Pension date coming up, some questions

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jrbdmb
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Pension date coming up, some questions

Post by jrbdmb »

I have a pension that I have from a previous employer that I am plan to start collecting within the next year. Note that a lump sum payout is not available and being married I will be selecting one of the J&S options. Three questions I have on this:

1. I can collect my full pension in August 2023 or prior to that with a reduction of appr. 5% a year. I will still be working for a few more years so I will take a tax hit on the extra income (but not enough to move to a higher bracket). I can see reasons to collect on the pension immediately to fund Roth IRA / backdoor Roth / taxable accounts, but I also like the idea of waiting another year to collect the maximum pension. How do I decide which path to take?

2. Related to the above, when looking at the detailed numbers the increase in the benefit from month to month is not a smooth line as I would have expected - in fact the increase per month varies from 0.29% and 0.44%. Is this typical?

3. My two most likely plan choices are the 75% J&S and 100% J&S. Other than personal preference (and that of my spouse) is there any financial considerations when choosing between these two?
Gryphon
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Re: Pension date coming up, some questions

Post by Gryphon »

jrbdmb wrote: Fri Aug 12, 2022 5:50 pm 3. My two most likely plan choices are the 75% J&S and 100% J&S. Other than personal preference (and that of my spouse) is there any financial considerations when choosing between these two?
The 100% J&S benefit will be smaller than the 75% benefit while you're both alive. Get estimates for both benefits so you know how much more income you'll need from other sources to make up the difference.

Another consideration: when one spouse dies you lose a Social Security benefit. Can the surviving spouse afford to also have pension income drop by 25% at the same time? How much of your total retirement income will be from pension + SS?
Mike Scott
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Re: Pension date coming up, some questions

Post by Mike Scott »

Since my pension and social security will be much higher than spouse and chances are spouse will live longest, our best choice looks like 100% survivor option for my pension and doing what I can to maximize my social security to establish a stable, long-term retirement base for whoever lives the longest. As it happens, the plan focused on spouse long term benefit is generally the best plan from other options and spouse appreciates the thought. There is a cost/reduction for the 100% pension option, but part of the plan is that I don't retire until the 100% option works.

edited after a bit more coffee
Last edited by Mike Scott on Sat Aug 13, 2022 7:12 am, edited 2 times in total.
jebmke
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Re: Pension date coming up, some questions

Post by jebmke »

Mike Scott wrote: Sat Aug 13, 2022 6:58 am Since my pension and social security will be much higher than spouse and chances are spouse will live longest, I think our best choice is 100% survivor option for my pension and doing what I can to maximize my social security to establish a stable, long-term retirement base for who ever lives the longest.
That was my situation as well.
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iim7V7IM7
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Re: Pension date coming up, some questions

Post by iim7V7IM7 »

Same with us…I will likely choose a 100% joint survivor option for my pension. Our two incomes and Social Security benefits are different due to disparity in our incomes. She will take hers pre PIA at age 65 and I will differ mine until I am 70. If I pass before her and she takes my Social Security and drops her’s the 100% joint survivor pension benefit will minimize the loss of reliable income. I would also suggest that you check your pension plan’s Form 5500 to see how well it is funded.
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CyclingDuo
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Re: Pension date coming up, some questions

Post by CyclingDuo »

jrbdmb wrote: Fri Aug 12, 2022 5:50 pm I have a pension that I have from a previous employer that I am plan to start collecting within the next year. Note that a lump sum payout is not available and being married I will be selecting one of the J&S options. Three questions I have on this:

