if it's COLAd, etc)

 

[chinaco]

Some things to consider.

1. Does the pension have a cola?
2. Is the Pension fully funded (i.e., solid financial footing)?
3. What is the state of your health.
4. Are you married? Will your spouse be able to continue to receive the pension?

You should create a complete financial plan that considers all of your financial resources. For pensions and SS, look at the common strategies to maximize the benefit for you and your spouse... but you should also consider longevity risk (i.e, chance of outliving your money).

That 20% increase is for the rest of your life. Part of the decision will be based on your other resources. If you ER do you have enough other assets to delay? Assuming you and your spouse both qualify for SS... the same goes for SS. A common strategy for SS is for one spouse to take it early (e.g. 62) and the other (higher earner) take it late (e.g., 70). The surviving spouse should be able to keep the larger benefit.

Take your time to understand your options and think about them... do not dismiss any of them off-hand. Sometimes, if you carefully consider all of your (workable) alternative, some option that you thought did not matter (and dismissed) can be very helpful.

If you are not willing to spend the time to learn and plan... Consider consulting with a fee-based financial adviser to get a plan worked out. But do your due diligence homework and make sure the FA is competent and has experience!!

 

[Ken11]

I will be making this decision by the end of this year.
I retired last year but havent yet taken my pension.
My pension is reduced 5%/yr for early participation.
However, I also have the option to take either an annual amount ( no cola)
OR a lump sum.
The math related to the lump sum will likely cause me to pull the trigger this year.

Considerations:
You might consider leaving the $ in the plan as a 4-5% risk free return. Thats damned good. However, if taking the lump sum then other factors come into play.
The interest rates used to convert the annuity to a lump sum will cause me to lose some lump sum value per annuity dollar in 2012. See the ERISA rules related to this.
The exact impact in 2012 wont be known for me until the august blended interest rates are reported ( my megacorp uses the august rates for the following years calculations).
So, I expect the lump sum impact of stayin in place to be uncertain over time and likely to be negative.
I dont like a non-cola pension. I need to better protect this significant portion of my nest egg from inflation.
I may re-consider some form of annuity in the future depending on interest rates and other factors at the time. Ideally I'll benefit from low rates today with my lump sum and maintain the option of grabbing annuities based on higher rates someday.

I am now 57 and wil be using the option of penalty free 401K withdrawals since i retired at 56>55.

My hope is that the market dives in the next few months due to the debt crisis or whatever-thereby giving me the chance to cash my lump sum and buy low. ( Sorry to be pulling against many of you folks).

Good luck with your decision

 

[Brett_Cameron]

I am able to retire from Megacorp at my discretion. If I retire before age 60, my pension will be calculated, then decreased 4% for each year. Today that would mean a 20% discount. As an alternate, I can wait to begin drawing my pension until age 60, and then draw the full amount. The golden handcuffs approach is to work 5 more years, increase the pension, and draw with no penalty.

I guess this is really similar to making the decision regarding when to draw SS- 62, FRA, or 70?

FIRECalc says that we have enough. Delaying the payments will increase future payments, so I guess you can calculate how many years it takes before the lines cross. Assuming you figure interest correctly, don't croak in the meantime, etc.

I would appreciate any thoughts!

I am in a similar situation. Difference is the pension reduction is 2% per year for every year before 65. My calcs and FIRECALC say I have enough now at 55. Since the joy of w*rk is gone, I will FIRE in 21 days.

I need a MAJOR lifestyle change!

 

[Delawaredave5]

Do you have retiree medical with Megacorp ? Is it affected by your choice ? My Megacorp has a 5% reducer each year for ER - similar to yours.

Unreduced pension starts at 58. If I left at 54, I would have 2 options:
1. Start a reduced pension (20% less),
2. Defer the pension and start withdrawing at 58 unreduced

However I think doing option 2 above has me forfeiting retiree medical coverage (or pushing it back to 62 or 65).

Maybe something similar applies to your Megacorp pension.


