Most private employers no longer offer traditional pensions, but they remain common for teachers, government employees, and others in the public sector, and many older private-sector plans are still paying benefits. If you are fortunate enough to have one, a key decision is when to start collecting.
Many plans pay a full benefit at 65 but allow you to start as early as 55. Starting early means a smaller monthly check, and some plans reward you for waiting past the normal age. So when is the right time to start? There is no single answer, but here are the factors I look at with clients.
Longevity
The longer you live, the more it pays to delay. Nobody knows exactly how long they will live, but your health and family history offer clues. Many people today can expect retirements of 25 to 30 years, and a married couple should plan for the possibility that one of them lives well into their 90s.
The specific terms of your plan
Pension terms vary widely. Payouts usually depend on your years of service and salary, so the timing may hinge on reaching a certain number of years. Check whether overtime and bonuses count, whether benefits are capped, and whether the plan offers cost-of-living adjustments. If you are also choosing between a lump sum and monthly payments, see What to Consider When Determining How to Receive a Pension Benefit.
How secure is the pension?
Federal and state laws are designed to make sure pension plans meet their obligations, but no plan is bulletproof. Many public plans are underfunded, and a struggling employer could affect future benefits. It may not be wise to count on a single pension for your entire retirement income.
Your personal circumstances
Consider your other sources of income, such as Social Security, IRAs, 401(k) plans, and other savings, as well as any plans to downsize your home or a spouse’s own pension. Your pension decision should be coordinated with all of them, especially your Social Security claiming strategy.
Compare cumulative payouts
The table below uses a hypothetical pension that pays $3,000 a month ($36,000 a year) at a normal retirement age of 65, with no cost-of-living increases. It assumes the benefit is reduced 5% for each year you start early and increased 5% for each year you wait, up to age 70. That means $2,250 a month starting at 60, $3,000 at 65, and $3,750 at 70.
| Age | Start at 60 | Start at 65 | Start at 70 |
|---|---|---|---|
| 70 | $270,000 | $180,000 | $0 |
| 75 | $405,000 | $360,000 | $225,000 |
| 80 | $540,000 | $540,000 | $450,000 |
| 85 | $675,000 | $720,000 | $675,000 |
| 90 | $810,000 | $900,000 | $900,000 |
| 95 | $945,000 | $1,080,000 | $1,125,000 |
Starting early produces the most total income until about age 80, when starting at 65 catches up. Waiting until 70 doesn’t pull ahead of starting at 65 until about age 90. This example is for illustration only; your plan’s terms and your results will differ.
A financial advisor can run these numbers using your plan’s actual terms and help you decide when to start taking your pension.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
