When to start taking pension payments?

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Barefootgirl
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Joined: Tue Oct 06, 2009 7:05 pm

When to start taking pension payments?

Post by Barefootgirl »

In a couple months, I will be eligible to begin receiving monthly pension payments as an early retirement benefit from a previous employer. It's kind of shocking to me that I used to think about this benefit years ago and now, here it is - cliche, but time does fly.

The amount is roughly 1/3 of what I would receive if I wait until normal retirement age - defined by the plan as age 65.

I am still working and do not need this additional income and further, I already have sufficient income to contribute the max to my 401K (TSP actually) plan, including catch up contributions - as well as my HSA.

So, if I were start taking these payments, I suspect I'd just invest the new money according to my AA.

My plan right now is to retire in approximately 4 years. I may or may not need this income at that time - I am not sure since I still have not worked out my withdrawal strategy for retirement.

I'm unsure as to the best path to take - receive payments now or later and surely I'm missing some elements I should be looking at in order to make the best decision.

I would appreciate receiving feedback from those who've faced a similar situation and what factors they considered in their decision.

Thank you.
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.
Bill M
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Re: When to start taking pension payments?

Post by Bill M »

The best strategy depends on lots of tiny details of your pension plan, and how it calculates your monthly benefit. I've seen two basic approaches: (1) based on employment history, calculate a lump sum amount and then convert it to a monthly annuity, and (2) based on employment history, calculate a monthly annuity amount. In case (1) the conversion from lump sum will almost certainly use current interest rates in the conversion, and that will hurt. In either case, calculating the present value of past wages might also be based on current interest rates, or might not, and this part can work in your favor or against; the details matter.

Pension plans often make unrealistic assumptions of future returns, like 7% per year above inflation. This causes benefits to rise by delaying the start of the pension (since they assume they'll have more funds available to pay benefits). Whether they meet that goal or not, it isn't likely that your AA will meet their target. But it also causes the plan to become increasingly underfunded. If there is a concern of the plan going bust, and being taken over by PBGC, that would enter into the decision as well.
Valuethinker
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Re: When to start taking pension payments?

Post by Valuethinker »

Generally better to defer until you need it-- this can save you tax, and increases your financial security (a guaranteed income when you are in withdrawal phase, independent of market movemetns). EXCEPTION: private sector pensions are not usually CPI indexed, so using such a pension to defer taking SS, which is, is often a good strategy.

Other exception. If the financial health of your former employer is a concern, you need to investigate your position if the PBGC took over the pension fund-- there would be some reduction in benefits (severe for high earners, potentially). That's if the pension is covered by the PBGC.

If your pension was in the public sector, there have been ex post (after the fact) reductions in promised benefits due to the soaring cost of these to taxpayers. Be especially careful of Illinois (from what I can gather, Puerto Rico is already a basket case). You need to pay attention to the current deficit of the plan, and what legislative proposals there are to close that, how likely they are to pass, etc.
furwut
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Re: When to start taking pension payments?

Post by furwut »

I believe this decision is a nuanced and difficult one. Michael Kitces wrote a post examining the reasoning for delaying Social Secuirty which should also be of help with pensions - though SS has a COLA and large benefit increase which helps the delay decision.

How Delaying Social Security Can Be The Best Long-Term Investment Or Annuity Money Can Buy
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midareff
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Re: When to start taking pension payments?

Post by midareff »

Agree with the previous two posts and would add that this is an income source that may help you decrease withdraws from taxable while delaying taking SS after retirement. Lots of number crunching to go on there. Had I known the market would do what it has done the last six I probably would have delayed but wound up starting at 65. I didn't want to wait and burn assets in taxable but being lucky is better than smart at times and those assets have ballooned allowing me to increase my withdrawals in a more than offsetting manner.
Topic Author
Barefootgirl
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Re: When to start taking pension payments?

Post by Barefootgirl »

Thank you for the link....this pension is not indexed for inflation, unfortunately.

I wonder if this is one of those questions that is good to take to a financial advisor...

BFG
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.
retiredjg
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Re: When to start taking pension payments?

Post by retiredjg »

Is it possible to receive this pension as a lump sum?
Topic Author
Barefootgirl
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Re: When to start taking pension payments?

Post by Barefootgirl »

A lump sum option is not available. They made an offer once, but the lump sum was signiicantly devalued when compared to annuity calculators.

BFG
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.
furwut
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Re: When to start taking pension payments?

Post by furwut »

Intuitively I think one would:

Delay the pension when:
Market expectations are low and/or inflation is low.

Take the pension when:
Market expectations are high and/or inflation is high.
Valuethinker
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Re: When to start taking pension payments?

Post by Valuethinker »

another factor

- if you have reason to believe your life expectancy will be significantly below average, take the pension as soon as you can

- conversely if you have reason to believe your life expectancy will be significantly longer than average, it's an argument for delaying (but given time and chance, not as strong an argument as the other way)
SGM
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Re: When to start taking pension payments?

Post by SGM »

We are delaying one pension to FRA or possibly 70. We don't need the money now although we are both retired. The payout will be higher at age 70 than at 66. As was discussed at a recent local BH meeting the comparison to TIPS returns is appropriate when you are comparing SS delay. I do not think risky investments such as the stock market are a good comparison. Risky investments don't always go up in value. I would think the same would hold for a single employer pension guaranteed by the PBGC. Multiemployer pensions are not funded as well according to recent news accounts. We expect longevity at least for one of us and that figures into the delay too.

In your case when the difference is a 2/3 decrease in the amount of the pension I think delay would be a better deal given the low interest rates of safe investments.

I took a small pension prior earlier because the payout was not projected to increase very much by waiting. Also interest rates were higher at the time. Annuity payouts were higher then than now so it appears to have been a good decision to take that one early.
carolinaman
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Re: When to start taking pension payments?

Post by carolinaman »

Based upon what you have told us, I would probably begin taking the pension when you retire in about 4 years. I am assuming your marginal tax rate will be less then, which should offset the decline of your non COLA pension due to inflation. If you do not need the money at that time, simply invest it for the future.

The fact your pension is non COLA will seriously reduce its value over time which argues for taking it sooner rather than later. OTOH, you are in a higher tax bracket today which argues for delaying taking the pension until your marginal tax bracket is less in retirement. However, if you were to delay your planned retirement, you should consider going ahead and taking the pension.

The fact that the pension only pays 1/3 now suggests that you are a long way from attaining the pension FRA (age 65). Also, I assume there is some sliding scale that increases pension each year you delay taking it. If you are not that far away from pension FRA, then there may be a argument to wait until age 65. Your age is a key factor in this analysis as is your marginal tax bracket now versus after retirement.

I hope this helps.
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