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Price of Putting Off Pension Can Be Well Worth It

Price of Putting Off Pension Can Be Well Worth It

Gail MarksJarvis

Q. I have a pension that is available to me and I wonder about beginning the pension now or waiting. If I take the pension now I will get about $1,183 per month. By waiting, it increases approximately 7.5 percent each year to a maximum of $2,071 per month at age 65. I am not in need of the pension at this time.

- Gary, Baltimore

You are wise to be analyzing the possibilities rather than taking what’s in front of you now and hoping it all works out later.

Research shows that only about a third of people try to calculate what they will need in retirement before leaving their job or starting to take a pension. Years later, bad decisions can catch up with them: Once you decide to take a pension, you can’t go back to your former employer and request a do-over when money is tight. And you might not be able to go back to work to cover unanticipated living expenses.

The AARP surveyed retirees a few years ago and found that almost half worry about paying their utility bills. This is something many people could have avoided if they had thought about their retirement needs before leaving their jobs and closing the door on options like higher-paying pensions.

People generally don’t think seriously about how long they will live and they forget to consider how inflation drives up the cost of living. They also forget medical costs, which can easily run $1,000 a month, says Denver financial planner Charles Farrell.

Although 65-year-old men might look at average life expectancy numbers and assume they will live to 85, that’s simply the average; about half of women who were married at age 65 live to 90. That means that married men must consider their longevity, plus the fact that their wife might need income longer than they will. And since joint coverage for spouses often cuts about 30 percent to 50 percent away from the original pension, maximizing the amount is critical. Imagine living on half of $14,200 (today’s pension) versus the roughly $24,800 annual sum if you wait until age 65.

Assume you and your spouse get the full $24,800 year after year, and apply the impact of inflation. If the inflation rate is 3 percent a year, you will need about $44,800 a year in 20 years to buy what $24,800 buys now. Try this calculator: http://www.calcxml.com/do/bud01.

Some people think: “What if I work a long time or delay my pension, and then die early? I will leave money on the table.” If that happens to concern you, you can calculate what you will receive by taking the smaller pension now or the higher pension later.

The difference between taking your $1,183 a month now or opting for the maximum of $2,071 in about 7 { years, when you are 65, is huge _ roughly 75 percent more by waiting.

If you want to know how many dollars you bypass by waiting to collect the pension, multiply the yearly sum you would receive now by the years you must wait before obtaining the larger pension. If you are nearing 58 now and wait for 7 { years to 65, you will bypass a total of about $106,500.

But don’t think of it as money you bypassed, Farrell said. Before retiring, see how long you would have to live before recovering the $106,500, he said. Given the fact that your pension at age 65 will be about $10,600 more a year than you will receive if you start your pension now, it will take you about 10 years to capture the money you thought you left on the table. If you live past 75, you will get everything back that you would have received if you claimed the pension early and every year after that, you and perhaps a spouse will receive much more.

That’s the basic calculation you need to see the difference in the start date on a pension, although financial planners may work the numbers harder by assuming the impact of taxes and the impact of investing on what you end up pocketing. Still, when you compare today’s 3.5 percent interest from 10-year Treasury bonds to a 7.5 percent guaranteed increase by waiting until age 65 for your pension, waiting for the pension looks like a good deal.


ABOUT THE WRITER

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her e-mail at gmarksjarvis@tribune.com.


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