Pension with no COLA

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yellowgirl
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Pension with no COLA

Post by yellowgirl »

If a person has a pension with no COLA, and the monthly payment at 55 year old is $1450 or $1868 at 62 year old. Should this person take the pension at 55 or 62? Assuming this person is single. Thank you.
jstrazzere
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Re: Pension with no COLA

Post by jstrazzere »

Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.
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yellowgirl
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Re: Pension with no COLA

Post by yellowgirl »

jstrazzere wrote:Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.

Should this person take the pension at 55 and delay social security to 70? Thank you.
randomguy
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Re: Pension with no COLA

Post by randomguy »

yellowgirl wrote:
jstrazzere wrote:Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.

Should this person take the pension at 55 and delay social security to 70? Thank you.
It takes something like 23 years to get the same amount of money from the pension without factoring in any returns from getting the money earlier. Throw in a 3% nominal return on that initial money, it will be well over 30 before breakeven happens. Delaying SS makes sense if you don't need the money AND you like being conservative (nothing beats having a COLA payment stream).
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BL
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Re: Pension with no COLA

Post by BL »

Probably delaying SS (self) until age 70, or as close to 70 as you can, would make sense to get the highest amount with COLA that you can never outlive. Maybe file and suspend at FRA (66 or 67?) in case you got a life-shortening disease so you could go back and get all payments from then rather than a short back payment. Do you have an ex-spouse or deceased spouse?
Mitchell777
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Re: Pension with no COLA

Post by Mitchell777 »

yellowgirl wrote:If a person has a pension with no COLA, and the monthly payment at 55 year old is $1450 or $1868 at 62 year old. Should this person take the pension at 55 or 62? Assuming this person is single. Thank you.
My situation is somewhat similar. I decided to wait until 62. But, I could only receive 55% of the total at age 55. You are getting a much better deal at 55. My main concern is I do not want to run out of money if by some miracle I live to be 90+. No hiers. Probably depends on other income and on health.
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midareff
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Re: Pension with no COLA

Post by midareff »

yellowgirl wrote:
jstrazzere wrote:Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.

Should this person take the pension at 55 and delay social security to 70? Thank you.

The simple math seems relatively neutral without knowing how it would impact a person's lifestyle, it is difficult to recommend. In one case are you retired at 55 with a pension and sufficient safe assets to draw down for 15 years, until 70? In another are you retired but have to get a (different) job for living expenses while you wait out that time period to SS @ 70? The 15 years between 55 and 70 could make that pension look pretty small if inflation runs even 2%, let alone a more normal %.

Looking at money .... 55 to 62, a 55 start provided $121,800 until 62. Waiting to 62 provides an additional $5016 yearly. Money payback is roughly 24.3 years, or equality of receipts happens at roughly 79.3 years of age. That is also roughly the point of equality for various SS starts. Obviously, the higher percentage of your funding that has a cola the better. I don't think you get to know which is better until you are having your 80th birthday :-). Live long and prosper. FWIW, I decided to say I should have waited on my 80th, should I get that far.
JW-Retired
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Re: Pension with no COLA

Post by JW-Retired »

yellowgirl wrote:
jstrazzere wrote:Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.
Should this person take the pension at 55 and delay social security to 70? Thank you.
We know nothing about your finances so impossible for us to do more than make a guess. My guess is you should delay the pension to at least 62 so it might be large enough to bridge your delay of SS to 70.

If you are thinking you will invest every (after-tax) dollar of the early pension and make up for having a $460/month smaller amount at 62, you may be kidding yourself. I admit I'm cynical, but IMO much of the 55-62 pension money will likely just evaporate into higher spending, or an excuse to quit working sooner.

Of course, if you have an immediate need for the pension money to live on that's entirely different.
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yellowgirl
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Re: Pension with no COLA

Post by yellowgirl »

JW Nearly Retired wrote:
yellowgirl wrote:
jstrazzere wrote:Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.
Should this person take the pension at 55 and delay social security to 70? Thank you.
We know nothing about your finances so impossible for us to do more than make a guess. My guess is you should delay the pension to at least 62 so it might be large enough to bridge your delay of SS to 70.

If you are thinking you will invest every (after-tax) dollar of the early pension to and make up for having a $460/month smaller amount at 62, you may be kidding yourself. I admit I'm cynical, but IMO much of the 55-62 pension money will likely just evaporate into higher spending, or an excuse to quit working sooner.

