Pension Question - Early Retirement
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Pension Question - Early Retirement
In a few weeks, I will turn 55 and therefore be eligible to begin receiving early pension payments from a previous employer.
I am still employed full time and plan to retire in a few years.
I haven't done anything about contacting the prior employer about beginning payments because I have not planned to take them. Obviously, the longer I delay taking them, the more they are worth and I don't need the income now. We are only talking around $600/month and the pension is not adjusted for cost of living. The plan is managed by a third party.
The company, while a large recognized household name, is not the financial powerhouse it once was (hey, I am not there any longer lol)....so what should i look for if I think they may not be doing well in the future and perhaps I should begin payments?
I'd rather look for signals or signs than go on hunches.
They offered a lump sum buyout last year, but I turned it down since it was heavily discounted. There is some scuttlebutt on the ex employee grapevine that they may come out with another offer in the future.
Thank you/
I am still employed full time and plan to retire in a few years.
I haven't done anything about contacting the prior employer about beginning payments because I have not planned to take them. Obviously, the longer I delay taking them, the more they are worth and I don't need the income now. We are only talking around $600/month and the pension is not adjusted for cost of living. The plan is managed by a third party.
The company, while a large recognized household name, is not the financial powerhouse it once was (hey, I am not there any longer lol)....so what should i look for if I think they may not be doing well in the future and perhaps I should begin payments?
I'd rather look for signals or signs than go on hunches.
They offered a lump sum buyout last year, but I turned it down since it was heavily discounted. There is some scuttlebutt on the ex employee grapevine that they may come out with another offer in the future.
Thank you/
Re: Pension Question - Early Retirement
"I haven't done anything about contacting the prior employer about beginning payments because I have not planned to take them. Obviously, the longer I delay taking them, the more they are worth and I don't need the income now."
Is that actually the case? Some pension plans don't give you higher payout because you delay taking them. I would confirm that to be true before making that decision.
Is that actually the case? Some pension plans don't give you higher payout because you delay taking them. I would confirm that to be true before making that decision.
- cheese_breath
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Re: Pension Question - Early Retirement
??? Is that based on full retirement age? It's been my understanding, and experience from places where I've worked, that taking your pension at 55 would result in smaller monthly payments than if you delayed until 60 or 65.Novine wrote:"I haven't done anything about contacting the prior employer about beginning payments because I have not planned to take them. Obviously, the longer I delay taking them, the more they are worth and I don't need the income now."
Is that actually the case? Some pension plans don't give you higher payout because you delay taking them. I would confirm that to be true before making that decision.
The surest way to know the future is when it becomes the past.
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Re: Pension Question - Early Retirement
For this pension, early retirement is defined as age 55. Full retirement is defined as age 65.
There is an online calculator that allows one to enter the age at which they wish to begin receive payments. The calculator then calculates
the monthly payment.
The smallest amount is at age 55 and it escalates until age 65 at which point, the largest amount is calculated and it does not rise from there.
Hopefully that answers the question, thank you.
There is an online calculator that allows one to enter the age at which they wish to begin receive payments. The calculator then calculates
the monthly payment.
The smallest amount is at age 55 and it escalates until age 65 at which point, the largest amount is calculated and it does not rise from there.
Hopefully that answers the question, thank you.
Re: Pension Question - Early Retirement
How large is the reduction from age 65 to age 55?
My back-of-the envelope math says that a "fair" reduction factor would be around 48%. So, for example, if your age 65 benefit is $1,000 per month then a "fair" payment at age 55 would be $480 each month. If they are offering you more than that then it may make sense to take the money now.
The 48% reduction is based on the current interest rates environment and the IRS mortality table for 2015.
My back-of-the envelope math says that a "fair" reduction factor would be around 48%. So, for example, if your age 65 benefit is $1,000 per month then a "fair" payment at age 55 would be $480 each month. If they are offering you more than that then it may make sense to take the money now.
The 48% reduction is based on the current interest rates environment and the IRS mortality table for 2015.
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Re: Pension Question - Early Retirement
You could compare that pension payout increase from 55 to 65 with other annuity payouts to see if it's actuarially fair. I'm betting it probably is.
I'd wait to start it till I quit employment or turned 65, WCF...
I'd wait to start it till I quit employment or turned 65, WCF...
Attempted new signature...
- cheese_breath
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Re: Pension Question - Early Retirement
My experience in the companies where I've worked is it's not a straight line age to payment relationship. There was a significant discount for retirements under age 60 and then a good bump for 60 and above.
The surest way to know the future is when it becomes the past.
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Re: Pension Question - Early Retirement
For the 10 years between age 55 and 65, it rises from $596 to $1565
I neglected to mention that I am now in the 28% tax bracket - after I retire, I fully expect that bracket to drop significantly.
Expected retirement is 3 years give or take.
I neglected to mention that I am now in the 28% tax bracket - after I retire, I fully expect that bracket to drop significantly.
Expected retirement is 3 years give or take.
Re: Pension Question - Early Retirement
If they have a pension plan they must publish details on that planTresBelle65 wrote:The company, while a large recognized household name, is not the financial powerhouse it once was (hey, I am not there any longer lol)....so what should i look for if I think they may not be doing well in the future and perhaps I should begin payments?
I'd rather look for signals or signs than go on hunches.
Investment assumptions and funding level is one. "Normal" assumptions are expected rate of return should be around 5% and a funding level of around 80%. If the number veer too far from this you have issues. They should even tell you if current pension obligations are meet. If they are not this is a issue. Current pension obligations are what employers have already earned, there are 2 other categories for what are reasonable future benefits will be.
Is the pension still open? If closed, this is good for you.
What is the "average lives" (a.k.a. average age) in the plan? The younger the better.