1. I can collect my full pension in August 2023 or prior to that with a reduction of appr. 5% a year. I will still be working for a few more years so I will take a tax hit on the extra income (but not enough to move to a higher bracket). I can see reasons to collect on the pension immediately to fund Roth IRA / backdoor Roth / taxable accounts, but I also like the idea of waiting another year to collect the maximum pension. How do I decide which path to take?
Since you will still be working at your current job, why not wait until August 2023 to collect the full amount? :moneybag That would get our vote.
jrbdmb wrote: Fri Aug 12, 2022 5:50 pm2. Related to the above, when looking at the detailed numbers the increase in the benefit from month to month is not a smooth line as I would have expected - in fact the increase per month varies from 0.29% and 0.44%. Is this typical?
I don't know if that is typical, but it gets back to #1 - why not wait until August 2023 to get the full amount and disregard how smooth or non-smooth the month to month benefit increases between now and then are?
jrbdmb wrote: Fri Aug 12, 2022 5:50 pm3. My two most likely plan choices are the 75% J&S and 100% J&S. Other than personal preference (and that of my spouse) is there any financial considerations when choosing between these two?
As mentioned above, you have to factor in Social Security for each of you, size of nest egg, how much longer you and your spouse will be working at your current jobs, expenses in retirement for the two of you, age differences between the two of you, prognosis - based on current health - for longevity for each of you, expenses for one of you if the other passes, and what portion of covering those expenses will come from each source. The larger the percentage that is coming from the pension, the more you have to pay attention to the selection of which benefit you choose.

I would certainly crunch some numbers of all your income streams to see what those income streams will be with both of you alive, and then run the numbers if you pass, and finally if your spouse passes. In all scenarios, you will come up with a range that you can use to guide your decisions as it won't be exact.

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Watty
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Re: Pension date coming up, some questions

Post by Watty »

Is the pension adjusted for inflation?

That would make a huge difference and if so then you would want to maximize it as much as possible.

Also be sure to check to see if you could also delay starting the pension beyond 2023 and how much more you would be paid then. That might allow you to be in a low tax bracket and do Roth conversions or qualify for an affordable care act healthcare subsidy if you will not be on Medicare by then.
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Re: Pension date coming up, some questions

Post by 2pedals »

jrbdmb wrote: Fri Aug 12, 2022 5:50 pm
3. My two most likely plan choices are the 75% J&S and 100% J&S. Other than personal preference (and that of my spouse) is there any financial considerations when choosing between these two?
There are a lot of financial different considerations but mostly are based on your individual situation. There are many posts on Bogleheads.org on this concern. The following is a post from a while ago where I asked a similar question. I decided to go with the 100% J&S. #Cruncher used a calculator that I was able to download (unprotect and unhide columns N thru T) and see the estimated present value based on longevity tables (and discounted for inflation that you guess) of each option (Single, 50%, 75% and 100% J&S).

viewtopic.php?t=216689
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jrbdmb
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Re: Pension date coming up, some questions

Post by jrbdmb »

Watty wrote: Sat Aug 13, 2022 9:37 am Is the pension adjusted for inflation?

That would make a huge difference and if so then you would want to maximize it as much as possible.

Also be sure to check to see if you could also delay starting the pension beyond 2023 and how much more you would be paid then. That might allow you to be in a low tax bracket and do Roth conversions or qualify for an affordable care act healthcare subsidy if you will not be on Medicare by then.
Unfortunately the pension is not adjusted for inflation, and there is no added benefit for delaying past August 2023.
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Re: Pension date coming up, some questions

Post by markcoop »

jrbdmb wrote: Fri Aug 12, 2022 5:50 pm 3. My two most likely plan choices are the 75% J&S and 100% J&S. Other than personal preference (and that of my spouse) is there any financial considerations when choosing between these two?
I think a financial consideration is the single survivor case. You would need to make some estimates, but planning out how close the single survivor will be to the next tax bracket, IRMAA and other break points could sway the decision from 100% to 75% to possibly other choices.