Of course, if you have an immediate need for the pension money to live on that's entirely different.
JW
This situation is for my father. He will still working full time with the same employer. He is 54 and soon he has to decide if he is going to take the pension at 55 or 62. He is planning to work till 67 at this job.
furwut
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Re: Pension with no COLA

Post by furwut »

This situation is for my father. He will still working full time with the same employer. He is 54 and soon he has to decide if he is going to take the pension at 55 or 62. He is planning to work till 67 at this job.
Is he locked into that choice or can he start the pension anytime from 55 to 62?

Per midareff's logic I think your father might prefer to delay since it looks like he doesn't need the money now.

I retired early and have chosen to delay my non-COLA pension until 65. My reasoning is that:
a) I have other funds to live off of.
b) The actuarial reduction for starting the pension early was 5% a year. So each year I delay is equivalent to a guaranteed 5% return. Pretty good at today's interest rates.
c) Actual inflation is quite low and, as foretold by the bond market, predicted to stay low for awhile.
d) By retiring early I'm concerned about longevity risk. Maximizing my annuity streams (i.e., delaying pension and SS) is one way of addressing that.
randomguy
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Re: Pension with no COLA

Post by randomguy »

furwut wrote:
b) The actuarial reduction for starting the pension early was 5% a year. So each year I delay is equivalent to a guaranteed 5% return. Pretty good at today's interest rates.
Are you saying your lump sum payment goes from 100k to 105k or your yearly payment goes from 10k to 10.5k? One of those is a 5% return. The other isn't.
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yellowgirl
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Re: Pension with no COLA

Post by yellowgirl »

furwut wrote:
This situation is for my father. He will still working full time with the same employer. He is 54 and soon he has to decide if he is going to take the pension at 55 or 62. He is planning to work till 67 at this job.
Is he locked into that choice or can he start the pension anytime from 55 to 62?

Per midareff's logic I think your father might prefer to delay since it looks like he doesn't need the money now.

I retired early and have chosen to delay my non-COLA pension until 65. My reasoning is that:
a) I have other funds to live off of.
b) The actuarial reduction for starting the pension early was 5% a year. So each year I delay is equivalent to a guaranteed 5% return. Pretty good at today's interest rates.
c) Actual inflation is quite low and, as foretold by the bond market, predicted to stay low for awhile.
d) By retiring early I'm concerned about longevity risk. Maximizing my annuity streams (i.e., delaying pension and SS) is one way of addressing that.
Yes he locked to that choice. He can take anytime from 55 to 62 and $1868 is the max that he can get.
randomguy
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Re: Pension with no COLA

Post by randomguy »

JW Nearly Retired wrote: We know nothing about your finances so impossible for us to do more than make a guess. My guess is you should delay the pension to at least 62 so it might be large enough to bridge your delay of SS to 70.

If you are thinking you will invest every (after-tax) dollar of the early pension and make up for having a $460/month smaller amount at 62, you may be kidding yourself. I admit I'm cynical, but IMO much of the 55-62 pension money will likely just evaporate into higher spending, or an excuse to quit working sooner.

Of course, if you have an immediate need for the pension money to live on that's entirely different.
JW
You have to know who you are. If you blow 10k bonuses on buying stuff then yeah you are likely to inflate your spending. If you have been investing those bonuses for the past 30 years, I am not too worried about you having more cash.

As far as quiting work, that could be a plus:) It all depends on if you have enough money or not. When you take this pension (which is just growing at about the rate of inflation) doesn't really matter.
furwut
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Re: Pension with no COLA

Post by furwut »

randomguy wrote:
furwut wrote:
b) The actuarial reduction for starting the pension early was 5% a year. So each year I delay is equivalent to a guaranteed 5% return. Pretty good at today's interest rates.
Are you saying your lump sum payment goes from 100k to 105k or your yearly payment goes from 10k to 10.5k? One of those is a 5% return. The other isn't.
What the HR rep told me was that annual payment was reduced by 5% for each year before the full retirement age of 65. So if the pension was 100K/yr at 65 I think it would be reduced to 95K/yr if I started at 64. And yes I realize that waiting one year from age 64 to age 65 is slightly greater than 5%.
JW-Retired
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Re: Pension with no COLA

Post by JW-Retired »

yellowgirl wrote:
This situation is for my father. He will still working full time with the same employer. He is 54 and soon he has to decide if he is going to take the pension at 55 or 62. He is planning to work till 67 at this job.
What is his working (federal + state) tax bracket? That percentage is going to be taxed away off the top of this pension. So I would defer the pension for as long as it will keep growing. It's like tax deferred savings. If the pension growth will stop at age 62 take it then.
JW
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randomguy
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Re: Pension with no COLA

