Retiring before you have a full work pension

[Anonymous]

Very broadly speaking, the actuarial reduction for commencing a pension before a pension plan's normal retirement age (generally age 65) is 6% for each year. So for someone to commence at age 55 instead, his pension will be cut by more than 50% of what it would have been had he stayed on to retire at age 65.

A someone mentioned though, some plans provide an encouragement of sorts for older, long-service employees to take early retirement -- i.e., 30 years of service and at least age 55. Generally, such an early retirement benefit is subsidized (i.e., there is no actuarial reduction and the individual is entitled to the "full" pension benefit as if he'd worked until age 65). Alternatively, instead of a 0% reduction, the plan might provide for some other reduction (i.e., subsidy), but in any case less than 6%. I have to assume your sister is referring to a pension plan that includes a special subsidized early retirement benefit for someone who attains a magic number under the terms of the plan, such as 30 years (or 25 years), in order to be eligible for a full subsidized pension. If she's just referring to the normal 6% actuarial reduction for commencing early, then her concern is still valid (6% per year adds up!) but less so.

[Anonymous]

Anonymous wrote:Very broadly speaking, the actuarial reduction for commencing a pension before a pension plan's normal retirement age (generally age 65) is 6% for each year. So for someone to commence at age 55 instead, his pension will be cut by more than 50% of what it would have been had he stayed on to retire at age 65.

A someone mentioned though, some plans provide an encouragement of sorts for older, long-service employees to take early retirement -- i.e., 30 years of service and at least age 55. Generally, such an early retirement benefit is subsidized (i.e., there is no actuarial reduction and the individual is entitled to the "full" pension benefit as if he'd worked until age 65). Alternatively, instead of a 0% reduction, the plan might provide for some other reduction (i.e., subsidy), but in any case less than 6%. I have to assume your sister is referring to a pension plan that includes a special subsidized early retirement benefit for someone who attains a magic number under the terms of the plan, such as 30 years (or 25 years), in order to be eligible for a full subsidized pension. If she's just referring to the normal 6% actuarial reduction for commencing early, then her concern is still valid (6% per year adds up!) but less so.

This is very well explained and helpful.

I think what some posters are missing, though, is that the decision of when to retire vis-a-vis a pension computation might not come down to a strictly numerical calculation. Many pension systems are part of a "3-legged stool" along with SS and 401k (or other self-directed plans). If someone has "enough" prior to reaching full pension benefits (via their 3 legged stool of SS/401k/and a reduced pension), they may simply prefer to retire early rather than work the extra 5 years (or whatever) simply to optimize their pension (which would provide them more than "enough").

As a thought experiment, take the pension out of the equation (as it is for so many people). Under the logic of many PPs, nobody could ever retire, because another year working would provide them with "more" in the 401k, so they would be foolish to retire "early" before accumulating that extra 401k money. Of course, that doesn't make sense, and one may in fact be wise to retire without fully optimizing all of their retirement incomes -- as long as they have "enough."

[Anonymous]

PP here, I'd like to clarify the first sentence of the second paragraph, which should read: "the decision of when to retire vis-a-vis a pension computation might not come down to a strictly numerical optimization."

[Anonymous]

I have a pension where the difference between 25 and 30 years is huge. If I retire at 25 I get 2K per month. If I leave at 30 I get almost 4K per month. Since this is for the rest of my life the difference is huge. The pension is structured to reward long term employees.


Wow what a terribly stupid system. Wherever you are (private company or public institution) I can't imagine who thought it would be a good idea to have a big bump at some arbitrary point like "30 years". Actually, I assume it's public, because any private company would be looking to find whatever cause necessary to fire people with 25+ years of service.

It's a public plan. But it's not a big jump from 29 to 30 years. The jump is incremental between 25 and 30 years, but amounts to 50% of the pension (so the last 5 years it is going up in big amounts each year).

[Anonymous]

Every situation is different. I definitely don't want to hold out for a full pension then drop dead in 3 months after retirement.

[Anonymous]

Every situation is different. I definitely don't want to hold out for a full pension then drop dead in 3 months after retirement.

Agreed. However, in general, people are living longer now. My parents lived into their 90's (and their own parents did not even come close to living that long---3 of my 4 grandparents did not make it to 65). If I live into my 90's, I would like to have enough money to cover my needs. Of course who knows . . . I might get hit by a car tomorrow. This is why it's important to enjoy what you do for a living and to keep a good work/life balance.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I would like to put some hard numbers on this because some people seem confused.

Let's look at FERS federal pension as an example. Let's say person A retires at 62 with 20 years of service and their salary at retirement (and high-3) is $100k. Their pension benefit (deferred until 62) will be $22k per year.

Person B works another 10 years, ...
And of course, other pension systems work differently, further confirming the notion that there is no one "right" answer to when to take your pension.

But person B didn't collect the pension for ten years while person A did. Not worth it.

Right, I should have added, it also depends on how long you think you're going to live. And this was only one example, and the ages and incomes obviously could be changed. The point was only that there is no one-size-fits-all answer. Heuristics like "you should never retire before full pension" are overly simplistic.

I would be surprised if anyone would your scenario of working until 72.

Fine, perhaps I didn't put enough thought into the hypothetical parameters in order to make it a balanced hypo. I really just came up with the numbers off the top of my head. Let's adjust the numbers a bit then.

Change it to: person A retires at 55 with 20 years of service and their salary at retirement (and high-3) is $100k. Their pension benefit (deferred until 62) will be $20k per year.

Person B works another 7 years, retiring at 62 with 27 years of service. Cost of living adjustments have brought their salary up to $110k. Their pension benefit will be $33k per year. So the difference will be about $13k per year for working those last 10 years.

