Taking pension early

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Dyons
Posts: 2
Joined: Thu Dec 15, 2016 3:35 pm

Taking pension early

Post by Dyons » Tue Sep 11, 2018 3:05 pm

I hope someone can help me understand the pros and cons of taking a no-COLA pension early.

I can get pensions from TWO former companies I worked for as follows:

PENSION COMPANY ONE:

At age 65: $3,816/- per month ($45,792/- per year)
At age 62 (my current age): $3,694/- per month ($44,328/- per year)
Difference taking it early: $1,464/- per year (a 3.2% reduction)

PENSION COMPANY TWO:

At age 65: $1,812/- per month ($21,744/- per year)
At age 62 (my current age): $1,575/- per month ($18,900/- per year)
Difference taking it early: $2,844/- per year (a 13.1% reduction)

Thus, if I took BOTH pensions at 62 (now), I would get $4,308/- LESS per year than if I were to wait until 65. I know that I am locking myself into a permanent reduction of $4,308/- per year for every year that I live but I need the money now rather than later. I have a cash flow problem now until the age of 66. After that I should be fine. Taking these now, would help reduce my taking money to meet these cash flow needs from my TD accounts.

1) Is there a way to show what the pros and cons are of waiting until 65 versus taking it now?

2) Of these two pensions, it seems that the first one has the least reduction - 3.2% - between the two dates. Is this the one to take early?

Thanks for any help thinking this through.

123
Posts: 3631
Joined: Fri Oct 12, 2012 3:55 pm

Re: Taking pension early

Post by 123 » Tue Sep 11, 2018 4:22 pm

Based on your numbers Company One is definately the one to take at age 62. With only a 3.2% reduction for 36 payments it would seem that anyone would be better off taking it at 62 than 65. If someone invested the payments between 62 and 65 it would seem that there's a strong possibility that they could generate a higher monthly income between the ongoing reduced pension and income from investments than if they waited for Company One pension at age 65.

Often there are health insurance benefits in connection with pension eligibility so that could be a consideration depending on what these pension plans offer and your personal situation.

Do either of these plans offer a lump-sum alternative? (Most non-government based plans do.) Lump-sums (which can usually be rolled-over into an IRA) can be attractive depending on your financial situation. Often the lump-sums are equivalent to around 11 - 12 years worth of payments. Sometimes people opt for the lump sum depending on their own medical situation. If a lump-sum alternative is calculated based on IRS provided interest rates (many are) lump sum could be greater at age 62 than at 65 (assuming that interest rates rise during that period). Interest rates can impact the amount of the lump-sum alternative but may not impact the projected monthly payment amounts.
The closest helping hand is at the end of your own arm.

FoolMeOnce
Posts: 249
Joined: Mon Apr 24, 2017 11:16 am

Re: Taking pension early

Post by FoolMeOnce » Tue Sep 11, 2018 4:34 pm

Dyons wrote:
Tue Sep 11, 2018 3:05 pm
I hope someone can help me understand the pros and cons of taking a no-COLA pension early.

I can get pensions from TWO former companies I worked for as follows:

PENSION COMPANY ONE:

At age 65: $3,816/- per month ($45,792/- per year)
At age 62 (my current age): $3,694/- per month ($44,328/- per year)
Difference taking it early: $1,464/- per year (a 3.2% reduction)

PENSION COMPANY TWO:

At age 65: $1,812/- per month ($21,744/- per year)
At age 62 (my current age): $1,575/- per month ($18,900/- per year)
Difference taking it early: $2,844/- per year (a 13.1% reduction)

Thus, if I took BOTH pensions at 62 (now), I would get $4,308/- LESS per year than if I were to wait until 65. I know that I am locking myself into a permanent reduction of $4,308/- per year for every year that I live but I need the money now rather than later. I have a cash flow problem now until the age of 66. After that I should be fine. Taking these now, would help reduce my taking money to meet these cash flow needs from my TD accounts.

1) Is there a way to show what the pros and cons are of waiting until 65 versus taking it now?

2) Of these two pensions, it seems that the first one has the least reduction - 3.2% - between the two dates. Is this the one to take early?

Thanks for any help thinking this through.
Take Company 1 at 62. There are probably more sophisticated ways to look at this, but by age 65 you will have pocketed $123,000 in pension payments. At a difference of $1,464 per year starting at age 65, it would take about 84 years for the age-65 start to make up that difference. (The absence of a COLA makes for easy math)

The second one takes roughly 20 years. Closer call. Any survivor benefit considerations at play?

delamer
Posts: 5819
Joined: Tue Feb 08, 2011 6:13 pm

Re: Taking pension early

Post by delamer » Tue Sep 11, 2018 7:23 pm

I’d set up a spreadsheet showing your various options for each year — expenses minus one pension (or the other) or minus both pensions or minus no pensions — from now through RMDs, at least.

