The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mikefixac on February 11, 2014, 05:53:14 PM
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Retired at 50. Can draw pension ~$62K. If wait, it goes up 7%/year for 5 years (where it is maxed out). Includes COLA, if that makes a difference. Also have enough to live on in taxable accounts without using pension.
What would you do? Appreciate your comments.
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Gut reaction without running the numbers - You are receiving a guaranteed 7% return by waiting for 5 years. I would take a guaranteed 7% return under almost any circumstance. The only reason I see to take it now would be the riskiness of the source. Is this corporate or government? Is the plan properly funded?
If there is an option to take a lump sum distribution, I would take that in 5 years to hedge against the possibility of an underfunded plan. If you think the source will dry up before the 5 year wait, take a lump sum yesterday.
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Cheddar has a good point regarding the riskiness, but makes a mistake about the return. It's not a 7% return -- you're giving up a year of pension in exchange for each 7% increase. Each year, then will take a bit over 14 years to "pay off." You could run a spreadsheet to figure it out exactly, but a back of the envelope calculation suggests that an annual return equivalent is (7% * years you collect pension - 1 years pension) divided by (years you collect pension). If you die after 1 year, you'll have forfeited a year's pension. If you live 14 years, you'll come out about even. If you live 42 years, you'll have an annual return equivalent of about (.07*42-1)/42 = 4.6%.
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What are your expenses per year? If they aren't even close to $62K, then why would you need any more than that?
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What are your expenses per year? If they aren't even close to $62K, then why would you need any more than that?
How is this at all responsive to the OP's question of what decision would be financially better?
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What are your expenses per year? If they aren't even close to $62K, then why would you need any more than that?
How is this at all responsive to the OP's question of what decision would be financially better?
I believe it's completely relevant. My reasoning is that if the starting value is already more than enough to cover your expenses, then FINANCIALLY it doesn't make sense to me to wait. Use the pension to cover base expenses FOR LIFE and use the taxable accounts to travel, give, leave a legacy, etc. He's set.
I think the math is pretty clear that it will take many years to break even by delaying. It's the same reason my dad decided to take social security 1 year early for 7% less.
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Cheddar has a good point regarding the riskiness, but makes a mistake about the return. It's not a 7% return -- you're giving up a year of pension in exchange for each 7% increase. Each year, then will take a bit over 14 years to "pay off." You could run a spreadsheet to figure it out exactly, but a back of the envelope calculation suggests that an annual return equivalent is (7% * years you collect pension - 1 years pension) divided by (years you collect pension). If you die after 1 year, you'll have forfeited a year's pension. If you live 14 years, you'll come out about even. If you live 42 years, you'll have an annual return equivalent of about (.07*42-1)/42 = 4.6%.
Thanks for the correction, wasn't thinking it all the way through. I'd be curious about the lump sum payout options. If that goes up 7%/yr and you can cash out the lump sum at the end of 5 years, maybe that would come closer to a 7% return. However, actuaries aren't stupid, so they would likely increase your lump sum by the 4.6% Beltim mentioned, or something similar.
I agree with Beltim on the expenses/year question. OP should be looking at this from an optimization of income strategy. If OP's expenses are $30k/year now, why would OP take $62k if it's inferior to $75k 5 years from now. Maybe OP's expenses will rise. Maybe they weren't estimated properly. Maybe OP gets married/divorced, adopts a child, has medical complications, wants to leave more inheritance to heirs. There are endless reasons to get the most you can out of this.
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What are your expenses per year? If they aren't even close to $62K, then why would you need any more than that?
How is this at all responsive to the OP's question of what decision would be financially better?
I believe it's completely relevant. My reasoning is that if the starting value is already more than enough to cover your expenses, then FINANCIALLY it doesn't make sense to me to wait. Use the pension to cover base expenses FOR LIFE and use the taxable accounts to travel, give, leave a legacy, etc. He's set.
I think the math is pretty clear that it will take many years to break even by delaying. It's the same reason my dad decided to take social security 1 year early for 7% less.
I think you have that backwards. Being able to cover living expenses from taxable accounts frees the OP to do whatever is financially best. In this case, it depends on the timeframe involved.
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I think the other big factor is what are you giving up for those 5 years. Meaning if the math works and you need more than 62k to live do you like your job? could you reduce your hours or somewhat get a break start part time ER. Its to simplistic to say work another 5 years as it is to not because you should be able to live on 62k a year. But if you can have your cake and eat it to that would be another thought.
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I would vote for taking the pension immediately. I factored in a 2% COLA and calculated that it would take 18 years before breaking even. That doesn't even take into account the time value of money. Plus your private 'stache is compounding in the meantime. Sounds like you'll be on easy street. Send us a postcard!
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yes your in fat city.. $62k guaranteed is worth about $1.55M.
If you have a stash in addition to this it almost doesn't matter what you do.. Unless your trying to live the life of a playboy...:)
Frank
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I would take it now. I agree that matters whether OP "needs" a higher return. He can take additional risk (risk of dying before breaking even) for a relatively small return if he lives long enough. Why take additional risk if you don't need to? Just enjoy life.
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OP here. I like what Numbers Guy said:
I would vote for taking the pension immediately. I factored in a 2% COLA and calculated that it would take 18 years before breaking even. That doesn't even take into account the time value of money. Plus your private 'stache is compounding in the meantime. Sounds like you'll be on easy street. Send us a postcard!
That makes a lot of sense.
Thanks everyone for posting. I'll be showing this to my wife.
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do it now. Half the people you know from 50 to 70 have passed away (dead). Always find it funny being a widowerer how people continue to think they will live much beyond 70. If you do you are lucky beyond your years. And bet there are comments about being negative because of my situation, or because of bad health, etc. It happens folks.