Take non-COLA pension now since the money will be devalued by inflation?

[jimm100]

I will hit age 62 later this year. I have 2 relatively small pensions that will be part of my retirement income. Neither one has a COLA, so when I start taking them, that will be the amount I receive for the rest of my life. My family has genes for long lives - a couple grandparents lived well into their 90s, my mom is nearing 100. Unfortunately, all have had significant declines in mental ability including memory and were no longer able to live independently by their mid-to-late 80s. I expect the same trajectory for me - very physically healthy, doing all I can to keep my mind sharp (including continuing to work), but am realistic about the cognitive decline made likely by my genes.

It appears that we are in for a year of 5-8% inflation, probably a second year, possibly even longer. And perhaps very high levels of inflation due to our $29 TRILLION in debt plus a continuing deficit. It is not clear to me how that is sustainable. Anyway, I really hate the idea of my hard-earned pensions being eaten up by inflation. In addition, my need for the ability to fund my hobbies and travel to see kids/grandkids will likely decline and disappear starting in about 20 years, so my near-to-mid-term income is more important to me that the very long term income.

Overall, if I actually retired and stopped working today, my retirement is slightly underfunded. At a 3% withdrawal rate, I would have about 85% of my goal which was about 80% of current income. I am max'ing my 401K on current income; if I start taking one or both pensions, I would max an IRA ($7K per year) too. My goal would be to save the entire pension amount, but we would probably spend some on the house (replace 10 year old flooring, replace 15 year old furniture) and some landscaping, so it is possible we would spend the amount in excess of the IRA contribution. But we will be replacing flooring and furniture one way or the other as my wife has been very patient on both fronts, its more a matter of trying to do it as cheaply as possible and scrimping in other areas of our lives and possibly taking some from savings vs getting what she wants and doing it from current income. And her car is 15 years old. And our daughters live 1000+ miles away and we'd like to see them more. So the fact of the matter is, if I take one or both pensions, we would save some, spend the rest, and have a higher standard of living which would make my wife happier.

My current job is definitely worth the salary vs stress ratio, primarily due to the current employment scenario. I am in IT and the current Great Resignation has our management very aware of how easily IT workers can switch jobs. I don't want to switch and would likely just retire if the stress exceeds what I find tolerable. I'm ready to be done, but am willing to continue for a few more years (65?) to keep growing my 401K and not drawing on it. Every year of work makes a significant difference in the amount I will have for retirement.

Company 1 has the following options, I started the paperwork for Option 1, but haven't set it in motion yet, would very much like feedback on the alternatives:
"SSA Leveling": $26,700 in 2022, then $616 for the rest of my life
Straight Amt from 62: $741/month
Straight Amt from 63: $759/month
Straight Amt from 64: $776/month
Straight Amt from 65: $794/month
Straight Amt from 66: $881/month
Straight Amt from 67: $980/month
Straight Amt from 68: $1,094/month
Straight Amt from 69: $1,223/month
Straight Amt from 70: $1,372/month
Straight Amt from 71: $1,543/month
Straight Amt from 72: $1,741/month
Straight Amt from 72.5: $1,838/month and then no further increases

I'm not sure if the increases are typical of pension plans, but the increases from 62 to 65 are quite small, but then they jump up a more meaningful amount and a much more attractive percentage. It appears that if inflation were zero, the choice would be pretty easy -- wait until the maximum monthly at age 72.5. But how to determine the best path with the unknown of inflation and the variation in pension increase?

I will be doing a similar modeling of the other pension, I think it is about 60% the size of the first one, so I started with the larger pension.

I have been a member for years, not sure if I posted before, but am amazed by the knowledge of members, willingness to help others, depth of analysis, and clarity of thinking by the FIRE members! Thanks in advance for your help!

 

[gamboolman]

Is Lump Sum a Option?

 

[Chuckanut]

This is a big decision. You might wish to spend a few hundred dollars and consult a CPA who will do things like create a present value table of for various inflation scenarios at various ages.

And, yes, find out if you can get a lump sum. Compare it to buying a non COLA'd SPIA with the lump sum. You might be surprised. Or you might not.

 

[RetiredHappy]

" It appears that if inflation were zero, the choice would be pretty easy -- wait until the maximum monthly at age 72.5. ". Wait until 72.5 gives you the best payout even under high inflation scenario. In fact, it is better to wait until 72.5 under high inflation scenario because you would otherwise be stuck with low payment of $741 for the rest of your life if you start taking at 62.