While not a financial powerhouse, can it meet it's debt burden? unfunded pension obligations are consider unsecured debt. The market does take this into account. One should be able to deconstruct the balance sheet to determine if the pension obligation is increasing or decreasing the company's beta. If it is increasing the firm's beta more than other firms in the industry this is a warning sign. This is a little tricky. You need to know some accounting and investment theory. Let me know if you are interested and I can see if I can dig up a link.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
- TheTimeLord
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Re: Pension Question - Early Retirement
I am just asking here but assuming his pension is covered by the Pension Benefit Guaranty Corporation (most likely) and falls within their limits is there really any exposure here?
http://www.pbgc.gov/home.html
http://www.pbgc.gov/home.html
Last edited by TheTimeLord on Fri Jun 26, 2015 10:50 am, edited 1 time in total.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. |
Run, You Clever Boy! [9085]
Re: Pension Question - Early Retirement
TresBelle65 wrote:For the 10 years between age 55 and 65, it rises from $596 to $1565
I neglected to mention that I am now in the 28% tax bracket - after I retire, I fully expect that bracket to drop significantly.
Expected retirement is 3 years give or take.
That implies a reduction actor of 38% (596/1,565). As i stated above, a "fair" reduction is quite a bit higher. The only way to get that low is to use some outdated assumptions for actuarial equivalence (like a 7% interest rate).
I would wait to take the pension unless you have reason to think your life expectancy is below average.
-G$$
Re: Pension Question - Early Retirement
The lump sum window might be a signal (a good one). Assuming the plan is covered by ERISA (it probably is if this is a large recognized hoursehold name) then the Plan needs to be at least 80% funded to pay lump sums. A bad signal would be to see a company stop paying lump sums if the option had always been available. That implies that the funding ratio is declining.TresBelle65 wrote: The company, while a large recognized household name, is not the financial powerhouse it once was (hey, I am not there any longer lol)....so what should i look for if I think they may not be doing well in the future and perhaps I should begin payments?
I'd rather look for signals or signs than go on hunches.
They offered a lump sum buyout last year, but I turned it down since it was heavily discounted. There is some scuttlebutt on the ex employee grapevine that they may come out with another offer in the future.
-g$$
Re: Pension Question - Early Retirement
This is a good point, though I would not consider 7% outdated. That is close to the current norm. I think we both can agree that it is optimistic.g$$ wrote:That implies a reduction actor of 38% (596/1,565). As i stated above, a "fair" reduction is quite a bit higher. The only way to get that low is to use some outdated assumptions for actuarial equivalence (like a 7% interest rate).
Saying that, and to extend, risk and returns are linked. If the pension plan is solid, this would be a low risk asset. In particular, it takes out longevity risk which is very expensive. As such, you should be using a low discount rate. Say 4%?
Thus, if you retired early your pension investment will be subpar. That being said, the purpose of life is not to die rich but to live richly. If you were to retire early how would you invest your time and how much is that worth?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Pension Question - Early Retirement
Yah, I would say something around 4% or 4.5% is a decent estimate of current discount rates for pension plans. That is about where high-quality corporate bond discount rates are at right now.alex_686 wrote:g$$ wrote: Saying that, and to extend, risk and returns are linked. If the pension plan is solid, this would be a low risk asset. In particular, it takes out longevity risk which is very expensive. As such, you should be using a low discount rate. Say 4%?
Thus, if you retired early your pension investment will be subpar. That being said, the purpose of life is not to die rich but to live richly. If you were to retire early how would you invest your time and how much is that worth?
Re: Pension Question - Early Retirement
TresBelle65 in original post wrote:In a few weeks, I will turn 55 ...
Based on this and assuming you live until age 83 (life expectancy for a 55 year old male per SSA Life Expectancy Calculator) you'd get an implicit annual return of 8.4% [ * ] by waiting until age 65 to start collecting the pension. This is a very high return. So high in fact that I'd double check the terms. Here is the calculation:TresBelle65 in [url=https://www.bogleheads.org/forum/viewtopic.php?p=2535775#p2535775]this post[/url] wrote:For the 10 years between age 55 and 65, [ the monthly pension payment ] rises from $596 to $1565
Code: Select all
Row Col A Col B Col C Formulas in Column B
1 Age now 55.00
2 Lives until 83.00
3 Annual rate to determine 8.4343%
4 Monthly rate 0.6771% =(1 + B3) ^ (1 / 12) - 1
5 Option 1 Option 2
6 Age annuity begins 55.00 65.00
7 Monthly payment $596.00 $1,565.00
8 Months until annuity begins 0 120 =ROUND(12 * (B6 - $B1), 0)
9 Months annuity runs 336 216 =ROUND(12 * ($B2 - B6), 0)
10 PV at age annuity begins $78,908 $177,332 =PV($B4, B9, -B7, 0, 0)
11 PV now $78,908 $78,908 =PV($B4, B8, 0, -B10, 0)
12 Difference $0 =B11 - C11
* Assuming the annuities run until age 86 (the life expectancy of a 55 year old female) the annual return would be 9.0%.
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Re: Pension Question - Early Retirement
yes, I am female.
I went back to the online calculator which includes all my personal employee data.
The numbers are:
$ 596 /age 55
$ 902 /age 60
$ 1,565 /age 65
again, these are hard numbers, not COLA adjusted.
I went back to the online calculator which includes all my personal employee data.
The numbers are:
$ 596 /age 55
$ 902 /age 60
$ 1,565 /age 65
again, these are hard numbers, not COLA adjusted.
Just one question
My pension allows us to take full pension benefits at age 62 if we had 25 years of service. I assume this is not a possible scenario for you or your pension?
Marty....don't go to the year 2020....Dr. Emmett Brown
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Re: Pension Question - Early Retirement
No, that is not a possibility for me and even if it were, I am still several years younger than 62.
Back to the orginal calculations - with a return % of somewhere between 8 and 9, it just seems a compelling reason to delay taking it as long as possible as it's highly unlikely I could reach those numbers by taking the payments now and investing the funds myself.
Do I understand this correctly?
