Should I start withdrawing my pension early?

Question

I am vested in my former company. My monthly pension payment will be $1100/month when I turn 65. If I start withdrawing now, my monthly payment is only $500/month. I am now 53. I don't intend to spend my $500 if I starting withdrawing now. Should I wait until 65 to start withdrawing my pension?

Answer 1

No, The taxes will have to be paid and you would be subject to the early withdrawal penalty. You would never make up this loss no matter what you could get on the net amount being invested.

Answer 2

You should really verify this with a financial planner (which I am not) since it's a major decision, but if I'm doing the math correctly, here's what I figured out.

If you start now and invest the whole $500/month every month in a mutual fund or something like that which grows on average at 8% per year (after any taxes you have to pay on distributions), in 12 years when you are 65, that will have grown to about $120,000. I calculated that using the "future value of an annuity" function in my spreadsheet with payment=$500, rate=.08/12 (the monthly growth rate), and term = 144 (the number of months in 12 years).

That's a HUGE headstart and a 6% return (0.5% per month) on the $120,000 you've saved would cover the $600 difference between the payments from then on. Plus you still have the $120K that you saved. I think you come out ahead no matter how long you live in this case.

Even if you invest in something conservative like CDs or bonds and only get an after-tax return of 4%, you'd still have over $92,000 by the end of 12 years and (again if I've calculated correctly) it would take 18 years after you started getting the $1100 checks to make up that difference. At that point, you'd be 83.

If it were me, and I had these numbers verified to be sure they are correct, I'd take the money now, invest it in a broad-market mutual fund or ETF (like SPY or IWM) and watch it grow. The indexes those ETFs track have historically grown significantly more than 8% a year which would put you even further ahead than the number above show.

You have to be SURE you will not spend it though. If you spend it, all this goes out the window and you'd probably be better off waiting.

Answer 3

If you have some means of investing and see yourself making more by the age of 65, then u might wish to start withdrawing it.
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Answer 4

Of course you should wait. $600 is a lot of bones man! Don't waste them.