Deciding whether to delay the start of pension benefits

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mesaverde
Posts: 582
Joined: Wed May 02, 2007 4:14 pm

Deciding whether to delay the start of pension benefits

Post by mesaverde »

[Topic is now in Personal Finance (Not Investing) - mod mkc]

Hello! I’m 51 and will be retiring in the next few years. I’ll have a pension from the Virginia Retirement System, which is fiscally sound. I can start the pension payments when I retire, or wait until age 65 for a higher amount (for the same reason people wait until age 70 to start taking Social Security). The initial pension payment does not increase if started after age 65 (so it does not make sense to delay beyond age 65). But once started, the pension payments increase each year (COLA) along with the Consumer Price Index, with a maximum annual increase of 5%. Here are the specific numbers (immediately taking the pension vs. waiting until age 65):

Retire at age 52: pension will initially pay $21k/year (or $43.3k/year if started at age 65, an average increase of 8.1% per year between age 52 and 65).
Retire at age 53: pension will initially pay $26.7k/year (or $46.9k/year if started at age 65, an average increase of 6.3% per year between age 53 and 65).
Retire at age 54: pension will initially pay $33.3k/year (or $50.2k/year if started at age 65, an average increase of 4.6% per year between age 54 and 65).
Retire at age 55: pension will initially pay $40.5k/year (or $53.3k/year if started at age 65, an average increase of 3.2% per year between age 55 and 65).

Which of these options appears to make the most sense financially? Retiring at age 52 and immediately taking the pension does not make sense (just as waiting from age 67 to 70 to start taking Social Security increases the benefit by a significant 8% per year). Retiring at age 55 seems ideal (given that 3.2% is only slightly above the average historic inflation rate).

Two key facts:
1. Regardless of when I retire, I have enough saved (outside the pension) to retire at any of the ages listed above. However, retiring later would allow an increased standard of living (for example, taking expensive trips to Africa, New Zealand, etc. that I otherwise might not be able to do).
2. Fortunately I’m in superb health (~top .01% for someone my age) so the chance of living beyond average life expectancy is high.
"Learn from the past, live in the present, plan for the future"
tetrad
Posts: 77
Joined: Mon Apr 08, 2024 10:23 am

Re: Deciding whether to delay the start of pension benefits

Post by tetrad »

I like your inflation rate thinking if your goal is to maximize the annual payment. You might also want to look at retire at say 55, then defer to 56, 57, 58, ..., 65 and look at the annual increment. The true max benefit start date is roughly when those individual year increments drop below the inflation rate. I actually retired at 56 and deferred my pension to 62 as it went up 5% a year until then.

If you want to know maximum total financial payout of different cases, you'd calculate something called the present value of the cash flow stream over your life expectancy using a present value rate something like 4% + inflation if you include inflation though your sane rate might be different. This can be done in a spreadsheet. Generally the PV analysis should not differ much with start age if the pension payout is truly actuarial based. Have no idea what incentives are built into your pension though. Only mentioning in the event you want to do a true financial value calculation.

Personally I think size of pension is maybe a better approach not total value.
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