Thank you, TresBelle
Back to the orginal calculations - with a return % of somewhere between 8 and 9, it just seems a compelling reason to delay taking it as long as possible as it's highly unlikely I could reach those numbers by taking the payments now and investing the funds myself.
Do I understand this correctly?
Thank you, TresBelle
Re: Pension Question - Early Retirement
Looks like this post died on the vine ; I'm not sure what Cruncher means by "implicit annual return" and I'm not sure how his example helps in your decision TresBelle - there's also an explicit assumption in his example that you'll live every year and die at 83 , realistic ? maybe ?
There is a 62% reduction in the age 65 benefit payable at 55 - using a current mortality table you can back into a rate around 8% that will produce that drop but the specific mortality table and interest rate(s) , i.e. actuarial equivalence factors found in the pension plan document don't , to my knowledge , have to align with the current factors that are mandated by IRS for funding and lump sum conversions - so for now I think you're stuck with those annuity choices.
In the future they may offer a lump sum option and then you can return to the forum with those numbers ; other responders have touched on indicators that speak to how well the plan is funded and you may be able to get a hold of the company's latest annual funding report for more information .
There is a 62% reduction in the age 65 benefit payable at 55 - using a current mortality table you can back into a rate around 8% that will produce that drop but the specific mortality table and interest rate(s) , i.e. actuarial equivalence factors found in the pension plan document don't , to my knowledge , have to align with the current factors that are mandated by IRS for funding and lump sum conversions - so for now I think you're stuck with those annuity choices.
In the future they may offer a lump sum option and then you can return to the forum with those numbers ; other responders have touched on indicators that speak to how well the plan is funded and you may be able to get a hold of the company's latest annual funding report for more information .
- cheese_breath
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Re: Pension Question - Early Retirement
And to clarify what I stated above, many (most?) defined benefit pension plan payments are not directly related to age. They may be significantly discounted for retirements under age 60.g$$ wrote:TresBelle65 wrote:For the 10 years between age 55 and 65, it rises from $596 to $1565
I neglected to mention that I am now in the 28% tax bracket - after I retire, I fully expect that bracket to drop significantly.
Expected retirement is 3 years give or take.
That implies a reduction actor of 38% (596/1,565). As i stated above, a "fair" reduction is quite a bit higher. The only way to get that low is to use some outdated assumptions for actuarial equivalence (like a 7% interest rate)....
The surest way to know the future is when it becomes the past.
- cheese_breath
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Re: Pension Question - Early Retirement
This illustrates the point I was trying to make in my previous posts. There is not a straight line relationship between age and payments. The five years between age 55 and 60 the payment increases by only $306. But for the five years between 60 and 65 it increases $663. There is a significant penalty for retiring under age 60.TresBelle65 wrote:yes, I am female.
I went back to the online calculator which includes all my personal employee data.
The numbers are:
$ 596 /age 55
$ 902 /age 60
$ 1,565 /age 65
again, these are hard numbers, not COLA adjusted.
The surest way to know the future is when it becomes the past.
Re: Pension Question - Early Retirement
The OP is not currently employed at the company offering this pension, but at Megacorp if you added up the under 61 penalty, the high four/final four salary, and the years employed factor you could get about a 12% increase in pension for every year you stayed on between 55 and 61. Talk about an incentive to keep working and an incentive to discriminate against employees in the 55-60 age group.cheese_breath wrote:This illustrates the point I was trying to make in my previous posts. There is not a straight line relationship between age and payments. The five years between age 55 and 60 the payment increases by only $306. But for the five years between 60 and 65 it increases $663. There is a significant penalty for retiring under age 60.TresBelle65 wrote:yes, I am female.
I went back to the online calculator which includes all my personal employee data.
The numbers are:
$ 596 /age 55
$ 902 /age 60
$ 1,565 /age 65
again, these are hard numbers, not COLA adjusted.
Re: Pension Question - Early Retirement
The "implicit return" is simply the rate which equalizes the discounted monthly cash flows of the two options, each ending at age 83: $596 starting now at age 55 or $1,565 starting in ten years at age 65. Row 11 of the spreadsheet in my previous post shows that, discounted at the annual 8.4% rate, both cash flows have the same present value of $79,000. But looking at it from the opposite direction may clarify the meaning -- and also help TresBelle decide.ubermax in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2544488#p2544488]this post[/url] wrote:... I'm not sure what Cruncher means by "implicit annual return" and I'm not sure how his example helps in your decision TresBelle
Assume that the money received monthly from either option is invested at the discount rate and allowed to compound. At age 83 both options will have grown to the same future value of $762,000. Here is an Excel extract showing this growth using the 0.67707% monthly rate: [ 1 ]
Code: Select all
Month Early Late
----- ------ ------
1 596 0 <-- age 55
2 1,196 0
3 1,800 0
…
120 109,798 0
121 111,138 1,565 <-- age 65
122 112,486 3,141
…
334 750,318 748,397
335 755,994 755,029
336 761,709 761,706 <-- age 83 [ 2 ] [ 3 ]
The last sentence doesn't seem to follow from the previous two, cheese_breath. There is indeed a penalty for taking the pension at age 55 instead of 60. But the penalty is even greater for taking it at age 60 instead of 65. The table below shows this. It is a variant of the one I did in my previous post except itcheese_breath in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2544546#p2544546]this post[/url] wrote:[For the] five years between age 55 and 60 the [monthly] payment increases by only $306. But for the five years between 60 and 65 it increases $663. There is a significant penalty for retiring under age 60.
- shows all three options, starting the pension at ages 55, 60, and 65;
- uses a more realistic, yet still good, 5% discount rate; and
- uses a more realistic (for a 55 year old female) life expectancy of 86 instead of 83.
