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fixed pension - should I wait?


I can start taking a pension after my 55th birthday, which is coming up in the next 6 months. This is a old-fashioned company penson. There is no cost of living increase for the pension, once it starts it is fixed for life.
If I wait one year, the monthly amount goes up about 5.4%, two years, 10.8%, up until age 62 when it would be 35% higher than age 55. Then there is no further increase from waiting. I don't have any major health problems that I know of, so my life expectancy is probably well over 80 yrs.
I could use this money for living expenses; if I don't take the pension right away, I'll probably take almost as much out of bank savings each year, since I am only employed part-time.
I'm also worried about inflation kicking in again someday soon, meaning the fixed monthly check will be worth less and less. My tax situation is pretty simple, I'm in the 15% bracket.
Should I wait or start taking the lower amount ASAP? I guess this is a lot like the question of taking Social Security payments at 62 or 66, except that SS has a cost of living increase built-in.
Reply to
Rapid Robert

I assume you are in good enough health.
Since once started the pension is fixed, and since before starting, it will rise faster than historical inflation, I suggest waiting until it maxes out at age 62.
I take it you can re-assess your situation every year and change your mind, no? If so, go year by year.
One risk to consider, if you have not already, is that it seems some pension funds are vulnerable to raiding under the law. This would argue for starting sooner.
Taking Social Security early has a much steeper cost, in general, than your pension plan. E.g. if I start taking SS at age 62, my monthly SS will be 30% lower than if I wait five years.
Reply to
Elle

What an interesting question. Yes, quite similar to the decision about SS benefits. If you wait to collect SS the benefits go up (after 62, through 70). But you will have collected for a shorter time period and might have received more lifetime benefits if you'd started earlier. It becomes a question of whether you'll live past the "break-even" date. With SS an added incentive is the cost of living adjustment, which you say isn't a factor with your pension. But still, the SSA says that "on average" people should receive roughly the same total benefits irrespective of starting date...suggesting lifestyle or tax choices can play a role in the decision. Or, stability of the pension fund itself.
I think a decent approach would be playing around with some scenarios to bracket the decision. Do you have Excel? You can chart out your lifetime benefits based on different starting years, and see when the lines cross -- the "break even" year. To get fancier, you might throw in inflation or time value of money assumptions. It's going to end up hinging on some unknowns (inflation, longevity) but it might help understand the decision better.
-Tad
Reply to
Tad Borek

What is the worst case scenario? For most retirees in good health it is running out of money before you die. With a fixed pension the big threat is inflation which could easily erode the purchasing power of your pension to the point where it will not be adequate.
The best way to protect yourself from inflation is to delay taking social security until age 70. This will not only maximize the amount of your social security benefit but it will also maximize the amount to the cost of the annual living adjustment thereby helping to offset the decline in purchasing power of your pension.
If you are married and and both you and your spouse are eligible for social secuity you can minimize the cost of waiting until age 70 to file for social security as follows. Suppost the husband is the high earner and suppost the husband is as old or older than the wife. When the wife reaches 62 she can file for social security benefits on her account and her husband can file for spousal benefits on the wife's account. Both will then collect benefites from the wife's account.
When the husband reaches 70 he can stop the benefits from his wife's account and file for benefits under his account. He will then get the full benefit for a 70 year old which is the maximum possible. The wife has the option to either continue her benefit or to stop her benefit and file for a spousal benefit under the husband's account. She should take the option that gives her the most money.
Were I in your situation I would base the pension decision in part on what would make it easiest for me to defer taking social secutity until age 70 to get the highest possible government guaranteed inflation adjusted income to offset the declining value of your pension.
If you file for social secutity and decide that you made a mistake you can undo it. Social secuity allows you to file a withdrawal of application, repay the benefits you have received (without interest) then refile at a later time.
--
 .Bill.
Reply to
Bill

In article ,
The amount that you get at 55 will be actuarially equivalent to what you would get at 65. Do you expect to live longer than average if so wait until you are 65.
Reply to
Avrum Lapin

I'm jumping in here to spell out the exact method I'd use.
Use Excel to project the balance you'd have by taking now and putting the money aside at X%, use 2% for now, but make it link to X so if you adjust the rate it ripples through. When you project out to 62, your sheet will show a lump sum. Are you happier with that lump sum, or do you wish you had the higher payment? At what rate do you prefer the lump sum? If it's pretty high, it means waiting is better. I hope that helped. Joe
Reply to
JoeTaxpayer

Without quoting all the preceding comments:
Tad, starting with 55 in 2011, I make the breakeven of lifetime amounts received to be 2017 assuming a longevity of 86 years (reasonable), using 100 as the payment starting 2011, and annual increases of 5.4 in all but 2018 when the increase is 2.6 (if I read correctly). That is, 2011 assumes 31 years paying 100 a year; 2012 assumes 30 years at 105.4, 2013 assumes 29 years at 110.8 ... up to 2018 assuming 24 years at 135.
The percentage increase in the total value paid out over the duration (or the expected value) dwindles progressively (annually) from 2% (2012), 1.62% (2013), 1.26% (2014), 0.91% (2015), 0.57% (2016) to 0.24% in 2017, and begins to shrink in 2018 (so the increases in the total just barely keep up with inflation to 2017 unless we go into deflation).
If my numbers are right, then it would seem the plan is set up to allow some flexibility, but definitely encourages the participant to begin benefits within a few years and enjoy them. Since inflation is currently below 2% (I believe) it seems to me that 2012 would be as good a time as any to start. A longer life will increase the expected value, but I don't think it makes a difference as to the optimum starting date. One consideration is that a sudden death from parachuting or bungee jumping BEFORE initiating the pension might affect the surviving spouse's rights.
Reply to
dapperdobbs

No, the pension is from a former employer. Thank you to all the other people who replied, it has been helpful and I have started playing with an Excel sheet.
Reply to
Rapid Robert

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