Taking pension: What would you choose and why?

aceySeptember 22, 2007

OK, here is my scenario, and I'd like to generate ideas on which I should choose and why. I will add that this is forward looking, but if all remains the same, which would be the better choice.

I am 51, and have earned a pension from a major US employer that I worked for for 12 years. ( I still work for a different company, and will also earn Social Security when the time comes).

So, 4 years from now, when I turn 55, I can take a "reduced benefit" of this pension and receive just over $800 monthly for life.

If I wait until I am 62, in 2018, I can take the pension which will be just over $1200 per month. If I wait until I am 65, in 2021, that amount remains the same for some reason.

So, that is $400 month difference for waiting the 7 years until I turn 62. That is about $33,600 I would never see.

I'm sure there is some formula for computing whether it is better to take the reduced benefit and enjoy it sooner, or how long it takes to make up that $33,000....I just don't know it!

I am in good health, don't smoke, and family history has us living well into our 90's, (hope that is true for me!!!)

Part of me says "take the money ASAP in case they ever decide to terminate the entire pension plan like some companies do". The other part of me says, "wait, take it at 62 and have more financial security per month". NO part of me says to wait until 65, since the amount is the same at 62 or 65.

My social security will be around $1500 at 62 or $2000 around age 66.

What say YOU about my pension?


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It's difficult to advise another what is the right thing for them to do. Can only speak for myself. After 32 years at one internationally reknowned company, I retired at 55 deciding to take the reduced benefit pension. I could have let it sit and grow, but opted to take less for longer for two reasons: I didn't need the money and it was a totally non contributory "gift". Plus I always paid in the max to the 401k - which is yet untapped - and got the employer match and have social security to draw on at some future date as well. And I can't lie, the inheritance business is an extremely good one to be in.

I've always been save-y without cramping my lifestyle, paid with cash and carried zero debt except for a mortgage. Although I really did want to retire at 55 in any case, it was precipitated by the need to leave the East Coast to return to Minnesota to look after aging parents. Sold my house (effectively removing my mortgage payments) and moved into the long since paid for family home. Now the house is mine and I'm doing very well living off interest and dividends. I still carry zero debt. Excess gets plowed into tax free investments.

The only thing you can really count on is the knowledge that life is a crapshoot. Over my working career, I knew many people who slaved to max out every possible benefit then died before being able to enjoy a dime. So, if you've crunched the numbers taking the inflation factor into account and reduced benefits don't negatively impact your life you might find an early pay out is to your advantage. If you don't need the money for day to day expenses, you could invest it in vehicles with higher rates of return to help compensate for early out losses. On the other hand, if all the actuarial tables indicate a long life span you might want to consider that and not want to jump too soon. Finding your own personal comfort zone will take some thought.

Other considerations - are you single? children to raise and educate? do you live in one of the country's more expensive regions? are all your resources geared to making your own golden years secure taking into consideration that some of those golden years may be spent in long term care? Trying to build an estate to leave to heirs?

Math is not my forte so I can't calculate what or how long it would take to compensate for taking early benefits, but there are people on these forums who can and will hopefully weigh in.

    Bookmark   September 22, 2007 at 12:53PM
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Things seem a little slow on these forums, but I had an additional thought to consider when "making up" for potential taking early benefit losses.

It costs money to work and this continual dole out doesn't often factor when you're actively involved in it. Consider: wear and tear on vehicle in commuting, gas, parking; clothing; lunches and coffee breaks; office events involving gifts or contributions.

Once away from it, and thinking back - I was spending thousands per year a handful of bills at a time.

    Bookmark   September 23, 2007 at 1:17PM
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I would take the money as soon as possible, in case the pension fund 'goes away' at some time, but still treat the money as a retirement fund, not to be used for expenses while still fully employed.
Without running the numbers, it seems to me that you could take the $800 per month and invest it in a balanced stock and bond portfolio and be easily able to beat the $400 per month additional that you would get by waiting until age 62. The critical question is, as always, will you invest ALL of the money and not use any of it until you retire.

