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Deciding When to Take Your Pension

December 30, 2011

Generally, the longer you wait to take your pension, the greater the monthly benefit is. However, waiting to take your pension isn’t guaranteed to get you the maximum lifetime returns. When actuaries calculate early and late retirement factors, they consider two factors in deciding how quickly the monthly benefit adjusts: interest and mortality.

A Sample Early or Late Retirement Table
Normally this would be done monthly, but I’ll just show every few years.
Age – Factor
58 —- 0.550
60 —- 0.646
62 —- 0.764
65 —- 1.000
68 —- 1.344
70 —- 1.664
(that’s GAM 83 at 5%, rounded to 3 decimals)

Interest
A dollar today is typically worth more than a dollar tomorrow. The reason for this stems from three major causes:
1. Time preference – most people are impatient and would rather consume something now than later and will pay to move consumption forward.

2. Returns on capital investment – If you invest in the stock market, you can earn a return. If you get a dollar today, and you can earn $1.05 by next year, you would rather have the money now to take advantage of that opportunity.

3. Inflation – Under fiat currency based central banking, prices tend to rise over time. You can buy more for a dollar today then you will be able to tomorrow.

Depending on the interest rate used to calculate the early retirement factor and how much you value the factors above, it might be better to take money right away rather than wait until later. If you think you can get a good return on invested money (unlikely in this climate), take the money earlier. If not, wait a bit. If you need the money now, for whatever reason, take early retirement. The best way to determine expected inflation is by looking at the TIPS spread, which measures the difference between inflation indexed and non-inflation indexed bonds. Expected inflation is around 2% right now, which is a little below long run historical averages.

Expected 10 Year Inflation
expected inflation Calculated Using the TIPS Spread

Mortality
Everyone dies someday, the only question is when. The longer you live and the earlier you start your pension, the longer you will collect your pension. Retiring early can drastically increase the number of payments you get before you die.

Average American Life Expectancy at Age 55: Age 79.3
(24.3 years)

Here’s a graph of how many payments someone with the average American life expectancy could hope to get if they retire at various ages:

Age 65, Expected Payments: 171
Age 62, Expected Payments: 207
Age 60, Expected Payments: 231
Age 58, Expected Payments: 255
Age 55, Expected Payments: 291

Now, all insurance companies and government agencies already take this into consideration. Life expectancy is rising over time. In my experience, if government agencies err, it is that they estimate that people will die too soon because newer, more accurate mortality tables are not rapidly adopted. That would imply that early retirement factors are too low, and therefore that gains from waiting to retire are better than fair for the retiree.

Government agencies don’t calculate individual mortality risk based on your personal information when calculating your early retirement factor. If you are in poor health, take your pension earlier; if you are good health, you can wait a bit more.

If you have the option to take a retirement benefit which is not reduced for early retirement, take it as soon as possible. Unreduced benefits simply get less valueable over time.

One of the main features of a pension is that it allows retirees to be sure that they will not outlive their savings. If you are using your pension for this purpose, make sure that you think you will get enough from your pension to live on if all of your other savings have been lost. People using pensions as a way to insure that they will have enough money if they live a really long time can use their other retirement savings when they are in their early retirement years as a way to delay when they begin their pension, so that their pensions are larger and can support them in old age. As always, deciding when to retire is not a simple task, because each person has different factors which influence their retirement decisions.

If you have a question about retirement or pension plans in general, feel free to leave a comment and I’ll do my best to answer it.

Additional Resources:
Spiffy factor calculator.
SSA Early/Deferred Pension calculator

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2 Comments leave one →
  1. Gary matuszewski permalink
    January 11, 2014 6:56 pm

    I am 55 and I am in a multi employer pension plan. My particular pension plan is in the red zone and has no employers participating anymore. as of last year paying people there pensions that they owe they said they have enough money to pay the pensions out for 11 years. At 55 I can collect 360 a month I am disabled but do not need this money to live on. The pension plan only makes money to add to the pension plan by what they make on their investments. If I wait tell 65 I would get 945 a month. The pension plan is top ended what I mean by that is that for the last year before your 65 the pension increase is 10% so the longer you wait the higher % youll get for each year you wait . I was hoping to use this pension as a cure for inflation at age 65 but I don’t know if I can trust my pension plan.PS I figure that at age 65 if the plan was out of money The pgbc would pay me 785 a month if my pension was out of money if we can trust them. Thank you for your advise in advance.

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