Would you claim this non-COLAd pension early?

[Admiral]

Spouse can claim a $50k/per annum (current dollars) pension in six years, which is normal retirement age.

The pension has no COLA for the first ten years based on current rules. It gets periodic adjustments after that.

Here’s the rub: the pension can be claimed early for a 6% reduction in benefit for each year claimed before age 60.
Ie if claimed at age 59 the benefit is reduced by 6% to $47k.

It strikes me that at a time of high inflation claiming early is not as bad as it would otherwise appear— and especially since there is no immediate COLA.

It’s highly likely that she would still be working (at another job) at age 59 so we’d likely just bank the money.

This is not a decision that’s pressing but seems like it’s worth at least thinking about. Even a 12% reduction is not that bad ($6k). The break even point for a 12% reduction is 8 years.

Thoughts?

ETA: obv we don’t know the inflation rate in five years so this is more of a thought experiment.

[randybobandy]

No I would not.

--Randy Bo Bandy

[2ball]

So she would retire, collect the pension, and then get another job? Would her pension and new job pay be more than she would make if she did not retire?

I assume she doesn’t mind working?

[tonyclifton]

The break even point for a 12% reduction is 8 years.

Please show your calculations on this.

If you work past 60 does that give an extra percentage? Try having that conversation next

My spouse has talked about getting a part-time job after retiring. My response is, if it is about the money, each year you work past full retirement age is like working four years of part-time jobs. So just work an extra year or two and skip the part-time job. Go volunteer wherever!

[Flobes]

Spouse can claim a $50k/per annum (current dollars) pension in six years, which is normal retirement age. ... the pension can be claimed early ... Thoughts?

Is it a pension from an employer where she did not have FICA withheld from her income?

Restated: Is this a pension that would subject any future Social Security benefits to WEP (and perhaps GPO) reductions?

If yes^, then it's a definite yes. Getting the money out early eliminates the WEP.

[fabis]

Is your wife 30 years old or 58? 6% per year is pretty bad

[Admiral]

Spouse age: 54. Pension age is 60 for no reductions. 6% for each year under 60.

SS: no reduction. SS projected amt is over $40k at age 67. No WEP.

The pension cannot be claimed while working for this employer, obviously. This assumes working for another employer. It can be claimed upon retirement or when separated. She does not plan to stay with this employer (local gov't) to age 60.

Sorry: re the breakeven point, taking a $3k reduction on a $50k payment means that the breakeven would be 16 years (50/3 = 16.6).

[Admiral]

So she would retire, collect the pension, and then get another job? Would her pension and new job pay be more than she would make if she did not retire?

I assume she doesn’t mind working?

She would get another job soon, then claim whenever she wants. She's not going to claim at age 54, but might at age 58 or 59. Once she leaves obviously the pension stops accruing and loses real-dollar value, based on inflation.

[beernutz]

Spouse age: 54. Pension age is 60 for no reductions. 6% for each year under 60.

SS: no reduction. SS projected amt is over $40k at age 67. No WEP.

The pension cannot be claimed while working for this employer, obviously. This assumes working for another employer. It can be claimed upon retirement or when separated. She does not plan to stay with this employer (local gov't) to age 60.

Sorry: re the breakeven point, taking a $3k reduction on a $50k payment means that the breakeven would be 16 years (50/3 = 16.6).

Sorry, I'm slow and trying to understand your wife's situation.

If she continues to work at same employer to 60 then retires/claims she gets 100% of her benefit.

If she works 5 more years at current employer to 59, retires/claims, she earns 94% of her benefit.

If she works 5 more years at current employer to 59, retires/doesn't claim until 60 she gets the same 100% benefit she would have gotten by working to 60?

The 6% reduction is only for claiming early but there's no benefit accrued for working the additional year?

If her local pension fund is like my state one I wouldn't count on those periodic adjustments. My pension is non-cola but periodic adjustments can be made if the state funds them. The last one was 14 years ago.

[Metsfan91]

No, I won't claim early. I'll delay to maximize payout.

[Admiral]

Spouse age: 54. Pension age is 60 for no reductions. 6% for each year under 60.

SS: no reduction. SS projected amt is over $40k at age 67. No WEP.

