When to take a pension?

[jjquantz]

This is the year that I become eligible to take the pension that I earned for 15 years of teaching.  I have run the numbers several different ways but have never had anyone validate my premises.  So here are the key factors:

1) Full retirement age is defined as age 65,
2) I can begin to collect at age 55 (this year).
3) The monthly amount is reduced by 1/4 of 1 percent for each month before Full retirement age. (So at 55 I would get 70% of the full pension, at 56 I would get 73%, etc.)
4) There is no inflation adjustment - I will receive the same amount for the rest of my (and my wife's) lifetime.

So the key question is: does it make any sense to delay taking the pension when the annual return for waiting starts at 4.29% for the first year of waiting and drops to about 3.1% in the last year?  The only factor that I can identify that MIGHT warrant delaying is taxes.  But if my tax rate in retirement is going to be the same as it is now, I don't see any benefit to waiting.  IF I collect now and invest the pension, I likely will come out ahead.

So, take an assured 3+% return (collect at 65) vs. a possible 7% (collect at 55 and invest).

Am I missing anything in my analysis?  Thoughts on which way to go?

[jernicklom]

It may help to provide a few more details such as:

where you live
are you required to retire from your job to take the pension, or can you continue to work
can you afford to retire immediately
are you still accruing benefits under the pension plan?



This will help someone provide a reasonable answer.

[jjquantz]

It may help to provide a few more details such as:

where you live
are you required to retire from your job to take the pension, or can you continue to work
can you afford to retire immediately
are you still accruing benefits under the pension plan?



This will help someone provide a reasonable answer.

Good call, jernicklom.  Here goes.

We live in the DC metro area.

I can continue to work and collect the pension, but might choose not to.  This income would not be necessary to any kind of early retirement.  We are currently considering my retirement with my wife continuing to work (she enjoys it). We can easily live off her income if I retire, but we would only be able to partially fund her 401k.  This pension would allow us to continue to fully fund her retirement plan.  So the net tax effect might be minimal.

I am no longer accruing benefits - whatever I am going to collect is set - the only variables are which type of distribution I am going to take and when I am going to start collecting.  We have already decided that a monthly payout that would continue for the DW in case of my death is the only reasonable approach.  Cashing out provides a pitifully small amount, especially given that taxes would definitely impact a lump sum distribution.

Edited to add illustrative numbers:

Using some nice round numbers for ease of discussion:

Age I start collecting           Monthly amount
65                                                1000
60                                                  850
55                                                  700

If I were to start collecting at 55, I would have 10 years at $8400/year to invest before I collect a cent at 65.  I have run this through several sets of calculations and the breakeven point for total payment (without taxes and ignoring investment income) is age 87.  With any kind of return, the breakeven point moves further out.  I just don't see why I wouldn't begin collecting immediately.  I just want to make sure that I haven't overlooked anything.

[jernicklom]

Perfect.  Here is my opinion.

The reduction of 3% per year is actually subsidized by your pension plan.  What I mean by that is the true cost of taking the pension payments early require a reduction of around 6% to be equal in value, since you will be collecting the pension for a longer period of time than if you took it at age 65.  Bottom line, it is a good deal to collect the pension as soon as you can.

Given you are not accruing benefits, there is not much downside in collecting the pension immediately so long as the extra income doesn’t incur high taxes.  From your description it sounds like this will not be an issue.

Because you are able to collect the pension and continue to work, you can decide to stop working when you see fit, independent of your decision to collect the pension payment.

Hope this is helpful.

[jjquantz]

Thanks, jernicklom.  That's basically my conclusion. Anyone else with a different opinion? Even when I take taxes into account I can't get waiting to be the better choice (unless I would move down several tax brackets, which I won't).

[Heart of Tin]

4) There is no inflation adjustment - I will receive the same amount for the rest of my (and my wife's) lifetime.

It sounds like you have a 100% survivor benefit. If your wife is 25, then there might be longterm benefit to deferring for a few years.

Seriously though, take the pension now. If for no other reason than because inflation will probably take away a good chunk of the value in the small monthly increases in benefit payments leaving you almost no better off when you start payments 10 years from now than you would be starting payments today except that you have ten fewer years in which to use the benefits.

[jjquantz]

No, wife is only 1 year younger.

Actually, thinking non-mustachian for a moment, the danger is taking it, blowing it on stuff and then having less income at 65.  But taking it and investing it, that's very different.