I eventually will have a similar choice but with a very modest pension (also not linked to inflation). My view is to error on the side of longevity. Pensions and SS, from what I've read, are typically your best choices to make sure you have an income stream no matter how long you live. I therefore like to max those out. Unfortunately, maxing things out for the couple does not equal maxing things out for the single survivor case. In my case, we don't appear to be near a break point. As I still have a few more years to decide, I haven't made a choice yet.
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Re: Pension date coming up, some questions

Post by Jack FFR1846 »

Something to be absolutely sure of is what the payments will be for each year of waiting. My pension did allow a lump sum, which I took this year, rolling it over to my tIRA. The other thing that I figured out early was that my pension payment amount went up as my age went up....UNTIL I turned 65. Beyond 65, the payments would have DROPPED. So this pushed me to do something this year. Why do they drop after 65? I have no idea, but the pension was with Fidelity and they had a tool to see what the payments would be based on my age in years and months.
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Watty
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Re: Pension date coming up, some questions

Post by Watty »

jrbdmb wrote: Fri Aug 12, 2022 5:50 pm I can collect my full pension in August 2023 or prior to that with a reduction of appr. 5% a year. I will still be working for a few more years so I will take a tax hit on the extra income (but not enough to move to a higher bracket).
If you can get the money into a deductible retirement account like an IRA or 401k that will offset the taxes.

Note: if you cannot do that in 2022 and have to pay the taxes this year but the extra money will allow you to make the deductible contributions in a future year then the future tax savings could offset those taxes.

jrbdmb wrote: Fri Aug 12, 2022 5:50 pm I can collect my full pension in August 2023 or prior to that with a reduction of appr. 5% a year.
jrbdmb wrote: Sun Aug 14, 2022 6:22 am Unfortunately the pension is not adjusted for inflation, and there is no added benefit for delaying past August 2023.
There are more complex ways to mathematically analyze it but here is a back of the envelope way that I would look at it assuming that the pension is for $10,000 a year since you did not say what it was.

1) If you start it now you will get $9,500 a year.
2) If you start it a year from now you will get $10,000 a year.

This means that if you start it now you can put the extra $9500 into a separate deductible retirement account like an IRA and invest it then take out $500 a year to supplement your $9500 pension check to still have the same $10,000 to spend. This means that it will take 19 years to come out ahead with delaying the pension (9500/500=19).

The $950 in the IRA will also be invested and hopefully growing which would push the breakeven point out a few more years so delaying the pension would not be an advantage for you for at least 20 years.

Even the if you get the extra $500 a year and pay taxes on it you might only net $400 after taxes. Most likely after 20 year of inflation $400 a year will not be a significant amount then.

One way of looking at pension questions is to turn question around and ask it this way instead. "I have $9,500 in an IRA, should I use it to buy a single premium immediate annuity that will pay me $500 a year?" Even if that is a fair price if that is not something that would fit into your plans then it would make sense to go on to start it now.

If that turns out to not be the optimal choice then the impact will not be for around 20 years when you pass the breakeven point and it will not be a life altering amount then because of inflation.
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jrbdmb
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Re: Pension date coming up, some questions

Post by jrbdmb »

Running the SS numbers one thing is clear - assuming my spouse and I are both at full retirement age, no matter who passes first our total household SS benefit would drop by 33%. I don't want to have our pension income cut as well at that time, so I will almost certainly go with the J&S 100% option.

I'm still debating whether to start the pension early - there are no additional tax-free options for me, but I could use the extra cash now to fund my Roth.
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jrbdmb
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Re: Pension date coming up, some questions

Post by jrbdmb »

Follow up on Early Pension -

I used the 2022 Cashflow.xls from MMM (thanks!) to calculate the break-even date of starting the pension early vs. collecting a larger amount in August 2023 when the benefit maxes out. In all cases with what I think is a conservative ROI of 2.5% the break-even date is 96.5 years old or older. So it seems as though I should really start my pension ASAP.

The only thing is the tax impact, as any early pension payments will be on top of my salary (22% or 24%), while future payments in retirement will likely be taxed at 12%. Not clear how much that should influence my decision.
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