The pension cannot be claimed while working for this employer, obviously. This assumes working for another employer. It can be claimed upon retirement or when separated. She does not plan to stay with this employer (local gov't) to age 60.

Sorry: re the breakeven point, taking a $3k reduction on a $50k payment means that the breakeven would be 16 years (50/3 = 16.6).

Sorry, I'm slow and trying to understand your wife's situation.

If she continues to work at same employer to 60 then retires/claims she gets 100% of her benefit.

If she works 5 more years at current employer to 59, retires/claims, she earns 94% of her benefit.

If she works 5 more years at current employer to 59, retires/doesn't claim until 60 she gets the same 100% benefit she would have gotten by working to 60?

The 6% reduction is only for claiming early but there's no benefit accrued for working the additional year?

If her local pension fund is like my state one I wouldn't count on those periodic adjustments. My pension is non-cola but periodic adjustments can be made if the state funds them. The last one was 14 years ago.

1) She gets 100% of her (current) $50k benefit regardless of whether she stays or leaves, at age 60. To be clear, if she stays, it's higher, see #2.
2) If she stays for six more years (to 60) then obviously the benefit is much higher (more years of service, probably higher salary). In that case it's like $73k.
3) Once she separates, the benefit is frozen, but she can claim the benefit at any age (above 52), with a 6% reduction for each year below 60.
4) The pension cannot be claimed while still working for the govt.
5) We don't count on the COLA; but as noted she will get SS

I'm asking if due to highish inflation, claiming early (perhaps a year) is a decent strategy. Obviously if we could know in advance that $47k could be invested and make more than 6%, we'd do that. But we can't.

ETA: It's similar to the social security claiming question: take the money now, or wait til later, except in this case, unlike SS, there is no upward adjustment for inflation so claiming early could turn out to be better in real-dollar terms.

[jeffyscott]

It strikes me that at a time of high inflation claiming early is not as bad as it would otherwise appear— and especially since there is no immediate COLA.

ETA: obv we don’t know the inflation rate in five years so this is more of a thought experiment.

FWIW, based on TIPS/nominal spread for 5 year, the market expectation is about 2.1% inflation over the next 5 years.

The pension has no COLA for the first ten years based on current rules.

Does that mean that if she takes it at 55, the COLAs start when she is 65, but if she waits until she is 60 the COLAs would start when she is 70? (Not that I have any idea how that would impact the decision )

Even a 12% reduction is not that bad ($6k). The break even point for a 12% reduction is 8 years.

If the break-even point is only 8 years, taking it early would seem to be a very bad decision. But how did you come up with that?

A 12% reduction would mean taking 2 years early and $50,000 for 8 years would be $400K, the reduced amount of $44,000 for 10 years would be $440K. I get about 14.7 years for the break-even, with $50K x 14.7 = $735K and 16.7 x $44K = $734,800. Of course, calculating this using a reasonable discount rate (4% ) might change it a little.

[Grogs]

Spouse age: 54. Pension age is 60 for no reductions. 6% for each year under 60.

SS: no reduction. SS projected amt is over $40k at age 67. No WEP.

The pension cannot be claimed while working for this employer, obviously. This assumes working for another employer. It can be claimed upon retirement or when separated. She does not plan to stay with this employer (local gov't) to age 60.

Sorry: re the breakeven point, taking a $3k reduction on a $50k payment means that the breakeven would be 16 years (50/3 = 16.6).

Sorry, I'm slow and trying to understand your wife's situation.

If she continues to work at same employer to 60 then retires/claims she gets 100% of her benefit.

If she works 5 more years at current employer to 59, retires/claims, she earns 94% of her benefit.

If she works 5 more years at current employer to 59, retires/doesn't claim until 60 she gets the same 100% benefit she would have gotten by working to 60?

The 6% reduction is only for claiming early but there's no benefit accrued for working the additional year?

If her local pension fund is like my state one I wouldn't count on those periodic adjustments. My pension is non-cola but periodic adjustments can be made if the state funds them. The last one was 14 years ago.

