Find Out What Age to Begin Your Pension Income

Couple deciding when to start a pension
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Carefully choosing when to start your pension can greatly reduce your risk of running out of money. This article assumes your pension plan either does not offer a lump sum option, or you have already done a lump sum vs. annuity pension analysis, chosen the annuity option, and now you are on to the next step of deciding what age to begin your pension benefits. An analysis of when to start your pension income can be quite similar to an analysis of when to start your Social Security benefits.

  • Both pensions and Social Security offer guaranteed income for life.
  • Pensions usually offer a choice that allows for continued income for a spouse; Social Security offers survivor income also.

However, that is where the similarities end. Whereas the Social Security rules are the same for everyone, each company's pension rules are not the same. This means two upcoming retirees with identical financial and family situations may make very different choices about when to start their pension based on which company they work for.

For example, each time I have looked at pension options for upcoming Honeywell retirees, I have seen no value in delaying the start date of the pension. Yet with many other pension plans reviewed, there's a great deal of value to having the retiree delay the start date of their pension even if they plan to retire earlier.

Example of Pension Analysis

David is retiring at 60. His pension offers several options and different payout amounts depending on what age he chooses to begin his pension income. Although he will retire at 60, it may be beneficial for him to wait until 65 to begin his pension. He has savings and other retirement accounts he can use to provide his needed retirement income from age 60 to 65 if he decides to delay the start of his pension. Here is a summary of two of David's pension choices:

  • Single life at age 60: $19,536 a year
  • Single life at age 65: $34,128

Should he start his pension at age 60 or 65?

If David waits five years to start his pension, he will get $14,592 more per year. But he will miss out on $97,680 (5 years x $19,536 per year). To do a simple analysis take $97,680 divided by $14,592 and you see he recovers his $97,680 in 6.7 years, in the year he reaches age 71. This could be referred to as his break-even age.

A simple analysis, however, does not take into account the time value of money. If David has to use $97,680 of his own money from age 60 to 65 then he will not be earning interest on that money. If we assume David could earn 4% on his money, it moves his break-even age out to about age 73.

Assuming David waits until age 65 to begin his pension, if he lives to 80, his delayed pension start date will put over $120,000 extra in his pocket when compared to starting his pension at 60. (Analysis still assuming a 4% return on David's personal savings and investments.)

The higher the rate of return David thinks he can earn on his investments, the less beneficial delaying the start date of his pension becomes. For example, if David thought he could earn a 10% rate of return on his savings and investments, his break-even age moves out to age 82.

Be cautious in assuming you can earn a high rate of return as you must also consider the level of investment risk required to attempt to earn that higher return. Pension income is guaranteed. Comparing pension benefits to riskier investments is not a fair analysis. It is often difficult if not impossible to find a higher rate of return on safe investments.

If David were married a similar break-even analysis could be done using pension options that provide ongoing income to a surviving spouse. In that case, joint life expectancy should be considered. 

Each Pension is Different

Each pension has its own formula that determines how much you may get at what age. I have worked with clients who had pensions from more than one company and with one pension we advised they begin benefits right away; while with the other pension we advised they wait five years before beginning benefits.

Taxes should also be considered in your final analysis. Sometimes delaying the start date of your pension and taking IRA or 401(k) withdrawals during the interim years provides an improved tax outcome when viewed over your full retirement time horizon.

Your gut feeling on when to begin pension benefits may not be right. Careful analysis in this area can pay off. Don't begin pension benefits without first looking at the numbers projected out over your full number of expected years in retirement.