Take pension now or at age 65?

[Global1]

I am moving from FT to PT in the next few months so, given a drop in my marginal tax rate, I am ready to consider tapping into my pension from a previous employer.

I can take the non-cola pension now (age 56) and receive $1076 per month. Alternatively, I can receive $1709 per month at age 65.

Both options assume a 50% survivor benefit for DW. There is no option for a lump-sum payout. Doing the math show that the break-even point comes at age 79.

I appreciate any thoughts or comments

 

[Big_Hitter]

it's a decent early retirement subsidy

 

[pb4uski]

One way to look at it is that you are paying $146,382 (the payments that you did not receive for 9 years accumulated at 5%/year interest) in exchange for a joint life annuity of $633/month at age 65 (the monthly increase). That's a 5.2% payout rate and a little better than current joint annuity pricing for a 65 yo couple which is 4.98%.

If you use a lower interest rate assumption then the payout rate is better, and vice versa.

 

[Global1]

Thanks - that's an easy way to consider it.

What are you thoughts about the effects of inflation? In other words the increased amount paid from taking the pension from 65 onward would be paid to me in "cheaper" dollars even though there would be more of them. If I take it now I would be getting "more valuable" dollars albeit less of them.

 

[unno2002]

[FONT=&quot]To be more generic, how is your health and the health of DW? Do you both expect to make it to 65? To the age of 79?[/FONT]
[FONT=&quot]Were we in the same situation, we have rentals, where for example taking SS at 62 vs full retirement, the SS can pay off a mortgage that then frees up rental income that exceeds the difference between early and “full retirement” age. It’s a matter of numbers, and your estimate of your life span.[/FONT]

 

[Koolau]

Just to confuse things further: How does this payment dove-tail with your other sources of income at the later date? My point would be that you could end up with more taxable income at 65 if you wait until then. I may run into this when I take SS at 70 and also face RMD of qualified money.

Since it looks as if you are in the ball-park of "equality" between 56 and 65, maybe the first question is whether you need it now. If you want to take it now due to possible inflation, do you have a way to make it "grow" between now and 65? Just some thoughts, so YMMV.

 

[karluk]

Your situation with your pension seems to be virtually identical to the oft discussed issue of taking Social Security at age 62 or delaying until FRA (or later). Since SS provides more generous increases for delaying than the roughly 5.25% annual increase in your pension, it's not surprising that the numbers seem to favor taking your pension early.

In particular, the break-even age of 79 that you calculate doesn't include any opportunity cost for the money that you will have to spend prior to age 65 to make up for the shortfall in your income caused by delaying the pension. If you take the early pension, you will suffer a smaller draw down of your portfolio in the early years, which in turn will allow more of your money to remain invested longer, thus providing more retirement income. My calculations indicate that if your portfolio averages 5% annual growth, taking the pension early will beat delaying until you are over 100. Unless you have exceptional longevity in your family or expect truly abysmal investment returns in the future, you should take the pension early.

 

[Global1]

Health? No one really knows for sure but given recent health issues (DW) and some of early demise in family history (me) I would guess that the chances of both of us making it to 85 are less than 50%

Do we need the money now? No, but that doesn't mean that it wouldn't come in handy now.


Sent from my iPhone using Early Retirement Forum

 

[Running_Man]

This calculation is not at all the same as with Social Security because the pension is not COLA'd, making the additional income far less valuable. The $140,000+ you would have at age 65 would provide for the income replacement per FIRECALC at an over 98% success rate for 30 years. And this would be at 100% income replacement for both parties, and if you took a slightly smaller increase to be at about 4% portfolio it could turn the portfolio into a COLA pension replacement. The early retirement subsidy seems to favor taking it early financially in this case and saving and investing the proceeds

 

[jim584672]

My situation is similar, pension option starts at 55 to 65, with numbers very close to yours. After considering the loss of ACA benefits due to higher income I decided to wait until 65.

 

[DEC-1982]

I can take the non-cola pension now (age 56) and receive $1076 per month. Alternatively, I can receive $1709 per month at age 65.

Are these fixed numbers or will the pension at 65 change over time from what you showed here?

As I do my pension estimate, the monthly pension I estimated for age 62 a few months ago is lower than the monthly pension I estimate for age 62 now. It used to be much higher a few years ago, then it started dropping, and now it's going up again. And although I don't think of myself as a market timer, since Federal interest rates are "supposedly" going to increase, for me it makes sense to sit tight so I get a better payout (so maybe I am a market timer).

I suppose not all pensions are the same.

 

[Big_Hitter]

^ you are probably in a cash balance plan - OP is probably in a traditional DB plan

 

[Global1]

Are these fixed numbers or will the pension at 65 change over time from what you showed here?

The numbers are not fixed - it is a projection based on current rates. I get an interest credit added to the total plan value each month (currently around $250k). The interest credit calculation for each month is factored by the treasury rate. Currently, with interest rates low, my interest credit is around $650/month. However, if rates go up then my interest credit each month will go up. If that happens then plan total amount will result in a value which is more than than the total plan value assumed in the current projection. As a result my monthly payout will be higher at 65 than the current projection. So it may be worth it to "time" the market as you suggest and wait it out as interest rates rise.

 

[Big_Hitter]

not only that, if interest rates go up the annuity payout should as well since annuity factors are lower at higher interest rates

 

[Global1]

not only that, if interest rates go up the annuity payout should as well since annuity factors are lower at higher interest rates

That's a great point. Strangely, the annuity payout calculation is not in the plan document so yesterday I requested that they provide it to me. I assume, like you, that the calculation factors in the prevailing rates in some way.

 

[Big_Hitter]

they are probably the 3-tiered segment rates for up to four months preceding the beginning of the plan year, although they could change monthly - the annuity calculation (actuarial equivalent) basis will be specified in the plan doc but possibly not in the spud - you need to read the definition of actuarial equivalence at the beginning of the plan document - if it references IRC 430 then it's the 3-tiered segment rates

 

[DEC-1982]

Originally I thought you were in a DB plan like Big_Hitter thought, but you are not.

I was thinking about increases in interest rates causing increases in monthly payments, not just the increases in monthly payments due to fewer years of payments. Of course it is anybody's guess as to when and how much interest rates will go up, but the expectation is that it will go up.

 

[Big_Hitter]

it has to be a cash balance plan (still a db plan)

 

[Global1]

Thanks for all the information. I'll assume that rates will rise. Therefore, the best strategy in that scenario is to delay my annuity until the actual time when rates (and my payout) are higher. Make sense?

 

[DEC-1982]

Thanks for all the information. I'll assume that rates will rise. Therefore, the best strategy in that scenario is to delay my annuity until the actual time when rates (and my payout) are higher. Make sense?

That's what I am doing with my plan.