1) She gets 100% of her (current) $50k benefit regardless of whether she stays or leaves, at age 60. To be clear, if she stays, it's higher, see #2.
2) If she stays for six more years (to 60) then obviously the benefit is much higher (more years of service, probably higher salary). In that case it's like $73k.
3) Once she separates, the benefit is frozen, but she can claim the benefit at any age (above 52), with a 6% reduction for each year below 60.
4) The pension cannot be claimed while still working for the govt.
5) We don't count on the COLA; but as noted she will get SS

I'm asking if due to highish inflation, claiming early (perhaps a year) is a decent strategy. Obviously if we could know in advance that $47k could be invested and make more than 6%, we'd do that. But we can't.

ETA: It's similar to the social security claiming question: take the money now, or wait til later, except in this case, unlike SS, there is no upward adjustment for inflation so claiming early could turn out to be better in real-dollar terms.

Admiral,

I will (hopefully) have a similar choice to make in a few years. I have a non-COLA pension with a full retirement age of 62. I hope to retire some time in the next 5-7 years, age 55-7. Let's say 55 for simplicity. For every year under age 62 when I start drawing retirement, the full payout gets reduced by 5%, so 95% at age 61, 90% at 60, and so forth.

So if I quit working at age 55, my choices would be:

- Take 65% retirement benefit immediately @ 55
- Wait 1 year and take 70% benefit at 56
- Wait 2 years and take 75% benefit at 57
...
- Wait 7 years and take 100% benefit at 62

Since the pension has no COLA, your intuition that higher inflation makes waiting less valuable is correct. I calculated the breakeven, in real dollars, for waiting to 62 vs. taking the pension immediately at age 55. With a 3% inflation, waiting breaks even at age 79. For 4% inflation, breakeven is 82. For 5%, it's 87, and for 6%, it's > age 95. This has me thinking of a strategy to take my pension early and then wait as long as possible on claiming SS.

With a 6%/yr reduction, your break evens will come sooner though. I will say that others make a good point that if your wife plans to keep working, it just makes a lot more sense to do 1 more year at current job than 2-3 someplace else. I know with my pension, I would see about a 20% increase in pension payout for working 55 to 56 because of the extra year of service, merit raise, and decreased penalty. I call it my "silver plated handcuffs" because the extra benefit of working another year at my company can't be topped by going somewhere else without a massive pay raise.

ETA: These are the breakeven ages I calculate for claiming at 54 vs. 60 for your wife:

Code: Select all

Inflation     Breakeven Age
3.0%	          74
4.0%	          76
5.0%	          79
6.0%	          83
7.0%	          92
7.5%	          > 95

[Golf maniac]

If I am following correctly if she takes the benefit at 59 she gets 94%. So thinking of it in a different way if she waits until 60 she gets a 6% return for waiting a year. Now, inflation will reduce that return, but in 5 years inflation could be a lot lower (hopefully). And honestly inflation doesn’t matter until she quits and has to decide when to take the pension. I think I would wait until 60 to take it.

[beernutz]

Spouse age: 54. Pension age is 60 for no reductions. 6% for each year under 60.

SS: no reduction. SS projected amt is over $40k at age 67. No WEP.

The pension cannot be claimed while working for this employer, obviously. This assumes working for another employer. It can be claimed upon retirement or when separated. She does not plan to stay with this employer (local gov't) to age 60.

Sorry: re the breakeven point, taking a $3k reduction on a $50k payment means that the breakeven would be 16 years (50/3 = 16.6).

Sorry, I'm slow and trying to understand your wife's situation.

If she continues to work at same employer to 60 then retires/claims she gets 100% of her benefit.

If she works 5 more years at current employer to 59, retires/claims, she earns 94% of her benefit.

If she works 5 more years at current employer to 59, retires/doesn't claim until 60 she gets the same 100% benefit she would have gotten by working to 60?

The 6% reduction is only for claiming early but there's no benefit accrued for working the additional year?

If her local pension fund is like my state one I wouldn't count on those periodic adjustments. My pension is non-cola but periodic adjustments can be made if the state funds them. The last one was 14 years ago.

1) She gets 100% of her (current) $50k benefit regardless of whether she stays or leaves, at age 60. To be clear, if she stays, it's higher, see #2.
2) If she stays for six more years (to 60) then obviously the benefit is much higher (more years of service, probably higher salary). In that case it's like $73k.
3) Once she separates, the benefit is frozen, but she can claim the benefit at any age (above 52), with a 6% reduction for each year below 60.
4) The pension cannot be claimed while still working for the govt.
5) We don't count on the COLA; but as noted she will get SS

I'm asking if due to highish inflation, claiming early (perhaps a year) is a decent strategy. Obviously if we could know in advance that $47k could be invested and make more than 6%, we'd do that. But we can't.