Code: Select all
Row Col A Col B Col C Col D Formulas in Column B
1 Age now 55
2 Lives until 86
3 Months until annuity ends 372 =ROUND(12 * (B2 - B1), 0)
4 Option 1 Option 2 Option 3
5 Age annuity begins 55 60 65
6 Monthly payment 596 902 1,565
7 Annual rate 5.0000% 5.0000% 5.0000%
8 Monthly rate 0.40741% 0.40741% 0.40741% =(1 + B7) ^ (1 / 12) - 1
9 Months annuity runs 372 312 252 =ROUND(12 * ($B2 - B5), 0)
10 Future value at annuity end 517,577 565,819 686,045 =B6 * ((1 + B8) ^ B9 - 1) / B8 [ 4 ]
11 Present value now 114,053 124,684 151,176 =B10 / (1 + B8) ^ $B3 [ 5 ]
12 Versus previous option 10,631 26,493
Code: Select all
0.67707% = monthly growth rate = 1.084343 ^ (1 / 12) - 1
Code: Select all
761709 = age 83 value of early option = 755994 * 1.0067707 + 596 761706 = age 83 value of late option = 755029 * 1.0067707 + 1565
- One gets the same result with the Excel FV function. (And saves 300+ rows of a spreadsheet!)
Code: Select all
761,700 = FV(0.67707%, 12 * (83 - 55), -596, 0, 0) 761,700 = FV(0.67707%, 12 * (83 - 65), -1565, 0, 0)
- Equivalent to =FV(B8, B9, -B6, 0, 0)
- Equivalent to =PV(B8, $B3, 0, -B10, 0)
Re: Pension Question - Early Retirement
TresBelle65 wrote:with a return % of somewhere between 8 and 9, it just seems a compelling reason to delay taking it as long as possible as it's highly unlikely I could reach those numbers by taking the payments now and investing the funds myself.
Do I understand this correctly?
Cruncher , from the above it seems as though TB65 is interpreting your statement as a rationale to defer the annuity ; while it's true that 79K invested at 8.4% will support a monthly payout of $596 from 55 to 65 as well as $1,565 beginning at 65, it doesn't reflect what she would be offered in reality as a lump sum in place of those annuities ; it's more like $122K at age 55 and an estimated $160K at age 65 .#Cruncher wrote:The "implicit return" is simply the rate which equalizes the discounted monthly cash flows of the two options, each ending at age 83: $596 starting now at age 55 or $1,565 starting in ten years at age 65.
The most compelling reason that I can think of to wait until 65 would be a 62% reduction in benefit if she were to accept that age 55 amount ; and that's just assuming only those annuities are on the table - if a lump sum is offered , then TB65 will have to consider that along with the annuity choices - my opinion , my $.02 !!
Re: Pension Question - Early Retirement
I agree the PV method is confusing for non-finance people. And although the PV's are accurate, they are theoretical for this purpose in that they do not reflect actual pension lump sum potential amounts. However, unless you have a crystal ball you have no idea what the lump offer would be at age 65, even an estimation. We could come very close for age 55 by using the appropriate segment rates and mortality, but it seems a moot point at this time since the lump is not on the table.ubermax wrote:it doesn't reflect what she would be offered in reality as a lump sum in place of those annuities ; it's more like $122K at age 55 and an estimated $160K at age 65 .
All we can accurately say at this time is that with the significant upside potential of deferring until age 65, unless the OP has poor health or cannot otherwise afford to defer, every effort should be made to delay payments until age 65 (or as Cruncher points out, as far past age 60 as pratical). The pension amount falls well within single employer PBGC limits so that probably isn't a concern. I suspect the challenge for the OP, who is planning a relatively early retirement, will be delaying the pension as long as possible while also trying to optimize social security, which should still most likely take precedence in the optimization process.
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Re: Pension Question - Early Retirement
As another data point, my pension from my previous bankrupt employer, which was dumped on the PBGC, increases by 10.1% each year that i delay taking it from age 65 to 70. This is for a fixed, not inflation adjusted, pension.
Ralph
Ralph
Re: Pension Question - Early Retirement
Frugal Al wrote:And although the PV's are accurate, they are theoretical for this purpose in that they do not reflect actual pension lump sum potential amounts.
They're not theoretical and they're certainly not accurate or reflective of TB's situation ; when you have a stream of payments that are discounted for interest only it means that you receive the payment whether you're alive or dead - only TB knows for sure but it would be highly unlikely that the benefit amounts noted aren't some type of life contingent benefit , i.e. discounted for interest and mortality .
I just think TB should be given accurate information as a basis to make decisions not a bunch of Excel functions that are more appropriate for an entirely different question.
Re: Pension Question - Early Retirement
Uber, you seem to have an ongoing conceptual problem with this issue (this thread and others). I said they (the PV's) are theoretical for this purpose. They do not exist as lump sums, which is fine since lump sums aren't offered. They are, however, illustrative of the respective cash flow values. It is accurate enough information to make an informed decision regarding the pension planning.ubermax wrote:They're not theoretical and they're certainly not accurate or reflective of TB's situation
Re: Pension Question - Early Retirement
You should get the pensions numbers for each age until they stop increasing. One company the pension increased until age 60 - my other company stopped increasing it at age 65. So, it depends on the plan. I waited until both paid the max and I'm happy I did.Obviously, the longer I delay taking them, the more they are worth and I don't need the income now
Re: Pension Question - Early Retirement
ubermax in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2544488#p2544488]this post[/url] wrote:... there's also an explicit assumption in [#Cruncher's] example that you'll live every year and die at 83
Ubermax, it sounds like you may be referring to a simplification I've made in my calculations. I do assume the recipient gets the annuity every month until her life expectancy, no less and no more. While this approach is easier to understand and much easier to use for calculations, it isn't the most accurate. It definitely isn't how an insurance company -- working on the other side of the table -- would do the computation. A more accurate calculation would take into account the probabilities that the annuitant could die at any age. Using this more accurate method lowers by about 0.7% points the annual rate at which the early and late annuities have the same discounted value.ubermax in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2546787#p2546787]this post[/url] wrote:... it would be highly unlikely that the benefit amounts noted aren't some type of life contingent benefit , i.e. discounted for interest and mortality.