    Bookmark   September 24, 2007 at 10:36AM
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I'd take the money. I took early retirement on a lot less than that. Do as Randy says and invest

    Bookmark   September 25, 2007 at 11:47PM
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I thank you for such good responses. I can add the following that you made me think of:

No children, so no college expenses, but no kids to care for me when I'm dribbling my soup either. So I am also thinking of investing in a good long term care insurance plan with a reputable company. My company offers a plan at a discounted rate with MetLife, but I'll shop around first. I'm thinking of investing in this type of plan in my fifties.

I do have a 401K and I've always been on the aggressive side of investing in it. I've a few paltry IRA's too. No CC debt, but a car payment. I would have no problem downsizing, and I could buy a house outright with the money from this one, and still have $$$ leftover.

Funny your comment about the inheritance business! Fortunately my Mom is alive and well, but she has a plan in place for my brother and myself when she passes.She is living off interest and dividends and is able to live in a senior independent retirement community so she's in good financial shape and I should not likely be facing the possibility of paying for her care.

So it seems to me that I must be in pretty good shape, and I certainly can invest that additional $800 per month. I really don't need it to live on, so I'm thinking that unless some drastic change occurs, I'll take it early, before the company decides to dump all future pensions.

Any other pearls of wisdom for me?

Thanks all!

    Bookmark   September 26, 2007 at 7:04AM
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I posed my question to a couple of personal friends who gave opposite advise:

Keep the money in the pension fund until I am 62 because:

Company won't do the evil deed of stopping the pension. It would take something like another Enron scenario to do that.

I won't "need" the money to live on.

In another 4 years, (when I am 55) the pension estimate will grow to more than the $800 that I quoted you all in today's dollars. (I didn't know I did that!?)

I may pay less taxes on that gift if I take it at 62 when I am probably NOT working, than at age 55 when I will probably still be working...so the taxes will be higher on it at the 55 age.

So, now I have been faced with both sides. Anyone care to compare the sides???


    Bookmark   September 26, 2007 at 10:02PM
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You've probably asnswered your own question by saying you don't need it; and the pension can sit and grow because it isn't conceiveable your company will go "Enron" on you. And there are tax bracket considerations.

Keep in mind there's no set schedule as to when you elect to start taking your pension after retiring. If your situation changes at age 57, or whatever, your decisions can always be rethought. Your pension doesn't have to coordinate with your first opportunity to start drawing Social Security - if that's what your target age of 62 is meant to hint at.

It's difficult and there really is a lot to think about. But someone else's comfort level - those of us on the internet and your personal friends - isn't necessarily yours. Maybe a session with a professional financial planner - someone who isn't trying to sell you something - or even the administrator of your 401k plan should be set up.

There's been some discussion on this forum or the Personal Finances forum on the pros and cons of long term care insurance. Some who have it are comfortable they made a good investment and many of the skeptics remain skeptical that it will actually pay off the way it's intended. I'm in the skeptical column because I fear the policy issuer, no matter how reputable, would place restrictions on the kind of facility I could choose to spend my final years and the care level I could receive. This is another industry that has the potential to be rife with fraud, so you really have to be informed.

No great wisdom here. I'm comfortable with my choices so far and will eventually be faced with having to make decisions about when to start drawing SS and from my 401k. I don't know, but I surmise having a husband and children or an actually defineable lifestyle would make decision making easier, or at the very least provide more concrete goals and reasons for taking the actions we do.

    Bookmark   September 27, 2007 at 12:01PM
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Hi acey,

I'd do some serious checking as to whether you'd really receive the same monthly benefit level whether you begin to draw at 62 or 65 .. that seems very peculiar, to me.

I've been thinking about your situation for several days, my thoughts beginning with, you only have a choice if you don't need the income: if you need it to manage, you need it. So you must begin to draw it at that time.

If you have a choice, you can choose to invest part, most or even all of it.

When investing, choice among the various types is important.

You say that if you wait till 62, there's $33,600. that you'll never see.

But ... wait a minute.

