Several years ago, I lost a job I thought I would retire from (long story, and I know now that they did me a BIG favor) and shortly afterwards got a letter stating that upon my 65th birthday, which is in 2029, I would be eligible for a pension of $271 a month.
Today, I got a letter stating that I can get $108 a month starting in September. Since there are no guarantees in this world, I am leaning towards doing this.
What do y’all think?
Somebody will be along to do the math - but how long do you expect to live?
If your family history says 2029 is unlikely, it is of course a no-brainer to start it now. Evey year after that changes the breakeven point.
Somehow you can use the NPV function in Excel (or your spreadsheet of choice) to figure it out, but that’s not my expertise.
Another key question: Will you be investing the $108 a month, or just spending it?
I ask because I see this happen a lot with Social Security. People tell themselves that taking the money at 62 makes sense because they can put it in the stock market and get a better return on it. (A questionable proposition itself). But they never quite get around to putting it into the stock market because there are too many shiny things out there.
OK, I’ll break down and do the math. Quick and dirty and someone should check it.
So-2015-2029: 14 years x 12 months x $108 month = $18,144 earned before you hit 65.
If you had waited, you’d be earning $271-$108 = $163 more every month from age 65 (I presume this is for life and not a set period of time).
$18,144/$163=112 months or about 9.3 years to get back to even and start adding money beyond what you’d get by starting now.
So, if you figure to live past age 74, it might be better to wait. But like others said, it depends on your health and family history, your need at this time for available funds, and what you plan to do with them.
Again, someone please check my conclusions.
Oh, boy.
I read the REST of the package, and I also have the option of taking a $23,000+ lump sum “in lieu of future payments”. I suspect this is the better option.
I have a month to decide.
You’ll be 65 in 2029, which implies you were born in 1964. Actuary tables suggest you have on average 28 (and change) more years to live, which implies you’ll pass out of your mortal coils around 2043.
Assuming a discount rate of 2%, the “pension now” option has a present value of 29K and the “pension at 65” option has a present value of 34K. Assuming a discount rate of 3%, the “pension now” option has a present value of 26K and the “pension at 65” option has a present value of 27K. The three choices converge at a discount rate of 3.8% or so.
So one way to look at this is if you can beat a 3.8% market return with no risk, you’re better off taking the money now.
Good luck.
Was this retirement fund a tax deferred deduction? You’ll probably have to pay the taxes now if you take the money before you’re 65.
Something to consider and check before you decide.
It’s an annuity. I also have a 403b from that place, and I’m not touching it before I’m 59 1/2 unless I’m desperate.
I started taking Social Security when I turned 62, four years ago. I also tend to eat dessert first. The future is uncertain.
Read the wording very carefully. Some pensions have a cost of living adjustment in them. If you take the early pension, you might not get the annual cost of living adjustment. I know that this was the case for a job that I had as an employee of the State of Illinois.
Also you have to wonder why they are offering things like the lump sum to you. It certainly is for their benefit and not yours. I was offered a lump sum and it worked out that if I lived for more than 5 years after I started taking the pension, I’d get more money than the lump sum. I retired at age 60 and reasonably expect to live to at least 70 or longer.
The math is hard to do, because any math that fails to account for inflation is bound to be inaccurate. And of course, we can’t predict what the inflation rate will be in the next 15 years.
Tell y’all what. I’m going to talk to an accountant before I make a final decision. I know one who will probably give me a few minutes of her time at no charge. 
But you’ll have to sleep with her, right?
Do you have a spouse and/or heirs? My pension, which was worth more than I was planning on, produced a lower return if I took an option that gave my wife 50% if I kicked off first. I took the lump sum and put it in an annuity which my wife would get and which my kids would get anything left when we both kick off. There are slightly better paying annuities without this feature, but it was worth it for us.
Single, no kids.
I did talk to the accountant, and she gave me more information that I need to clarify with that employer, which I will call tomorrow morning.
Construct is right on. This all assumes that you aren’t planning spending your retirement funds until age 65 anyway. This will also preserve your tax deferred status by putting transferring them into a separate managed retirement account.
If you plan on spending these funds prior to your retirement, it kind of defeats the purpose of retirement funds.
I have decided to roll the amount over into my 403(b). It’s the only way I can do it without incurring big penalties.
That sounds wise. Pensions are iffy things, they tend to be dependant on the health of the company - and companies tend to come and go over the 40 years you may yet live. Putting it into a 403(b) is going to keep you from spending it, and give you some retirement income from it when you need it.
Is the 271 subject to COLA? In which case, it would shorten the payback figure.
I’d recommend the age 65 option. You’re going to need money more then, when your earning potential is far less, than you do now.
On the other hand, if you religiously invest all the lesser amount, you will probably be able to match or better the 271.
Exactly, but you can be sure that a “2015 dollar” is going to buy a heck of a lot more than a “2029 dollar”. Let’s say inflation is “only” 2% a year. (which is the Feds target BTW.) By 2029 you dollars will have lost 28% of their value!
Take the lump sum. How can you be sure that whatever agency that is responsible for paying you, will even be around 5 years from now, let alone in 2029.