Author Topic: If I retire early, should I take my pension ASAP or defer it?  (Read 2001 times)

Mitch76

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If I retire early, should I take my pension ASAP or defer it?
« on: January 29, 2017, 03:52:10 PM »
Hi guys, I'm a 40 year old, aiming for early retirement, and was wondering when the best time would be to take my work pensions.

It's complicated by the fact that my work's pension scheme is split into two parts. The pension scheme was originally a final salary scheme, however that was stopped in 2015, and from then we were enrolled on a new career average revalued earnings scheme - so I'll eventually have 2 work pensions, plus I'll also receive the UK state pension at age 67, about 6000/year.

Key points:
- The final salary pension can be taken penalty free from age 60, and the new career average pension can be taken penalty free from age 67.

- The earliest I can draw the final salary pension is from age 50, however there are penalties for each year before 60.

- The earliest I can draw the career average pension is from age 55, however there are penalties for each year before 67.

-The final salary pension is easy to calculate, and if I draw it at age 60 I'll get 9284 (plus inflation) per year, plus a lump sum x3 yearly value, so about 27,000 lump sum. I can take the pension earlier, but for each early year there is a penalty:

Age 59: 8819.8 (-5%)
Age 58: 8355.6 (-10%)
Age 57: 7984.24 (-14%)
Age 56: 7612.88 (-18%)
Age 55: 7334.36 (-21%)
Age 54: 6963 (-25%)
Age 53: 6684.48 (-28%)
Age 52: 6405.96 (-31%)
Age 51: 6127.44 (-34%)
Age 50: 5848.92 (-37%)

- It is more difficult to estimate how much will be available in the career average pension, as it depends on how many more years I will be working and thus contributing into it, but for each year I work I'll receive around 750/year (and is increased 1.5% above inflation each year). By the time I'm 50 that is approximately 10,000 per year (if I draw it penalty free at 67).

- The penalties for the career average pension are:
Age 66: (-5%)
Age 65: (-10%)
Age 64: (-14%)
Age 63: (-18%)
Age 62: (-21%)
Age 61: (-25%)
Age 60: (-28%)
Age 59: (-31%)
Age 58: (-34%)
Age 57: (-37%)
Age 56: (-40%)
Age 55: (-43%)

So my main question is, if I retire at say 50, is it best to take the pensions as soon as I'm able (at age 50, and 55), or would it be more beneficial to live off my 'stash until I can take those pensions penalty free (at age 60, and 67)?

And an additional questions would be, how would I calculate how much 'stash I'd need to keep me going until the pensions kick in, as the 4% rule wouldn't apply as there would be a lot more cash coming down the road.

Apologies for my long rambling post, and thanks in advance for any advice received.

bugbaby

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Re: If I retire early, should I take my pension ASAP or defer it?
« Reply #1 on: January 29, 2017, 08:11:48 PM »
The pertinent information here would include:
- Current stache & expected stache at various age points
- Expected retirement expenses (realistically including health, travel etc)
-Current & planned savings rate
-any foreseeable changes such as housing costs, locations, family or other situations that could come into play.

Basically a Case Study would yield the most useful responses.

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MDM

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Re: If I retire early, should I take my pension ASAP or defer it?
« Reply #2 on: January 29, 2017, 10:19:20 PM »
So my main question is, if I retire at say 50, is it best to take the pensions as soon as I'm able (at age 50, and 55), or would it be more beneficial to live off my 'stash until I can take those pensions penalty free (at age 60, and 67)?

And an additional questions would be, how would I calculate how much 'stash I'd need to keep me going until the pensions kick in, as the 4% rule wouldn't apply as there would be a lot more cash coming down the road.
How good are you with spreadsheets? 

At first glance this seems nigh impossible to answer without one, but probably not too hard given a few hours with one.  Or maybe one of the better retirement calculators.

Metric Mouse

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Re: If I retire early, should I take my pension ASAP or defer it?
« Reply #3 on: January 30, 2017, 12:02:16 AM »
So my main question is, if I retire at say 50, is it best to take the pensions as soon as I'm able (at age 50, and 55), or would it be more beneficial to live off my 'stash until I can take those pensions penalty free (at age 60, and 67)?

And an additional questions would be, how would I calculate how much 'stash I'd need to keep me going until the pensions kick in, as the 4% rule wouldn't apply as there would be a lot more cash coming down the road.

Apologies for my long rambling post, and thanks in advance for any advice received.

I'd say wait on the pensions, until at least 60.

So for the first one, that would mean you'd need a bridge stache to cover 10 years of full spending. After that, you would need a second 'bucket' to cover the rest of the spending, minus the pension amounts. What is your average spending amount you're looking to cover?

Monkey Uncle

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Re: If I retire early, should I take my pension ASAP or defer it?
« Reply #4 on: January 30, 2017, 04:35:20 AM »
I'd suggest running the various scenarios through cFiresim, Firecalc, or something similar that allows you to input extra income from pensions.  You'll need to adjust expected pension amounts to account for inflation between the time you quit and the time you start drawing (I'm assuming they won't increase with inflation during that time period).  cFiresim allows you to investigate the maximum initial spend rate, which in my opinion is the metric that is most of interest.  The scenario that results in the highest initial spend rate without running out of money wins.  Of course, be mindful of the assumption that lies behind these simulations: investment returns going forward will be no worse than the worst times of the past.

I ran my numbers in cFiresim and discovered that, providing the return assumption holds, I'm better off taking my pension and SS as soon as I can.  The reduced draw on my stash helps mitigate sequence of return risk.

Mitch76

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Re: If I retire early, should I take my pension ASAP or defer it?
« Reply #5 on: January 30, 2017, 07:45:06 AM »
Thanks for the replies. A couple of answers to some of the points raised...
Yes I should do a case study.
I live in the U.K. so all my healthcare costs are covered by the NHS.
I live in a large (for the area) 4 bedroom house, no mortgage, I could easily downsize once the kids move out if required, freeing up about 150,000 if necessary.
With regards to inflation, the pension pots increase by 1.5% above inflation (CPI) each year I am an active member. If I leave the scheme, the pots still track inflation, but do not rise by the 1.5%.

Monkey Uncle - many thanks for suggesting cFiresim and Firecalc, I was unaware of them. I'll give them a shot.

Prairie Stash

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Re: If I retire early, should I take my pension ASAP or defer it?
« Reply #6 on: January 30, 2017, 02:58:41 PM »
You might be viewing it backwards, think of it as pension starts at 50 with the option of growing until you're 60. By your question I assume you don't need it for living.

If you retire at age 55 you get 5,848.92. Lets pretend you invest that and all other pension money until 60. Will that sum of money produce enough cash after age 60 to make up the difference that having permanent smaller payments create? Your payouts grow at ~5%/year for 9 years, guaranteed.

The downside with pension payouts if you die early there's nothing left for the estate(for your widow/widower perhaps?). If you collect early and invest you can leave a lump sum for someone to inherit.  You assume market risk by doing so, its not a risk free strategy. However dying early in retirement and leaving your widow without resources is also a risk, is the pension transferable?