​

 

[Mulligan]

I did like Arebelspy and justified early ER by getting to my colas quicker to compensate for loss of benefits. You didn't mention how happy or unhappy you are in your current state of employment. After being laid up in bed for 8 days because my back went out on me mysteriously while at the gym, I now more than ever appreciate the importance of good health and being young enough to enjoy it. Don't assume you will feel as good at 65 as you do at 55. You can always make more money, but you can't buy extended years of your life!

 

[Amethyst]

Woo-hoo! May the joy of liberty be yours!

Amethyst

Since the joy of w*rk is gone, I will FIRE in 21 days.
!

 

[clifp]

Ok I must be missing something because it seems to me at 4% or less reduction and maybe even for 5%, it is is a no brainer to take the pension now. To use a simple example lets assume the OP pension is 25K at age 60 and is reduced 4% (1K) for each year. At 55 it would be 20K per year. The life expectancy for a 55 year old male is 24+ years. If he takes at 56 he'd get $21K/year the break even point would 20 years, (i.e 20K/year for 21 years vs 21K/year for 20 years) or slightly less than the life expectancy. However this ignore the time value of money.

I made a simple spreadsheet, and assumed a 25% tax rate and pretty conservative 4% earnings rate. I found that you would need to live to 97 before delaying the pension by even one year would pay off and well over 100 before you'd come out ahead by delaying it to 60. If we drop investments rates to 3% than you still need to to live past 94 to be better off waiting to take the money a 60.

I noticed that my social security payments from age 62 to my full retirement age 66 and 10 months are reduced by almost 6% a year, plus the loss of the cola.

 

[Ken11]

O
I noticed that my social security payments from age 62 to my full retirement age 66 and 10 months are reduced by almost 6% a year, plus the loss of the cola.

Whaddaya mean loss of the cola?
Once you start receiving SS, say at 62 wouldn't the cola apply going forward?
Am I misunderstanding something?

 

[arebelspy]

Ok I must be missing something because it seems to me at 4% or less reduction and maybe even for 5%, it is is a no brainer to take the pension now. To use a simple example lets assume the OP pension is 25K at age 60 and is reduced 4% (1K) for each year. At 55 it would be 20K per year. The life expectancy for a 55 year old male is 24+ years. If he takes at 56 he'd get $21K/year the break even point would 20 years, (i.e 20K/year for 21 years vs 21K/year for 20 years) or slightly less than the life expectancy. However this ignore the time value of money.

I made a simple spreadsheet, and assumed a 25% tax rate and pretty conservative 4% earnings rate. I found that you would need to live to 97 before delaying the pension by even one year would pay off and well over 100 before you'd come out ahead by delaying it to 60. If we drop investments rates to 3% than you still need to to live past 94 to be better off waiting to take the money a 60.

I noticed that my social security payments from age 62 to my full retirement age 66 and 10 months are reduced by almost 6% a year, plus the loss of the cola.

That's similar to my findings, I believe, which is why I'm planning on taking my pension at age 50, with only 60% of my potential benefits. I'd guess the OP, if retiring, would be better off taking the pension now at 55 (at 80% of their benefit), rather than waiting 5 years, but like I said in my first post, it's worth running it real quick in excel to make sure and find the break even point.

Taking it earlier at 40 or 45 wasn't worth it in terms of the break-even year (early 70s or something like that compared to taking it at 50) versus the break-even taking it at 50 vs 55 or 60 (mid to late 80s IIRC).

It's something that won't take long to calculate, but my guess is it's better to take it now.

 

[clifp]

Whaddaya mean loss of the cola?
Once you start receiving SS, say at 62 wouldn't the cola apply going forward?
Am I misunderstanding something?

I didn't explain myself well. Let's imagine that OP pension or a government pension has a COLA. Say between 55 and 60 inflation has risen 30% over those years. If you start collecting your pension at 55 it has risen from 20K to 26K, but if you waited until 60 than the pension which was schedule to be 25K has risen 30% to $32,500. The difference between $32,500 and $26,000 is $6500 which is larger than $5,000 that you'd get with a COLA provision and makes the payback period shorter.