This SSA Actuarial Life Table says that a 55 year old female has a Life expectancy of 28.65 (i.e., until age 83.65). But the table also shows the Death probability each year from age 0 to 119. [ * ] For example for females alive at age 55, 0.4520% are expected to die within the next year. For those still alive at age 56, 0.4836% are expected to die in the next year, etc. Using these figures, it is possible to compute the probability that a woman will die in any year from age 55 onward. These probabilities in turn can be applied against the discounted value of the amounts she would receive should she die in that year. The sum of these probability-weighted values provides a more accurate result than does my simplified method. I also discuss this issue in my post, Re: lump sum now vs pension later?.
First, here is the simplified method from my first post modified to use a life expectancy of 83.65 years to agree with the SSA table. It shows that an 8.6% annual return causes the early and late options to have the same discounted value.
Code: Select all
Age now 55
Lives until 83.65
Annual rate to determine 8.5692% <----------
Monthly rate 0.68750%
Option 1 Option 2
Age annuity begins 55 65
Monthly payment $596 $1,565
Months until annuity begins 0 120
Months annuity runs 344 224
PV at age annuity begins $78,480 $178,578
PV now $78,480 $78,480
Difference $0
Code: Select all
Age % Die Months PV Prob PV
--- ------- ------ -------- -------
55 0.4520% 6 3,497.90 15.81
56 0.4814% 18 10,107.73 48.66
57 0.5137% 30 16,234.38 83.39
...
64 0.8746% 114 48,256.20 422.04
65 0.9557% 126 51,594.20 493.08
66 1.0437% 138 54,688.19 570.77
...
83 3.5214% 342 83,125.40 2,927.18
84 3.6954% 354 83,914.46 3,100.95
...
113 0.0008% 702 92,812.61 0.72
114 0.0003% 714 92,893.54 0.27
115 0.0001% 726 92,968.55 0.09
...
--------- ---------
Total 100.0000% 78,757.41
- Discount rate:
Code: Select all
7.8865% = annual discount rate that equalizes the early and late options 0.63458% = monthly discount rate = 1.078865 ^ (1 / 12) - 1
- % Die: Of women alive on 55th birthday:
Code: Select all
0.4520% will die while age 55 according to the SSA table 0.4814% will die while age 56 = 0.4836% from SSA table * (1 - 0.004520) 0.5137% will die while age 57 = 0.5185% from SSA table * (1 - 0.004520 - 0.004814) ...
- Months: On average those who die within the annuity's first year will receive six monthly payments; those who die the second year will receive 18 monthly payments; etc.
- PV: Present value now. First calculate the present value at the beginning of the annuity and then discount that back to now. For the early annuity the beginning of the annuity is the same as now.
Code: Select all
16,234.38 =PV(0.63458%, 30, -596, 0, 0) / 1.0063458 ^ 0
- Prob PV: Probability-weighted present value:
Code: Select all
83.39 = 0.5137% * 16234.38
Code: Select all
Age % Die Months PV Prob PV
--- ------- ------ -------- -------
55 0.4520% 0 0.00 0.00
56 0.4814% 0 0.00 0.00
57 0.5137% 0 0.00 0.00
...
64 0.8746% 0 0.00 0.00
65 0.9557% 6 4,299.37 41.09
66 1.0437% 18 12,423.69 129.66
...
83 3.5214% 222 87,095.23 3,066.97
84 3.6954% 234 89,167.18 3,295.06
...
113 0.0008% 582 112,532.28 0.87
114 0.0003% 594 112,744.78 0.32
115 0.0001% 606 112,941.75 0.11
...
--------- ---------
Total 100.0000% 78,757.35
- PV: Present value now. Zero for ages 55 - 64 since annuity doesn't start until age 65. For the late annuity the present value at the start of the annuity is discounted back for 120 months to get the value now.
Code: Select all
4,299.37 =PV(0.63458%, 6, -1565, 0, 0) / 1.0063458 ^ 120
-
- Posts: 304
- Joined: Sun Apr 12, 2015 2:44 pm
Re: Pension Question - Early Retirement
Thank you all for the comments and analysis.
I confess to not being mathematically inclined, but it would appear from reading the last posts, that year over year, there is no significant advantage to waiting since it appears to escalate annually at an even rate and presumably since I still have sufficient income while working, the major issue to consider might be the tax bracket I am in when I begin to collect payments.
To the comment about Social Security, I have 33 years of earnings records, but the first couple years were quite low (part time work).
Thank you again.
I confess to not being mathematically inclined, but it would appear from reading the last posts, that year over year, there is no significant advantage to waiting since it appears to escalate annually at an even rate and presumably since I still have sufficient income while working, the major issue to consider might be the tax bracket I am in when I begin to collect payments.
To the comment about Social Security, I have 33 years of earnings records, but the first couple years were quite low (part time work).
Thank you again.
Re: Pension Question - Early Retirement
I'd like to first respond to the Cruncher - we can illustrate the impact on present value of introducing a survival probability along with the interest rate with a very simple example ; in the annuity context present value is an expected future payment discounted to the present - let's first start with the concept of present value using interest discount only - an expected payment of $100 a year from now discounted to the present at 10% is roughly $90.91 , i.e $100/(1.1) ; now let's introduce survivorship, if the probability that the person survives the year is 1/2 , then the expected payment is $50 , i.e. $100 x (1/2) and the present value using the same 10% is $45.45, i.e. $50/(1.1) .
Now another example with the same 1 year timeframe ; annuity #1 pays $500 now and annuity #2 pays $1500 a year from now ; we first consider present value with interest only and want to solve for the interest rate that produces equality in present value of these two amounts - so we have $500= $1500/(1+i) and we see that i=2 or 200% - but again if the probability of surviving the year is 0.5 , we now get an interest rate of only 50% for equality , i.e. 500 = (1/2) x $1500 /(1+i) and solving for i we get 0.50 or 50% - the survival probability effectively dilutes the expected amount payable in a year and hence allows for a smaller interest rate to achieve equality - the same logic can be extended to periodic payments for a longer period than a year.
