When to pull the pension trigger

[stepford]

When I retired from Megacorp a year ago at age 55 I delayed starting my pension for tax reasons. I'm thinking it's about time to commence the pension, but the decision has so many moving parts it's giving me pause.

The main benefit of delaying is being able to do significant Roth conversions in a low tax bracket so long as I defer the pension. In addition, the non-COLA'd pension monthly payment increases by about 5.5% for every year I delay. On the flipside, though, every year I delay I eat into my savings at a significant (though sustainable) rate. When I model everything in Fidelity RIP or I-orp it turns out the effect of delaying for a few years (measured as predicted net worth at age 85) is almost negligible.

But there are questions beyond the calculation. Is it better to maintain higher after tax net worth at the expense of having more than 50% of my assets in a t-IRA or to reduce the RMD tax torpedo at the expense of spending down my taxable savings? Again "better" is a loaded word. In actual dollars there isn't much difference, but I think my ability to handle unplanned financial shocks is probably better if I preserve as much of my after tax net worth as possible. Furthermore the new possibility that tax rates may be going down adds more impetus on the side of taking the pension now and risking higher taxes in 14 years when RMDs and SS simultaneously hit.

I recognize that I'm not providing enough detail for anyone to duplicate my calculations and thus tell me the "best" choice. I just wanted to express the many facets of this decision and see how others have handled it.

 

[Big_Hitter]

what are the ER reduction factors from NRD?

 

[nun]

I recognize that I'm not providing enough detail for anyone to duplicate my calculations and thus tell me the "best" choice. I just wanted to express the many facets of this decision and see how others have handled it.

The analysis space is very complex and so when faced with the choice of when to take my pension I took it as soon as I could mostly because it simplified my life. Waiting a few years would not have increased the amount of pension I'd get for the same lifespan and I like getting the monthly check and not worrying about SWRs from my other other investments.

 

[Chuckanut]

IMHO, it is best to have one's retirement income balanced over several different sources maybe 1/3 pension, 1/3 investments, and 1/3 SS payments. We have no idea how tax laws will change and no guarantees as to what our investments will do. So, having balanced sources may be helpful in the event one income source is compromised. Run some scenarios through FireCalc and see how things play out. That should help.

 

[pb4uski]

IMHO, it is best to have one's retirement income balanced over several different sources maybe 1/3 pension, 1/3 investments, and 1/2 SS payments. ....

Sign me up for that 1/3, 1/3, 1/2 version. I can splurge with the extra income.

 

[pb4uski]

I faced the same issue with a former employer DB pension. I could start anytime between 55 and 65.. however the annual increases between 55-60 were pretty good (11% on average) but between 60-65 were not so good (4% on average). I ultimately decided to take at 61.

It means that my annual Roth conversions will be reduced by this new pension income, but I'm ok with that... it is nice having that pension check added to the checking account each month.

 

[Chuckanut]

Sign me up for that 1/3, 1/3, 1/2 version. I can splurge with the extra income.

Did you ever listen to Car Talk? If so, you know that there are three halves in a show.

Actually, getting the ratios that close is probably not that easy, but the point is that if one source gets shut down, one can live on the other two, albeit with less left over for taking a quick trip to Paris for a meal at Restaurant Le Meurice.

 

[IMATERP]

When I retired from Megacorp a year ago at age 55 I delayed starting my pension for tax reasons. I'm thinking it's about time to commence the pension, but the decision has so many moving parts it's giving me pause.

The main benefit of delaying is being able to do significant Roth conversions in a low tax bracket so long as I defer the pension. In addition, the non-COLA'd pension monthly payment increases by about 5.5% for every year I delay. On the flipside, though, every year I delay I eat into my savings at a significant (though sustainable) rate. When I model everything in Fidelity RIP or I-orp it turns out the effect of delaying for a few years (measured as predicted net worth at age 85) is almost negligible.

But there are questions beyond the calculation. Is it better to maintain higher after tax net worth at the expense of having more than 50% of my assets in a t-IRA or to reduce the RMD tax torpedo at the expense of spending down my taxable savings? Again "better" is a loaded word. In actual dollars there isn't much difference, but I think my ability to handle unplanned financial shocks is probably better if I preserve as much of my after tax net worth as possible. Furthermore the new possibility that tax rates may be going down adds more impetus on the side of taking the pension now and risking higher taxes in 14 years when RMDs and SS simultaneously hit.