In the case of SS, the COLA (which is tied to average wages) has been traditional better than a CPI based COLA, and makes it more valuable to put off collecting to SS.

As a VERY gross generalization, I think you are better off taking most private, state, and local pension as early as possible. In the case of social security, it seems to be pretty well design so that there isn't an obvious financial benefit one way or another.

 

[chinaco]

Most people do not understand their pensions or how to analyze the pension, their situation, alternatives, and determine their best course of action.

One of the first things people need to do is to contact their benefits dept to find out the options available to them for taking payout (lump sum or annuity).

If the retiree can defer taking the pension (annuity or lump sum), and they do not need the money immediately to get by (have other resources that they can spend). Assuming the retiree did a thorough job of their analysis and decided to defer taking the pension...they can reevaluate the situation every year based on their circumstances, the pension, the macro economic environment, etc.


For the annuity option, one way to compare is to check the lump sum against buying the equivalent annuity from a highly rated insurance company. This will provide a sense of the value of the payout vs the lump sum.

 

[BigNick]

Ok I must be missing something because it seems to me at 4% or less reduction and maybe even for 5%, it is is a no brainer to take the pension now. To use a simple example lets assume the OP pension is 25K at age 60 and is reduced 4% (1K) for each year. At 55 it would be 20K per year. The life expectancy for a 55 year old male is 24+ years. If he takes at 56 he'd get $21K/year the break even point would 20 years, (i.e 20K/year for 21 years vs 21K/year for 20 years) or slightly less than the life expectancy. However this ignore the time value of money.

I made a simple spreadsheet, and assumed a 25% tax rate and pretty conservative 4% earnings rate. I found that you would need to live to 97 before delaying the pension by even one year would pay off and well over 100 before you'd come out ahead by delaying it to 60. If we drop investments rates to 3% than you still need to to live past 94 to be better off waiting to take the money a 60.

I'm pleased to find someone who is even more hawkish than me on this! My calculations typically show that for every year you leave early, it takes three years (the early year, plus two more) to "catch up". So if I go at 52 instead of 60, I will be 76 before my "total amount paid out by the fund" number is less than what it would have been. It depends on which tax and return numbers you plug in, of course. But by 76, I don't imagine that I'll be spending half what I will be at 56 on travel and the other big-ticket items.

Unless you plan to spend more after 75 - maybe someone who had a baby at 55 and will need college money ? - then the numbers almost always work out more favourably by taking the pension now. Things that work against that are /a/ if the pension has a great COLA, /b/ if the pension is likely to be a huge chunk of your total retirement income, and /c/ if you're going to put the extra money into something which likely will not keep up with inflation. But otherwise, having more money now is not like eating tomorrow's lunch in advance - money doesn't go sour like milk, unless inflation kills it (and good equity investments should mitigate that).

There is also the question of who would have priority if the pension fund hit trouble. Suppose the fund turned out to be 20% short of what it needed to pay everybody - I'm guessing that existing recipients would never take a bigger hit than 20% in those circumstances, and there could be pressure to make that a lot less (after all, those who are still contributing could be asked to pay in more, since they already have time to do so). This seems doubly likely if the pension is funded with public money. So taking benefits now could also be a way of minimising one's exposure to fund risk.

 

[clifp]

There is also the question of who would have priority if the pension fund hit trouble. Suppose the fund turned out to be 20% short of what it needed to pay everybody - I'm guessing that existing recipients would never take a bigger hit than 20% in those circumstances, and there could be pressure to make that a lot less (after all, those who are still contributing could be asked to pay in more, since they already have time to do so). This seems doubly likely if the pension is funded with public money. So taking benefits now could also be a way of minimising one's exposure to fund risk.