Cruncher , if you look back at TresBelle's response to your original post , it's clear that she thought you were advocating the deferred annuity starting at age 65 based on your "implicit rate of return" argument ; my contention and point in a nutshell is the following : if you assume interest only discounting and have immediate annuity X and deferred annuity Y and solve for rate R that achieves equality , then you don't have enough information to point to the annuity that is the better deal ; the 8% annual SS bump for retirement after full retirement age and the increase in pension benefit going from say age 55 to 65 aren't "implicit rates of return" they're both late retirement adjustments in the same way that early retirement benefits get reductions ; another example are early retirement benefits that are heavily sweetened to entice active employees to retire ;
the best option in this case actuarially would be the early benefit but knowing the interest rate that produces equality of two present values, i.e. the early benefit or the normal retirement benefit is not going to show that ; I mean suppose the interest rate is 7% , what do you do with that information.
At this point it should be noted that before your original response above there was another response that pointed out the fact that TresBelle's reduction in benefit from age 65 to 55 was much worse than actuarial equivalence using current high grade bond rates ; this fact is helpful in that it tips the scale somewhat in favor of waiting until say age 65 .
It's only conjecture on my part but it seems as though in your eagerness to provide a numerical metric upon which TresBelle could make a decision you did some spreadsheet work and created this "implicit rate of return" idea .
I know there are a few others on the forum who are passionate and very vocal with a viewpoint that is different than mine on this topic but if I need to stand alone so be it .
Good Luck TresBelle , as time goes on I'm sure you'll get more information from the employer and will also learn more through your own research .
Now another example with the same 1 year timeframe ; annuity #1 pays $500 now and annuity #2 pays $1500 a year from now ; we first consider present value with interest only and want to solve for the interest rate that produces equality in present value of these two amounts - so we have $500= $1500/(1+i) and we see that i=2 or 200% - but again if the probability of surviving the year is 0.5 , we now get an interest rate of only 50% for equality , i.e. 500 = (1/2) x $1500 /(1+i) and solving for i we get 0.50 or 50% - the survival probability effectively dilutes the expected amount payable in a year and hence allows for a smaller interest rate to achieve equality - the same logic can be extended to periodic payments for a longer period than a year.
Cruncher , if you look back at TresBelle's response to your original post , it's clear that she thought you were advocating the deferred annuity starting at age 65 based on your "implicit rate of return" argument ; my contention and point in a nutshell is the following : if you assume interest only discounting and have immediate annuity X and deferred annuity Y and solve for rate R that achieves equality , then you don't have enough information to point to the annuity that is the better deal ; the 8% annual SS bump for retirement after full retirement age and the increase in pension benefit going from say age 55 to 65 aren't "implicit rates of return" they're both late retirement adjustments in the same way that early retirement benefits get reductions ; another example are early retirement benefits that are heavily sweetened to entice active employees to retire ;
the best option in this case actuarially would be the early benefit but knowing the interest rate that produces equality of two present values, i.e. the early benefit or the normal retirement benefit is not going to show that ; I mean suppose the interest rate is 7% , what do you do with that information.
At this point it should be noted that before your original response above there was another response that pointed out the fact that TresBelle's reduction in benefit from age 65 to 55 was much worse than actuarial equivalence using current high grade bond rates ; this fact is helpful in that it tips the scale somewhat in favor of waiting until say age 65 .
It's only conjecture on my part but it seems as though in your eagerness to provide a numerical metric upon which TresBelle could make a decision you did some spreadsheet work and created this "implicit rate of return" idea .
I know there are a few others on the forum who are passionate and very vocal with a viewpoint that is different than mine on this topic but if I need to stand alone so be it .
Good Luck TresBelle , as time goes on I'm sure you'll get more information from the employer and will also learn more through your own research .
- ResearchMed
- Posts: 16795
- Joined: Fri Dec 26, 2008 10:25 pm
Re: Pension Question - Early Retirement
If this is a Defined Benefit plan, which it seems to be, then the lump sum option was *removed* yesterday, by the IRS.TresBelle65 wrote:In a few weeks, I will turn 55 and therefore be eligible to begin receiving early pension payments from a previous employer.
I am still employed full time and plan to retire in a few years.
I haven't done anything about contacting the prior employer about beginning payments because I have not planned to take them. Obviously, the longer I delay taking them, the more they are worth and I don't need the income now. We are only talking around $600/month and the pension is not adjusted for cost of living. The plan is managed by a third party.
The company, while a large recognized household name, is not the financial powerhouse it once was (hey, I am not there any longer lol)....so what should i look for if I think they may not be doing well in the future and perhaps I should begin payments?
I'd rather look for signals or signs than go on hunches.
They offered a lump sum buyout last year, but I turned it down since it was heavily discounted. There is some scuttlebutt on the ex employee grapevine that they may come out with another offer in the future.
Thank you/
Not much warning (if any at all).
RM
This signature is a placebo. You are in the control group.
Re: Pension Question - Early Retirement
RM, if you open the IRS link in one of the responses to the original post , you'll see that Code section 401(a)(9) is cited - that's only RMDs not lump sums in general .ResearchMed wrote:If this is a Defined Benefit plan, which it seems to be, then the lump sum option was *removed* yesterday, by the IRS.
Not much warning (if any at all).
RM
Re: Pension Question - Early Retirement
If you only get 48% of what you would get at 65, then you have taken a 52% reduction. (100 - 48 = 52). So I'm not sure whether you meant a 48% or 52% reduction based on your post.g$$ wrote:How large is the reduction from age 65 to age 55?
My back-of-the envelope math says that a "fair" reduction factor would be around 48%. So, for example, if your age 65 benefit is $1,000 per month then a "fair" payment at age 55 would be $480 each month. If they are offering you more than that then it may make sense to take the money now.