That's only at exactly age 62, it seems to me.

After one month, the extra $400. means that the $33,600. difference that you said you'd "never see" ... has been reduced a bit - by $400.

Next month, another $400. more than if you'd taken the pension early.

After a year, you've received $4,800. more than you would have, if you'd taken the pension early and were receiving only $800. per month during each of those 12 months.

The main qualification that I can see is - you need to stay alive throughout that full year in able to reduce the $33,600. by the full $4,800.00.

Afer 7 years, at $4,800. additional per year, you'll have reduced that so-called "difference" to 0, won't you?

And it seems to me that the possibility of your reaching age 69 is quite good.

If you live beyond that ... you're laughing.

With one proviso ...

... there's been no discussion about what the $800. monthly could have earned through those years.

And that's not the raw figure - you can't keep all of it.

We all have an unchosen partner in all of our financial affairs - well, in relation to all of our earnings, anyway.

That partner asks us one quuestion each year, and makes one statement:

the question: "How much did you earn this year?",

and the statement: "You need to give us part of it".

Or are your income tax people more generous than that?

Actually, in Canada, if one earns only about $10,000., one avoids the statement - one pays no income tax.

There are some other so-called Canadian single "taxpayers" who can earn up to over $46,000. annual income and pay none, as well - but that's another story.

Plus, if you invest in systems where the amount of your money is guaranteed, you must re-invest a good portion of the annual after-tax earnings in order to keep the purchasing power of those dollars (francs, marks, yen, yuan, rupees, or whatever) intact.

Because we've had annual inflation for 70 years, since the Dirty Thirties, that has reduced the purchasing power of each of those dollars (or whatever other currency) by a certain amount, every year.

We can only claim that we've really earned the difference.

Which in many of those years, has been very little .. in many years, almost nil.

Good wishes for making what has a good possibility of...

    Bookmark   September 27, 2007 at 6:19PM
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I think the fact that your mom is situated like she is is good news too you have some kind of background in those things even if it may not be an active one. So many are at a loss as to what why how in those situations.

    Bookmark   September 27, 2007 at 8:04PM
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Take the $800 now. There are no guarantees. And when you reach 100, come back here and tell me what bad advice I gave you!

    Bookmark   September 30, 2007 at 12:00PM
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Met Life is not cheap LTC insurance but is one of the most reputable companies who sells it. They have been in the market for a good long while and their track record is very good. As compared to Bankers Life, for instance, who has wonderful rates as well as the highest level of consumer complaints about nonpayment of services.

I would suggest you find a financial planner willing to run a Monte Carlo simulation for you. Taxes will reduce your early pension - and since your investment account will be a taxable one (since you're already investing to the max in your non-taxable accounts), you'll also pay tax on these profits every year.

No matter what, there is no right or wrong answer. You have options, which many people would envy you for. If you are comfortable with aggressive risk, there is nothing wrong with waiting to maximize your pension.

BTW, are you sure you have an actual pension? Or is it merely an annuity? You need to know the difference, because legally it's the issuer who is bearing the risk of being around to pay out future installments.

For instance, if you have an annuity guaranteed to you and the company changes its pension plan, that wouldn't affect you. But if the insurance company went bankrupt, you'd get pennies on the dollar in settlement (happened to my FIL).

Social Security uses a set formula to determine the difference between taking early retirement and standard retirement. It takes approx. 17 years to make up for the difference in monthly amount. I've listened to three identical presentations over the years from representatives at Social Security - my DH's employer has regular retirement workshops and seminars - and all three of them admitted they intended to retire at the earliest age. I found that admission by workers experienced in the system, to be very interesting.

    Bookmark   September 30, 2007 at 5:58PM
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The recognized method of determining which scenario to elect is based on present value (PV) using a Discounted Cash Flow (DCF) analysis. I used a 7% discount rate.

The PV of your retirement pension at age 55 is $119,127. The PV of your pension at age 62 discounted back to age 55 is $101,084. So, take the pension at age 55.