Post by randomguy »

furwut wrote:
randomguy wrote:
furwut wrote:
b) The actuarial reduction for starting the pension early was 5% a year. So each year I delay is equivalent to a guaranteed 5% return. Pretty good at today's interest rates.
Are you saying your lump sum payment goes from 100k to 105k or your yearly payment goes from 10k to 10.5k? One of those is a 5% return. The other isn't.
What the HR rep told me was that annual payment was reduced by 5% for each year before the full retirement age of 65. So if the pension was 100K/yr at 65 I think it would be reduced to 95K/yr if I started at 64. And yes I realize that waiting one year from age 64 to age 65 is slightly greater than 5%.
Thats not a 5% return in my book:) Think about where you are at various time points in the future

10 years out:
10 years of 95k = 950k
9 years of 100k = 900k

So at age 74 you have lost money by waiting 1 year

20 years out:
20 x 95= 1900
19*100 = 1900

at 84 you break even

30 year out
95k: 2850
100k: 2900

So at age 94 you have made an extra 50k by waiting. You can not just focus on the gain (5k/yr going forward) you also have to look at what your passing up (95k) when you are evaluating the options.
jstrazzere
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Re: Pension with no COLA

Post by jstrazzere »

yellowgirl wrote:
jstrazzere wrote:Considering just the factors presented, it appears that taking the pension at 55 makes the most sense.

But other factors like taxes, other income, Social Security, extreme longevity, etc, etc - may change the choice.

Should this person take the pension at 55 and delay social security to 70? Thank you.
I don't know. Too many unstated factors to state a choice.
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ResearchMed
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Re: Pension with no COLA

Post by ResearchMed »

yellowgirl wrote:
furwut wrote:
This situation is for my father. He will still working full time with the same employer. He is 54 and soon he has to decide if he is going to take the pension at 55 or 62. He is planning to work till 67 at this job.
Is he locked into that choice or can he start the pension anytime from 55 to 62?

Per midareff's logic I think your father might prefer to delay since it looks like he doesn't need the money now.

I retired early and have chosen to delay my non-COLA pension until 65. My reasoning is that:
a) I have other funds to live off of.
b) The actuarial reduction for starting the pension early was 5% a year. So each year I delay is equivalent to a guaranteed 5% return. Pretty good at today's interest rates.
c) Actual inflation is quite low and, as foretold by the bond market, predicted to stay low for awhile.
d) By retiring early I'm concerned about longevity risk. Maximizing my annuity streams (i.e., delaying pension and SS) is one way of addressing that.
Yes he locked to that choice. He can take anytime from 55 to 62 and $1868 is the max that he can get.
IF his health happens to fail, or for some other reason he decides to retire early, does he still have to wait until 62?

RM
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furwut
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Re: Pension with no COLA

Post by furwut »

@randomguy

I concede that describing the benefit of an delaying payments as directly equivalent to an investment return is sloppy though, in my defense, commonly done. :beer

Let's turn to the invaluable Michael Kitches for a fuller explanation (using Social Security).
Often the decision to delay benefits is explained as being the equivalent of an 8% annual return (for those delaying past full retirement age), or a 76% cumulative return over 8 years (for delaying all the way from age 62 to 70). However, the caveat to making the decision to delay is that it also has a non-trivial "cost" in the form of benefits that aren't received (and can't be invested or consumed) today. While this certainly doesn't eliminate the value of delaying Social Security benefits, it does make the trade-off more complex and nuanced than just (incorrectly) equating it to an 8%/year (or 76%-per-8-years) returns.
In my case, my pension discount rate is 5% and non-Cola so I think in the face of high inflation I would prefer start the pension immediately (or take a lump sum). With inflation < 2% currently I hope there is a worthwhile benefit to delaying (though not as much one as there is with Social Security). My employer did offer me a lump sum but it wasn't anywhere close to the amount I would have needed to buy an annuity to replicate my pension stream starting at age 65. I didn't fully consider taking the lump sum and investing nor starting the payment immediately. If started now the benefit would only be 37% of what I would get at 65 - I retired at 52.

Have to think on this some. :confused
randomguy
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Re: Pension with no COLA

Post by randomguy »

furwut wrote:@randomguy

I concede that describing the benefit of an delaying payments as directly equivalent to an investment return is sloppy though, in my defense, commonly done. :beer
which is why I asked the question.:) It is sort of like saying an annuity pays 6% which is a heck of a lot better than a bond pay 2%. Both those numbers are percentages but they don't mean remotely the same thing.

As for what to pick, in this case it doesn't really matter. Delaying to 65 gives you slightly better longevity protection (i.e. you live past 90 or so) while taking it early hedges against the risk of early death. With no inflation adjustment, the difference between the 2 choices is going to be a pretty trivial amount of money except in the extreme cases (you die at 65 or live to 100) so it isn't worth losing a lot of sleep over.
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