The 48% reduction is based on the current interest rates environment and the IRS mortality table for 2015.
As a reference point, my former employer reduced the pension 4% per year - so at 55 one would get 60% of the full pension amount - unless one had more than 15 years of service (in which case they could retire with 80% at 55 or full benefits at 60). I fall into the latter category.
I'm still working, so I haven't started taking my pension yet either. I'm waiting until I retire or hit 60 - whichever comes first. If I took it now, I would be taxed on it a substantially higher tax rate than I would after I retire. (Once I retire, I'll be spending down my taxable account at least until 59.5).
Re: Pension Question - Early Retirement
g$$ wrote:How large is the reduction from age 65 to age 55?
My back-of-the envelope math says that a "fair" reduction factor would be around 48%. So, for example, if your age 65 benefit is $1,000 per month then a "fair" payment at age 55 would be $480 each month. If they are offering you more than that then it may make sense to take the money now.
The 48% reduction is based on the current interest rates environment and the IRS mortality table for 2015.
Good catch Cherijoh , the 48% reduction factor is in the ballpark using a current mortality table and a 4% interest rate ; I think G$$ meant to say $520 in his example ; in TresBelle's case the amount was $1,565 at age 65 and $596 at age 55 or a 62% reduction or in G$$'s example $380 per month.cherijoh wrote:If you only get 48% of what you would get at 65, then you have taken a 52% reduction. (100 - 48 = 52). So I'm not sure whether you meant a 48% or 52% reduction based on your post. ).
That 62% reduction relates to an 8% interest assumption , roughly ; but the point that G$$ was making is key, which is that a 48% reduction is fair whereas a 62% reduction is on the high side which then provides a good argument to wait until 65 .
Re: Pension Question - Early Retirement
I agree that one doesn't have all the necessary information to make a decision. For example, one needs to consider things like health, returns from alternative investments, the safety of the deferred annuity, and how it fits into one's overall investment portfolio. But one does know the return from taking the deferred annuity; and this is certainly the key factor for making a decision. It's similar to knowing the yield-to-maturity of a corporate bond one is considering buying. This wouldn't be all one needs to know; but it certainly would be key.ubermax in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2550019#p2550019]this post[/url] wrote:... my contention and point in a nutshell is the following: if you assume interest only discounting and have immediate annuity X and deferred annuity Y and solve for rate R that achieves equality, then you don't have enough information to point to the annuity that is the better deal ...
Regarding "interest only discounting", I agree that one gets a more accurate return by weighting the annuity by the probability of being alive to collect it at all possible ages. I did this in my previous post; and I do it again -- in a different way -- below in this post.
Ubermax, my "implicit rate of return" is not something I created. It is merely an implementation of the standard internal rate of return concept widely used in investment analysis. Determining it for a deferred annuity vs an immediate annuity is, in principle, the same as determining it for an annuity vs a lump sum -- if one were offered.ubermax in same post wrote:it seems as though in your eagerness to provide a numerical metric upon which TresBelle could make a decision you did some spreadsheet work and created this "implicit rate of return" idea.
By taking the deferred annuity one is, in effect, investing the money one would have gotten during the first 10 years of the immediate annuity in exchange for expected larger proceeds from the deferred annuity. This is essentially the same as if one invested the money one would have gotten by taking a lump sum in exchange for the cash flow from the annuity. In both cases there is a cash flow stream that equals the net difference between the two options. This cash flow difference has an internal rate of return which measures the return of the "investment". This is standard financial analysis. To repeat, it is not something I created.
Here is an extract from the Excel sheet where I do the computation. It shows one gets a 7.9% internal rate of return from taking the deferred $1,565 / month annuity starting at age 65 instead of the immediate $596 / month annuity starting at age 55. This is the same return I derived -- by a slightly different method -- in my previous post.
Code: Select all
Age % Alive % Die $596/mo $1,565/mo Difference @7.8848%
--- --------- ------- --------- --------- ---------- ----------
55 100.0000% 0.4520% 7,135.84 0.00 (7,135.84) (7,135.84)
56 99.5480% 0.4814% 7,102.46 0.00 (7,102.46) (6,583.37)
57 99.0666% 0.5137% 7,066.87 0.00 (7,066.87) (6,071.65)
58 98.5529% 0.5489% 7,028.88 0.00 (7,028.88) (5,597.64)
59 98.0040% 0.5881% 6,988.21 0.00 (6,988.21) (5,158.52)
60 97.4159% 0.6321% 6,944.58 0.00 (6,944.58) (4,751.65)
61 96.7837% 0.6819% 6,897.59 0.00 (6,897.59) (4,374.57)
62 96.1018% 0.7386% 6,846.79 0.00 (6,846.79) (4,024.99)