Depending on your 401k balance, your budget, and your priorities, you may prefer to be person A or person B.

But, the point isn't really in the specific numbers. It's that there is no single one right answer that works in every situation.

Someone else already mentioned, but the difference is not $13K per year due to the opportunity cost of not getting money for 7 years. 7 years x 20K=140K, so breakeven is 10 3/4 years-almost 73. Also, pensions get COLAs plus you could plan to invest part of that pension income and get a return. That said, I would not plan to retire if you're a healthy 55 year old.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I would like to put some hard numbers on this because some people seem confused.

Let's look at FERS federal pension as an example. Let's say person A retires at 62 with 20 years of service and their salary at retirement (and high-3) is $100k. Their pension benefit (deferred until 62) will be $22k per year.

Person B works another 10 years, ...
And of course, other pension systems work differently, further confirming the notion that there is no one "right" answer to when to take your pension.

But person B didn't collect the pension for ten years while person A did. Not worth it.

Right, I should have added, it also depends on how long you think you're going to live. And this was only one example, and the ages and incomes obviously could be changed. The point was only that there is no one-size-fits-all answer. Heuristics like "you should never retire before full pension" are overly simplistic.

I would be surprised if anyone would your scenario of working until 72.

Fine, perhaps I didn't put enough thought into the hypothetical parameters in order to make it a balanced hypo. I really just came up with the numbers off the top of my head. Let's adjust the numbers a bit then.

Change it to: person A retires at 55 with 20 years of service and their salary at retirement (and high-3) is $100k. Their pension benefit (deferred until 62) will be $20k per year.

Person B works another 7 years, retiring at 62 with 27 years of service. Cost of living adjustments have brought their salary up to $110k. Their pension benefit will be $33k per year. So the difference will be about $13k per year for working those last 10 years.

Depending on your 401k balance, your budget, and your priorities, you may prefer to be person A or person B.

But, the point isn't really in the specific numbers. It's that there is no single one right answer that works in every situation.

Someone else already mentioned, but the difference is not $13K per year due to the opportunity cost of not getting money for 7 years. 7 years x 20K=140K, so breakeven is 10 3/4 years-almost 73. Also, pensions get COLAs plus you could plan to invest part of that pension income and get a return. That said, I would not plan to retire if you're a healthy 55 year old.

Sure, there is the opportunity cost of not getting your pension. But, you are getting paid your full salary while working. So financially, you are much better off working and delaying your pension. That doesn't necessarily mean you should continuing working because, as others have said, every has different preferences, life expectancies, and other resources.

[Anonymous]

The pearl clutching on this thread about not achieving the full pension benefit is pretty strange - what about the opportunity cost of wasting another 5-10 years in a soul-sucking job? I'm planning to retire after 20 years with the Feds at age 51, and have no qualms about having to ratchet down my retirement spending by 10% as a result.

[Anonymous]

Bottom line - if you feel you will have enough in retirement - retire when you think you can.

[Anonymous]

The pearl clutching on this thread about not achieving the full pension benefit is pretty strange - what about the opportunity cost of wasting another 5-10 years in a soul-sucking job? I'm planning to retire after 20 years with the Feds at age 51, and have no qualms about having to ratchet down my retirement spending by 10% as a result.

This is why work/life balance is so important. In your case, you could "retire" at age 51 and still get another job that is not "soul-sucking" if you are so inclined. If people like their jobs, they may prefer to continue and put more into retirement. There is no one answer. I feel lucky that I like my job.

[Anonymous]

Anonymous wrote:The pearl clutching on this thread about not achieving the full pension benefit is pretty strange - what about the opportunity cost of wasting another 5-10 years in a soul-sucking job? I'm planning to retire after 20 years with the Feds at age 51, and have no qualms about having to ratchet down my retirement spending by 10% as a result.

Are you a first responder or does your agency offer early outs every year? I am 52 with 20 years in and am not eligible to retire for four more years. Also, the benefit is reduced if you retire before 60 and increase if you wait until you are 62.

I don't think there is pearl clutching and think it is people demonstrating the math. It comes down to when you think you will have enough money for retirement. People who work longer generally have more money in retirement than if they had worked a shorter period of time. what is enough? It is an individual answer. Absent a windfall, I do not plan to retire until my children are out of college, so that is mid-60s for me. Also, I enjoy my job.

[Anonymous]

Most people love their jobs, it's the management (thus morale, pay, etc.) that makes them leave/switch/retire. Quality of life, commute, and health condition are also factors when you should call it quit.

[Anonymous]

Anonymous wrote:Most people love their jobs, it's the management (thus morale, pay, etc.) that makes them leave/switch/retire. Quality of life, commute, and health condition are also factors when you should call it quit.

Yeah, I doubt that. You think the woman at McDonalds loves asking if you want fries with that? Or that the garbage man enjoys picking up your trash? Even in the professional world I still don't think most people really love working; they do it because they need to pay the bills.

[Anonymous]

Most people love their jobs, it's the management (thus morale, pay, etc.) that makes them leave/switch/retire. Quality of life, commute, and health condition are also factors when you should call it quit.


Yeah, I doubt that. You think the woman at McDonalds loves asking if you want fries with that? Or that the garbage man enjoys picking up your trash? Even in the professional world I still don't think most people really love working; they do it because they need to pay the bills.

Do I love every single solitary moment on my job? No. But I like it enough to get up in the morning and look forward to going and interacting with many people to accomplish things. I could leave today and pay my bills for a long time (years), and even retire. But I'm getting enough out of my job that I don't wish to do that. Yes, I'm a professional and I've invested a lot of education and training in my area (and continue to do that). I've switched around within my area enough to keep learning. I feel like I'm pretty valuable and younger people seek me out to ask for help/advice. I can share some "war stories". I enjoy that.