This is the rational objective portion of deciding when to take your pension. I had a similar decision to make at age 55 and elected to wait until age 62 because the "numbers" were more beneficial to wait. Meanwhile, I was diagnosed with a major illness so I say go for the early pension and take in all the life you can.:)

    Bookmark   October 22, 2007 at 5:47PM
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Thanks for your commentary, do you have the time to explain or teach me how you got the $119,000 and 101,000 figures?
And what does DCF mean?

And i hope your major illness is not too constrictive....believe me, I hear you, and that is why I'm listening long and hard!!!!


    Bookmark   October 22, 2007 at 7:03PM
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DCF means Discounted Cash Flow. I used Excel to run the numbers. I forgot to mention that I based the numbers on a life expectancy of 85. It seemed reasonable for planning purposes. When you compute a Present Value or PV, you are fundamentally determining today's value of an income stream over time. IOW, if you have $10.00 today, it is worth $10.00. If you receive $1.00 per year over the next ten years, you would still have $10.00 but ten years out. Money has a time value hence the PV of the $1.00 annual flow over ten years is less than the value of $10.00 today. Does that make sense? I have some cognitive difficulties so hopefully it is clear...:)

And thanks for your comments. I will know more after my next MRI later this week.

    Bookmark   October 23, 2007 at 6:23PM
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Let's see $800 per month for 7 years =$67,200 so between 55 and 62 this is what you will have received. At 62 you will be loosing $400 per month $1,200 -$800 = $400. Now stay with me $67,200/$400 = 168 months or 14 years, age 76, before you have lost a dime, not accounting for anything that you have made off investing the money for the 21 years, 76-55=21. I say take the money as soon as possible and invest it as you don't know what is waiting for you in the future.
I'm a 9 year cancer survivor, told that I had Kidney cancer on my 49th birthday, so you never know what is around the corner. BTW My wife and I retired comfortably at 55 .

    Bookmark   November 3, 2007 at 9:35AM
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Dear Acey:
It had been almost 5 years since you posted your question.
Could you kindly let us know how are you doing with your financial planning of late?
I just turned 55 in january this year and really am interested on your story...
Thank you in advance.

    Bookmark   April 17, 2012 at 2:32PM
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7 years, times 12 months times $800 comes to about 67,000. If you take that money early. Now, if you divide that by 4800 (the amount of money you'll get extra per year, if you wait until you're 62, you get 14. That means, if you wait and take the higher amount at 62, you'll have to live until 76 before you even start making a profit.

And that doesn't take into account, the amount you might realize if you take the money early and invest it wisely.

Seems to me, taking the money early is the way to go.

As a matter of fact, I've done the same calculations on SS, and have an appt this morning to apply for my retirement benefits (I'll be 62 in a couple of weeks). Now, I have heard that SS is designed so that if you live what they consider an average life span, it really doesn't matter when you start taking it, it evens out in the end, and you get about the same amount. Not everyone does live that long, however.

You have to make your own decisions, of course. But, if it were me, I'd take the money now, and put the entire amount away in a secure, interest-paying investment, so it could increase a bit until I needed it.

    Bookmark   May 11, 2012 at 8:01AM
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Azzalea, you can apply for SS online. No need for an appointment! Maybe too late to save you the trip, but others can just registered online. Same for Medicare.

Here is a link that might be useful: SS Administration

    Bookmark   May 11, 2012 at 10:16AM
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Yes, Sushi, I know--thank you. But I don't put any personal info online--not even on secure sites.

And it was NO big deal at all. The office is about 5 minutes from my house. I got there a few minutes before my appt. time (10:30), signed in, they called me back, the young man was VERY helpful, I had questions and he answered all of them--and actually told me I might be eligible for more benefits than I was applying for (we'll have to see about that), we got my application done, and set up some stuff my husband will need for his, and I was on my way home by 11. I always rather deal with people than machines, and it's SO easy to do this through the local office. And honestly, I don't believe a website would have been as informative (nor as friendly, and I was talking to a couple of the employees, each gave me additional info.)