The financial solvency of your pension plan is also something you should consider in figuring out when to take your pension. It is always worth remembering that whatever your concern about the future investment climate; high inflation, bad stock market, debt crisis, bad economy etc., your pension fund manager (private or public) faces the exact same problems as you do. All of the potential events that would make it possible for you to run out of money apply to them also.

 

[ER Fireball]

I would like to thank everybody for their replies. clifp really brought it into focus with his 21k for 20years vs 20k for 21 years comparison. Even though the pension would go up 4% for each year, you are investing a year's pension for that future cash-flow. So the return is 4% on each years deferred pension. The breakeven point is out there around 25 years.

Some of the other questions-
Is there a COLA on the pension. No. It is a 1.5% of the average of your highest 5 years of the last 10 years, x the number of years of service. So working an extra year will increase the pension by 1.5% plus whatever average raise you got over the last 5 years plus 4% for less penalty before age 60. So pretty strong incentive to work until 60 years old. More years to build the nest egg, everything's good, except having to be there more years.

Is it fully funded? At this time, yup. The company is strong, I trust that the pension will be there much better than I think I will see any SS.

Lump sum option? Nope. Only way to take it out is a month at a time.

Longevity risk? Investments are in good shape. Not like some of them on this board, but pretty darn good shape.

College expenses? Not unless I lose my first wife and acquire a 2nd one that is still in college! She would have to have HUGE assets of her own to get me to do something silly like that!

Enjoy my current job? It's OK. I work with some very good people. I am in a position now, financially and career-wise, that works out. I have no aspirations of climbing the ladder further. The ability to retire tomorrow helps immensely.

Occasionally the company has offered early retirement or separation opportunities. A year ago they offered a plan to some divisions (not the one where I work) that gave them 18 months of salary to walk out the door. I want to be in a position where I have my background investigation complete.

 

[Retire Soon]

ER Fireball, your current situation is remarkably similar to what I once faced. Five years ago, I felt the need to make a decision between retiring at 55 or waiting until I was 60. I, too was torn between retiring at an earlier age or holding out for a larger pension at a later date. Ultimately, I decided to retire at 55.

I can tell you from personal experience that ER is far better than W*rking. But, let me qualify this statement by saying that this is only true if you have interests or hobbies that will occupy your free time. For me, I've traveled more in the past five years than I traveled in my first fifty. Currently, DW and I are enjoying immensely an RV tour through Alaska with absolutely no time contraints, except we'd like to be out of here before it gets 50 degrees below zero.

Why did I make this decision? Well, it's very simple. I decided that my health was good at the time and that I had absolutely no way of knowing what it would be like five years later. I could count on the present, but not the future.

But, the question begged, why not wait and then I'd have a much larger pension later ? Well, I'm not a gambling man. Time is a precious natural resource and one that cannot be replaced. My health was good at the time and I had absolutely no way of knowing what it would be like at age 60.

What would I have done with the extra money in a monthly pension? I really don't think it would have contributed more or less enjoyment to my ER. Extra money is nice, but there are limitations as to what difference it will make in your overall happiness.

So what are you waiting for? I would recommend that you begin typing up your resignation and begin living life to the fullest!

 

[MBAustin]

Unreduced pension starts at 58. If I left at 54, I would have 2 options:
1. Start a reduced pension (20% less),
2. Defer the pension and start withdrawing at 58 unreduced

However I think doing option 2 above has me forfeiting retiree medical coverage (or pushing it back to 62 or 65).
​

My megacorp pension is similar. I had the same concern about retiree medical however found that the decision to take/defer pension and to take retiree medical were totally separate. And that the election of retiree medical was a one-time opportunity that had to be made within 30 days of retirement date - if I didn't take it then I would completely lose the opportunity to ever take it.

It was surprisingly difficult to get this information clearly - took several calls to HR to get it all straight. The homework was worth it - I deferred my pension (plan to take it at 58 when it is non-reduced but can always decide to take it earlier if needed) and took the retiree medical (of course). Now just need to find health insurance for DS (19 YO) before his COBRA runs out.