I recognize that I'm not providing enough detail for anyone to duplicate my calculations and thus tell me the "best" choice. I just wanted to express the many facets of this decision and see how others have handled it.

I'm sort of in the same boat - and have a general question. I am 56 and will not be receiving my State Pension until age 60. I have cash on the side and am planning to stop working late this year. Thus, I may choose not to have any income for three years.

So my question is: Would it be wise to transfer funds from my 401 to Roth annually (say 25 K per year ?) My tax rate in the current year would be very low and the earnings could grow tax free.

I'm just looking at maximizing any benefits while not working...

Michael

 

[travelover]

I'm sort of in the same boat - and have a general question. I am 56 and will not be receiving my State Pension until age 60. I have cash on the side and am planning to stop working late this year. Thus, I may choose not to have any income for three years.

So my question is: Would it be wise to transfer funds from my 401 to Roth annually (say 25 K per year ?) My tax rate in the current year would be very low and the earnings could grow tax free.

I'm just looking at maximizing any benefits while not working...

Michael

This can be a good strategy, especially if you have a significant amount in tax deferred accounts. Have you estimated what tax bracket you will be in when you hit 70 1/2 and have to take RMDs and are drawing a pension and Social Security?

 

[Chuckanut]

This can be a good strategy, especially if you have a significant amount in tax deferred accounts. Have you estimated what tax bracket you will be in when you hit 70 1/2 and have to take RMDs and are drawing a pension and Social Security?

This is the so-called tax torpedo?

 

[travelover]

This is the so-called tax torpedo?

Yes. For me is it eye opening as I've been retired 10 years and have not withdrawn a dime because with DW working, we've been in the 25% bracket all along.

 

[IMATERP]

This can be a good strategy, especially if you have a significant amount in tax deferred accounts. Have you estimated what tax bracket you will be in when you hit 70 1/2 and have to take RMDs and are drawing a pension and Social Security?

Thanks for your concurrence. I'm guessing that I will have around 500k in my 401k by the end of this year. That money can grow tax free until RMD.
I'll have 225k between brokerage and Roth which I don't need to touch for a while.

At age 60, my State pension offers a blended distribution where I can receive a combined benefit where I'll receive a greater $ amount up to age 62 (when SS kicks in.). Simply, I'll receive $2,750 a month + Cola for the rest of my life.

Hence, my logic is to transfer a small portion of the 500k for the next 3 years that I am not working. Btw - my monthly budget is less than 2k a month as my wife and I paid off our home and she still works.

M

 

[travelover]

...........
Hence, my logic is to transfer a small portion of the 500k for the next 3 years that I am not working. Btw - my monthly budget is less than 2k a month as my wife and I paid off our home and she still works.
M

As I mentioned, plug in your numbers for post age 70 into an online tax estimator like TaxCaster and see how much you will be paying in taxes. I think I'd Roth convert to the top of the 15% bracket while your taxable income is low.

 

[DrRoy]

I worked for a megacorp with a modest pension, but my business group was sold off when I was 54. At the time of the sale, we were considered retired from the megacorp, but still working for the sold business. The pension allowed payment starting at age 50, at a 40% reduction from the "full" pension amount. The reduction drops 5% per year to age 58, when you can receive the full amount. I could have started receiving the pension at 54 at the reduced amount, but I have not done so. However, I am the only person I know in that situation that waited. I think should wait to tap your pension so that you can receive a higher benefit and also do the Roth conversions that you mentioned.

 

[pb4uski]

As I mentioned, plug in your numbers for post age 70 into an online tax estimator like TaxCaster and see how much you will be paying in taxes. I think I'd Roth convert to the top of the 15% bracket while your taxable income is low.

+1 that is what I have been doing for the last few years and my annual tax on the amount converted has been in the 2-10% range, averaging about 7% for the 4 years that I have been doing it. Much better than the 25%+ when I deferred that income and what I expect once I start SS.