Taking pension at 55 vs. other years

[bmjohnson35]

I am eligible to start collecting a pension at 55.  It would pay out $727 a month or $8724 annually. Each year I delay collecting, I would receive an additional $53 per month or $636 more each year.  I have calculated the payout for ages 56 through 62 as well and determined it will take around 13 yrs to break even regardless which year I start collecting.  Since the payout calculation is linear, does this make sense or are my calculations off?

Example:

collect @ 55 - $8724 vs. collecting at 60 - $11928

difference of annual payments is $3204

difference between age 60 & 55 = 5 years

Multiply $8724 x 5 yrs = $43620

Divide $43620 by $3204 = 13.61 yrs to break even, then receive $3204 more per year from that point forward.
 

[blueberrybushes]

Your calculations make sense and agree when I reproduced them in Excel:

Two questions:

1)  Do you need the money now?
2)  How long do you expect to live?

If you need the money now, delaying until 60 is immaterial.  Since you ask the question, I assume you don't need the money.

If you expect to die before 73, take the money now and enjoy.

If you don't need the money and expect to live past 73, waiting until 60 makes sense in the purest of logic.  However, the benefit of waiting is relatively small though (an additional $23K gross by the time you are 80).  You have to decide.  I think I would take the money now and put it in a S&P 500 Index Fund.

[bmjohnson35]

I don't really need it now, but we will likely have higher cost of living when we possibly move later this year.  Online calculators project I will live to 90, but family history indicates I will pass in my 70's.  I agree that the delayed benefit doesn't feel significant. 

Since the pension doesn't have any inflation adjustment, the lower future value of the money is another element to consider.  If the market takes a nose dive, reducing the amount I have to pull from investments for expenses would also be a benefit.

Thanks for your feedback blueberrybushes.

[reeshau]

@blueberrybushes has the right framework. The pension is a guaranteed income stream. (To the extent of the ongoing solvency of the payer)  It is the ultimate fixed income investment.  This question is the same as the more-typical "when should I take Social Security?"

You can view this as income, to supplement your living expenses.  Or, you could view this as longevity insurance, to give you money should your stache run out.  In the latter case, delay it as long as possible; if you never need it, you planned your life well and/or got lucky.  In the former case, take it when you need it.

Your initial approach is more like maximizing return, a common way to begin looking at it.  If so, take your guess based on mortality tables or family history, and solve the equation.

[spartana]

Also consider if any or all of your pension benefits can be transferred to a beneficiary  on your death. That often reduces the amount you will get each month. Most public pensions have various options with different costs and pay outs to heirs so that may effect your decision. I have a CalPERS public safety pension I could get at age 50 (although I quit working and contributing into it approx a decade before I would be able to start collecting and only 10 years of on that job plus 4 years of military credit so not huge amount) and have chosen to start taking benefits at age 50 since the math worked out better for me then waiting longer (especially as a single person with no heirs). I do have an inflation adjusted pension but since it's a relatively small pensions any annual increase is minimal.

Also if you didn't pay into SS on your pension earning job, but are eligible for SS from other jobs, any SS benefit you get will be reduced by the Windfall Elimination Provision (WEP). It doesn't effect your pension amount just your SS benefit amount.

[bmjohnson35]

Thanks for all the input. 

I'm leaning toward collecting at 55, but will wait and see the next 8 or so months play out.

[hooplady]

Are you sure your pension doesn't have a provision to reduce once you're eligible for Social Security? Mine did, so taking the first few years was worth more than the latter years. It didn't matter if I actually took SSA (in my case Railroad Retirement), only that I was eligible at xxxx year.

I don't know how common this is, but worth verifying. May affect the math.

[bmjohnson35]

Are you sure your pension doesn't have a provision to reduce once you're eligible for Social Security? Mine did, so taking the first few years was worth more than the latter years. It didn't matter if I actually took SSA (in my case Railroad Retirement), only that I was eligible at xxxx year.

I don't know how common this is, but worth verifying. May affect the math.

I don't think so, but I will confirm. Thanks.

[spartana]

Are you sure your pension doesn't have a provision to reduce once you're eligible for Social Security? Mine did, so taking the first few years was worth more than the latter years. It didn't matter if I actually took SSA (in my case Railroad Retirement), only that I was eligible at xxxx year.

I don't know how common this is, but worth verifying. May affect the math.

My sister has this on an private sector pension. I think she can start collecting the pension at age 55 which includes an additional amount until she is 62. After that her pension amount gets reduced whether she starts to collect SS benefits at 62 or not. Hers won't have COLA and, after age 62, will only be around $600/month. 

[ATtiny85]

Are you doing / plan to do any Roth conversions at 55+?

We are planning fairly aggressive conversions for several years, and deferring our non-COLA pensions is going to provide more flexibility with managing income. Will see how the numbers actually come together in a couple years. Our pensions reduce 4% for each year we take them prior to 67.

[bmjohnson35]

Nope.  We're using ACA for healthcare, so we have income restrictions.  I figure I will let my retirement account grow in the meantime.  As long as I can make it to medicare coverage age with decent healthcare insurance, I have no problem paying some more taxes on my future IRA distributions.