ETA: It's similar to the social security claiming question: take the money now, or wait til later, except in this case, unlike SS, there is no upward adjustment for inflation so claiming early could turn out to be better in real-dollar terms.

Thank you, I understand now. If I'm reading correctly, she gets 46% more pension ($73k) by staying with her current employer for 6 years until 60 or a 7.66% increase each year.

It appears the breakeven period between taking $50k at 54 and $73k at 60 is 19 years when she would be just over 72. If she delays taking by 1 year to when she's 55 and gets $53k then the breakeven period is extended by a few months.

Leaving out other factors including a possible salary differential should she leave her current job I'd be tempted to claim as early as possible if persistent high inflation is the concern.

[Admiral]

Spouse age: 54. Pension age is 60 for no reductions. 6% for each year under 60.

SS: no reduction. SS projected amt is over $40k at age 67. No WEP.

The pension cannot be claimed while working for this employer, obviously. This assumes working for another employer. It can be claimed upon retirement or when separated. She does not plan to stay with this employer (local gov't) to age 60.

Sorry: re the breakeven point, taking a $3k reduction on a $50k payment means that the breakeven would be 16 years (50/3 = 16.6).

Sorry, I'm slow and trying to understand your wife's situation.

If she continues to work at same employer to 60 then retires/claims she gets 100% of her benefit.

If she works 5 more years at current employer to 59, retires/claims, she earns 94% of her benefit.

If she works 5 more years at current employer to 59, retires/doesn't claim until 60 she gets the same 100% benefit she would have gotten by working to 60?

The 6% reduction is only for claiming early but there's no benefit accrued for working the additional year?

If her local pension fund is like my state one I wouldn't count on those periodic adjustments. My pension is non-cola but periodic adjustments can be made if the state funds them. The last one was 14 years ago.

1) She gets 100% of her (current) $50k benefit regardless of whether she stays or leaves, at age 60. To be clear, if she stays, it's higher, see #2.
2) If she stays for six more years (to 60) then obviously the benefit is much higher (more years of service, probably higher salary). In that case it's like $73k.
3) Once she separates, the benefit is frozen, but she can claim the benefit at any age (above 52), with a 6% reduction for each year below 60.
4) The pension cannot be claimed while still working for the govt.
5) We don't count on the COLA; but as noted she will get SS

I'm asking if due to highish inflation, claiming early (perhaps a year) is a decent strategy. Obviously if we could know in advance that $47k could be invested and make more than 6%, we'd do that. But we can't.

ETA: It's similar to the social security claiming question: take the money now, or wait til later, except in this case, unlike SS, there is no upward adjustment for inflation so claiming early could turn out to be better in real-dollar terms.

Thank you, I understand now. If I'm reading correctly, she gets 46% more pension ($73k) by staying with her current employer for 6 years until 60 or a 7.66% increase each year.

It appears the breakeven period between taking $50k at 54 and $73k at 60 is 19 years when she would be just over 72. If she delays taking by 1 year to when she's 55 and gets $53k then the breakeven period is extended by a few months.

Leaving out other factors including a possible salary differential should she leave her current job I'd be tempted to claim as early as possible if persistent high inflation is the concern.

This isn't a decision about leaving the job now or in six years. Of course staying longer means a much larger pension. The decision is, after separation, when to claim a non-COLAd pension: earlier, so you have the money to spend or invest, or later, when the slightly larger payment has been (somewhat) eroded by inflation.

Clearly if inflation were 2%, then taking a 6% reduction just to get the money one year earlier would be unwise. However, the calculation changes if the value of the pension is being eroded in an amount equal to, or even higher than, the early-claiming penalty.

[furwut]

Clearly if inflation were 2%, then taking a 6% reduction just to get the money one year earlier would be unwise.

If you have faith in the Fed and Chairman Powell then I’d expect the average inflation rate between now and the normal retirement date to be closer to their 2% target than 6%. So I’d wait.