Then you’ll be clear on how much you’ll need to take out of investments, and can make a better decision.

Off the cuff, though, I agree with FoolMeOnce.

bradpevans
Posts: 308
Joined: Sun Apr 08, 2018 1:09 pm

Re: Taking pension early

Post by bradpevans » Tue Sep 11, 2018 7:39 pm

Dyons wrote:
Tue Sep 11, 2018 3:05 pm
I hope someone can help me understand the pros and cons of taking a no-COLA pension early.

I can get pensions from TWO former companies I worked for as follows:

PENSION COMPANY ONE:

At age 65: $3,816/- per month ($45,792/- per year)
At age 62 (my current age): $3,694/- per month ($44,328/- per year)
Difference taking it early: $1,464/- per year (a 3.2% reduction)

PENSION COMPANY TWO:

At age 65: $1,812/- per month ($21,744/- per year)
At age 62 (my current age): $1,575/- per month ($18,900/- per year)
Difference taking it early: $2,844/- per year (a 13.1% reduction)

Thus, if I took BOTH pensions at 62 (now), I would get $4,308/- LESS per year than if I were to wait until 65. I know that I am locking myself into a permanent reduction of $4,308/- per year for every year that I live but I need the money now rather than later. I have a cash flow problem now until the age of 66. After that I should be fine. Taking these now, would help reduce my taking money to meet these cash flow needs from my TD accounts.

1) Is there a way to show what the pros and cons are of waiting until 65 versus taking it now?

2) Of these two pensions, it seems that the first one has the least reduction - 3.2% - between the two dates. Is this the one to take early?

Thanks for any help thinking this through.

It might be easier to think of in terms of increase for delaying rather than reduction
The break even point (in years) is roughly 100/yearly increase (as others have noted)
I’m Thinking your percents are change for 3 years not for each year

Have you checked other starting ages? One of mine has little increase from 62 to 65 but then takes bigger jumps after 65

Taking both now does put less strain now on your TD account now
But taking more later also put less strain on your TD account later
It also means more of your income is NOT subject to market return risk

Dyons
Posts: 2
Joined: Thu Dec 15, 2016 3:35 pm

Re: Taking pension early

Post by Dyons » Tue Sep 11, 2018 8:53 pm

Thanks, everyone, for all your thoughtful responses.

@123
Company 2 does offer a partial lump sum and the rest as an annuity. Specifically, it is $92850/- as lump sum plus residual annuity as follows:
At 62, $978/- per MONTH (for 100% joint and survivor with popup)
At 65, $1291/- per MONTH (ditto)

Company 1 does not offer a lump sum option.

@FoolMeOnce
The figures I quoted were for 100% joint and survivor with popup.

I'll brood over what everyone has said, and come back with a few more questions, if I may. THANKS VERY MUCH, AGAIN, for all your advice and help!

Valuethinker
Posts: 35655
Joined: Fri May 11, 2007 11:07 am

Re: Taking pension early

Post by Valuethinker » Wed Sep 12, 2018 2:53 am

Dyons wrote:
Tue Sep 11, 2018 3:05 pm
I hope someone can help me understand the pros and cons of taking a no-COLA pension early.

I can get pensions from TWO former companies I worked for as follows:

PENSION COMPANY ONE:

At age 65: $3,816/- per month ($45,792/- per year)
At age 62 (my current age): $3,694/- per month ($44,328/- per year)
Difference taking it early: $1,464/- per year (a 3.2% reduction)

PENSION COMPANY TWO:

At age 65: $1,812/- per month ($21,744/- per year)
At age 62 (my current age): $1,575/- per month ($18,900/- per year)
Difference taking it early: $2,844/- per year (a 13.1% reduction)

Thus, if I took BOTH pensions at 62 (now), I would get $4,308/- LESS per year than if I were to wait until 65. I know that I am locking myself into a permanent reduction of $4,308/- per year for every year that I live but I need the money now rather than later. I have a cash flow problem now until the age of 66. After that I should be fine. Taking these now, would help reduce my taking money to meet these cash flow needs from my TD accounts.

1) Is there a way to show what the pros and cons are of waiting until 65 versus taking it now?

2) Of these two pensions, it seems that the first one has the least reduction - 3.2% - between the two dates. Is this the one to take early?

Thanks for any help thinking this through.
Since you have cash flow problems, you should certainly take pension One.

If you need further cash flow, then you could take Pension Two as well.

The advantage of deferring Social Security for as long as possible is that it is inflation indexed and will thus protect you in the very long run of retirement.

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