63 95.3632% 0.8029% 6,791.66 0.00 (6,791.66) (3,700.78)
64 94.5603% 0.8746% 6,731.68 0.00 (6,731.68) (3,400.01)
65 93.6857% 0.9557% 6,666.23 17,504.44 10,838.21 5,074.04
66 92.7300% 1.0437% 6,594.73 17,316.70 10,721.97 4,652.76
67 91.6863% 1.1343% 6,516.84 17,112.18 10,595.34 4,261.78
68 90.5520% 1.2259% 6,432.44 16,890.55 10,458.11 3,899.14
69 89.3261% 1.3214% 6,341.35 16,651.36 10,310.01 3,562.99
70 88.0047% 1.4286% 6,243.01 16,393.14 10,150.13 3,251.37
71 86.5761% 1.5482% 6,136.56 16,113.62 9,977.06 2,962.36
72 85.0280% 1.6745% 6,021.32 15,811.02 9,789.70 2,694.29
73 83.3535% 1.8064% 5,896.85 15,484.17 9,587.33 2,445.75
74 81.5472% 1.9462% 5,762.66 15,131.81 9,369.15 2,215.41
75 79.6010% 2.1044% 5,617.81 14,751.46 9,133.65 2,001.88
76 77.4965% 2.2759% 5,461.17 14,340.14 8,878.98 1,803.83
77 75.2206% 2.4461% 5,292.31 13,896.74 8,604.44 1,620.30
78 72.7745% 2.6104% 5,111.49 13,421.94 8,310.45 1,450.56
79 70.1641% 2.7753% 4,918.89 12,916.21 7,997.32 1,293.89
80 67.3888% 2.9535% 4,714.03 12,378.27 7,664.25 1,149.37
81 64.4352% 3.1450% 4,495.95 11,805.63 7,309.68 1,016.08
82 61.2903% 3.3363% 4,264.18 11,197.04 6,932.86 893.27
83 57.9540% 3.5214% 4,018.95 10,553.10 6,534.16 780.37
84 54.4326% 3.6954% 3,760.87 9,875.45 6,114.58 676.89
85 50.7372% 3.8523% 3,490.97 9,166.72 5,675.75 582.39
86 46.8850% 3.9837% 3,210.75 8,430.92 5,220.17 496.49
87 42.9012% 4.0796% 2,922.41 7,673.78 4,751.37 418.88
88 38.8216% 4.1288% 2,628.88 6,903.01 4,274.13 349.27
89 34.6929% 4.1207% 2,333.88 6,128.39 3,794.51 287.41
90 30.5722% 4.0473% 2,041.79 5,361.41 3,319.62 233.06
91 26.5249% 3.9040% 1,757.45 4,614.79 2,857.34 185.95
92 22.6209% 3.6909% 1,485.86 3,901.64 2,415.78 145.72
93 18.9301% 3.4134% 1,231.82 3,234.55 2,002.74 111.98
94 15.5167% 3.0819% 999.55 2,624.65 1,625.11 84.22
95 12.4349% 2.6999% 792.79 2,081.75 1,288.95 61.92
96 9.7349% 2.2931% 614.24 1,612.90 998.66 44.47
97 7.4418% 1.8873% 464.75 1,220.36 755.61 31.19
98 5.5545% 1.5049% 343.45 901.84 558.39 21.36
99 4.0497% 1.1630% 248.05 651.33 403.28 14.30
100 2.8867% 0.8787% 175.03 459.61 284.58 9.35
101 2.0080% 0.6479% 120.44 316.26 195.82 5.97
102 1.3601% 0.4652% 80.64 211.74 131.10 3.70
103 0.8949% 0.3244% 52.40 137.59 85.19 2.23
104 0.5704% 0.2192% 32.96 86.54 53.58 1.30
105 0.3512% 0.1431% 20.00 52.52 32.52 0.73
106 0.2081% 0.0899% 11.67 30.65 18.98 0.40
107 0.1183% 0.0541% 6.52 17.13 10.60 0.20
108 0.0641% 0.0311% 3.47 9.12 5.65 0.10
109 0.0330% 0.0170% 1.75 4.61 2.85 0.05
110 0.0160% 0.0087% 0.83 2.19 1.36 0.02
111 0.0073% 0.0042% 0.37 0.97 0.60 0.01
112 0.0031% 0.0019% 0.15 0.40 0.25 0.00
113 0.0012% 0.0008% 0.06 0.15 0.09 0.00
114 0.0004% 0.0003% 0.02 0.05 0.03 0.00
115 0.0001% 0.0001% 0.01 0.02 0.01 0.00
--------- ---------- ---------- ---------- ----
Total 100.0000% 204,875.14 355,382.59 150,507.45 0.00
- Age, $596/mo, & $1,565/mo columns: For each age I assume those alive at the end of the year will get all 12 monthly payments. Plus those who die during the year will receive on average 6 monthly payments. For example:
Code: Select all
Age 55: 7,135.84 = 596 * (12 * 99.5480% + 6 * 0.4520%) Age 65: 17,504.44 = 1565 * (12 * 92.7300% + 6 * 0.9557%)
- % Alive: This is derived from the Death probability column from the same SSA Actuarial Life Table I used in my previous post. I start with 100% at age 55 since that's when the immediate annuity begins. Subsequent years are computed as for example:
Code: Select all
Age 56: 99.5480% = 100.0000% * (1 - 0.4520%) Age 66: 92.7300% = 93.6857% * (1 - 1.0201%)
- % Die: This is also derived from the Death probability column. For example:
Code: Select all
Age 55: 0.4520% = 100.0000% * 0.4520% Age 65: 0.9557% = 93.6857% * 1.0201%
- Difference: This is just the deferred annuity column ($1,565/mo) less the immediate annuity column ($596/mo). The Excel IRR function takes this column as its parameter to compute the internal rate of return of 7.8848%. This is quite close to the 7.8865% value I got in my previous post using a slightly different method.
- @ 7.8848%: This column shows the Difference discounted by the internal rate of return. By definition it adds up to zero.
Code: Select all
Age 55: -7,135.84 = -7135.84 / (1 + 7.8848%) ^ 0 Age 65: 5,074.04 = 10838.21 / (1 + 7.8848%) ^ 10
Re: Pension Question - Early Retirement
So Crunch how do you determine the "implicit rate of return" for a deferred annuity ?
and I have immediate annuity X and deferred annuity Y , using interest only their PV's are equal at 7% , which is the better choice and why ?
and PS Crunch , I already commented on your method , doesn't hold water for me .
and I have immediate annuity X and deferred annuity Y , using interest only their PV's are equal at 7% , which is the better choice and why ?
and PS Crunch , I already commented on your method , doesn't hold water for me .
Re: Pension Question - Early Retirement
#Cruncher has done an excellent job in providing an answer to TresBells original question. He applied recognized financial principles with creativity to show that delaying until 65 is the better financial choice. He even gave a rate of return that can be used to compare with alternative investments of the cash flow from the pension if taken at 55 instead of 65, and incorporated a mortality table. Delaying until 65 is the clear winner
[OT comments removed by admin LadyGeek]
[OT comments removed by admin LadyGeek]