Obviously, online applications are good for some, but I'd highly recommend the local SS office if you have questions, or just prefer the human touch for this sort of thing.

    Bookmark   May 12, 2012 at 10:54AM
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DL and others...Acey here. Yes it has been 5 years!I did not activate the pension because: Things have happened in 2011 that astounded me. I separated from my husband, I moved 3 times, and am now settled in a rental. Our divorce was finalized at the end of March of this year, and our house sold in mid-April. That's the good news, if you can believe it!

As part of the divorce, I had to have a forensic accountant determine the value of the pension...in case my ex was to try to come get some of it. The accountant told me that if the pension ended up being intact, to go ahead and take the money.

so i waited until the dust settled, and I am in the processing of activating it at age 56, to start July.

I also underwent a major financial re-do, and ....

Here is the even better good news....

I have made enough to retire! I plan to get the pension started and am modifying my other investments to allow an income stream. Should I care to retire, I can...although I do not have to!

That's my story and I'm sticking to it! Thanks for asking! I am looking forward to this new phase of my life!

    Bookmark   May 12, 2012 at 4:27PM
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I will be 55 next month. I can collect a union pension of $1485 per month at 55, or $2635 per month at 62. My husband has not had steady work for over a year, so we are not currently saving, but living on our incomes. I continue to work, but in a different industry. Should I take the pension now or wait 7 years?

    Bookmark   May 13, 2012 at 1:37AM
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I would like to add, I should be receiving $ 1100+ pension from my current employer in addition to social security when I retire at age 66.

    Bookmark   May 13, 2012 at 11:21AM
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Dear Acey:
Thank you for the reply and thank you for sharing your BAD NEWS-GOOD NEWS story! I wish you the BEST in the future.

For for me, claim it as-soon-as-you-can is my motto now! My Dad passed away in his early 70s and my Mom was no longer with us when she was in her mid-70s. So, the odd for me to make it to the age of 80 seems to be smaller than for me to have no money to spend when I pass that age. So, for me, take-it-now is the CHOICE.

Again, thank you and GOOD LUCK to you.


    Bookmark   May 29, 2012 at 6:31PM
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Do you think it wise to plan an income to carry you to age 100?

It's better to run out of days before one ruins out of dollars than the other way 'round, I've heard.

I figure that at 65, I may well have 35 years of life ahead ...which is seven 5-year blocks.

If I use up all of the first five-year block during the first five years, it isn't there to work for me any more, so other blocks will have to carry the full load ... but then I'll be eating up the second block, and after ten years it won't be available to work for me any more, either.

So it seems to me that I'd better make that first block of funds (i.e. "asset" - not "funds" as in "mutual funds")(1) last for a full ten years, to reduce the possibility of my having eaten through all of them before I hit 100 ... and now some are saying that we should plan to fund to 110, even 120.

As I plan to still have 85% of my current asset still around in 10 years, and probably half of it still here in 20 years, it might be wise for me to keep in mind that, since about 1870, there hasn't been a 20 year period in which the entire stock market went down.

Dad, as a farmer who of necessity had to make long-term financial plans, used to say that some people couldn't see beyond the end of their own nose. In recent years, we've become more prone to think only of today/the short term.

Good wishes to you as you proceed with your plans.

Learning how money works (and taxes) is an interesting hobby - and it pays well!

ole joyful ... who, at 80+, lives frugally, by choice rather than necessity ... so the assets/investments are, so far, more or less "play money"

1. I haven't bought a mutual fund in 25 years, and not about to. They make great noises about the superior skills of their managers ... but if they're so smart, how come about 85 - 90% of the time they don't do as well as the segment of the market in which they operate? Most of your (i. e. U.S.) managers charge 1.5% or more management fee annually (ours [Canadian] charge 2.5% or more), guaranteed, whether they make any growth or not ... and the only skin that they have in the game is if we get so mad at them that we move our money elsewhere.

Nobody cares as much about your money as you ... except possibly someone who may have a strong desire to move some of it from your pocket into his/hers.

o j

    Bookmark   December 12, 2013 at 5:59PM
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