 

[fosterscik]

I would wait until at least age 66 (at that point the annual increases are >11% per year of delay; before that only ~ 2.5%). I realize that you have to give up several years of income, but like the never-ending when to take SS question, I favor delay until 70.
The same calculations apply: I give up x dollars (fund from some other source) for later guaranteed larger fixed income. I prefer to mentally earmark the "missed" funds in my fixed income holdings and pay myself the pension amount from those funds. This effectively changes my current low yielding bond funds into a deferred fixed annuity.

 

[chassis]

Take a lump sum if offered. You can earn yourself a far better return than the pension custodian will do for you.

 

[youbet]

My goal would be to save the entire pension amount, but we would probably spend some on the house (replace 10 year old flooring, replace 15 year old furniture) and some landscaping, so it is possible we would spend the amount in excess of the IRA contribution.

This statement really throws a wrench into the analysis. The idea that taking the pension early would cause you to spend more puts a subjective factor into what should be a "numbers" calculation.

Your plans for SS also come into play. When are you planning to start SS?

About the only comment I can make, and this assumes you invest 100% of your pension - not spend part of it, is to either take it at 62 or at 72.5. Given the year to year increases, anything between those points doesn't make sense.

 

[pb4uski]

Are all of the options single life or joint life? Either way, I would get on immediate annuities.com and calculate the single premium for each option... which is essentially the commercial value of the option. And then look closely at the option with the highest value.

 

[jimm100]

Is Lump Sum a Option?

$86,600 one time lump sum -- does not seem attractive. In a bit of a hurry at the moment, saw that there were replies, will be back to check out in more detail later when I have more time. Thanks!

 

[jimm100]

Are all of the options single life or joint life? Either way, I would get on immediate annuities.com and calculate the single premium for each option... which is essentially the commercial value of the option. And then look closely at the option with the highest value.

Single life. There is virtually no chance my spouse will outlive me and she would be fine on the other retirement funds.

 

[chassis]

$86,600 one time lump sum -- does not seem attractive. In a bit of a hurry at the moment, saw that there were replies, will be back to check out in more detail later when I have more time. Thanks!

Yep doesn't seem attractive.

If you withdraw at a 3.5% rate, you achieve 100% of your goal. 3.5% is sustainable over the long term with a healthy equity allocation. Does this change your views?

 

[DrRoy]

Wait until your other income is not enough. If your longevity is good I think you will come out better.

 

[RunningBum]

I don't see that inflation is really a factor here. Your pension probably has pretty much the same NPV no matter what your age is when you take it. That value will be devalued by inflation whether you start now or at 72. Maybe I'm mistaken, but you should be able to make a spreadsheet that shows the effect of inflation taking your pension at various ages. I don't think you'll see much difference.

And since you say this are a relatively small part of your income, I wouldn't let it dictate when to leave.

 

[ceciledian]

We chose to wait until my wee no COLA pension maxes value in 3 years. We planned for when I begin distributions it will be with no survivor benefits but if something happens to me beforehand this allows my husband to get at least 50%. Waiting also allows us to keep the ACA subsidy which is more than my full pension amount.

 

[jimm100]

Is it valid to do a standard ROI of $1838-$741= Gain of $1097 / $741= 148% over 11 years = 13.45% ? Is that the annualized ROI percentage?

If so, it seems pretty clear that I should wait unless we get hyper inflation?

While typing all that out in my initial post, I realize that I was very focused on the first few years and how small the increases were. Then I was severely tempted to start taking distributions now so I could spend them.

13.45% with no risk other than the company (HP) going out of business is an amazing return. And being able to count on it every month for the rest of my life, whether the stock market is up or down), makes it a no-brainer: I should not take it until 72.5 years old.

 

[RunningBum]

No, that's not the ROI because you would be getting that $741/month for 10 years before you would start getting that $1838/month.

Like the "when to take SS" question, there is a breakeven point that you should try to figure out for yourself. What I look at in a situation like that, is if I have a reasonable chance to live to the breakeven point, am I better off with the larger payment as longevity insurance, or would I rather leave more to my heirs if I did die early by starting the payouts sooner.

I still don't get why you think inflation has any impact here. Have you modeled this?