Funding your early retirement with a Defined Pension Plan is a fortunate thing to have. However you may have serious decisions to consider before taking your pension benefit. There are very few companies still offering defined pension plans. The ones that do are constantly trying to trim back those obligations. Pensions are also still available to some government employees.
Many people who start working for a company or government position that offered a pension never reach eligibility. Primarily due to staff reductions or quitting. It’s hard to work for one company or government entity for that long to reach the eligibility thresholds. Many government employees also have to give to their plan. Many do not have the ability to collect Social Security. Their pension takes the place of Social Security.
People who made the decision early in your life to dedicate themselves to a career that had a defined pension probably did so knowing they would have lower compensation. Lower than doing the same career with no pension benefit.
The misconception is that pensions for the average worker, public and private employees are large. That they pay a huge percentage of the retiree’s salary once they leave. The truth is that most pensions pay a small percentage of the retiree’s final salary. Unlike the pensions paid to executives and high office government officials.
A Defined Pension Plan is no guarantee for Early Retirement
With a pension you still need to know what your retirement lifestyle will cost. Pensions are often talked about as one leg of the retirement 3 legged stool. Social Security and savings are the other legs.
Obviously retiring early means Social Security is years away. Thus having a pension is no guarantee alone for anyone to retire early. You still have to have savings and a small lifestyle expense footprint. You must know what your retirement lifestyle cost is to decide if your pension plus savings equals a funded early retirement.
Most pensions do not come with cost of living increases. If it is offered it means selecting that payment option in exchange for a lower starting monthly payment. The inflation percent that will be paid going forward may be limited to a fixed maximum that may not meet inflation increase expectations over many years.
Some pensions may also have the retiree option to forgo the monthly annuity for a lump sum payment. A lump sum you can roll into an IRA and fund your retirement with.
There are a lot of serious decisions to consider. If you have any reservations about your decision you should get professional help. But do so with your eyes wide open.
Defined Pension Plan – Annuity vs Lump Sum decision
Be sure you have a trusted financial planner. Hopefully they are certified as a fiduciary working for your best interest. If your planner says take the lump sum without justifying that assessment, then consider whether that assessment is biased.
Some planners may just want control of that lump sum and of course the associated fees they will receive. This is not to say that there are not cases when taking the Lump Sum option is a better decision. Just weigh everything being looked at.
Defined Pension Plan eligibility rules
Be sure you know your Defined Pension Plan eligibility rules and where you stand.
Know exactly when you become fully eligible to collect your company pension. Do not make the mistake of letting your enthusiasm for wanting to retire early have you leave your company before you can get your full benefit. Understand what the full eligibility rules are. If you are within a few months of getting a big bump in the benefit, you should really consider waiting. Waiting until you reach your company’s pension calculation mile-stone.
Get information to calculate what the differences in pension benefits you receive when retiring early. Compare the differences between retiring young against staying longer to add extra years of service and an older age. Not that it should change your mind by itself. But you want to retire early knowing all there is to know. That way you will feel confident in your decision.
Defined Pension Plan health and funding status
Know the funding status and health of your Defined Pension Plan.
It would be a total bummer if after retiring your pension fund goes bust. It may be insured by the PBGC (Pension Benefit Guaranty Corp.). But depending on your age at default and the plan’s underfunded percentage, your monthly payment may be considerably trimmed. Check your pension plan’s funding ratio to see the amount of money that they have set aside to pay future obligations.
If your company doesn’t openly share this information, ask for a copy of your pension plan’s form 5500 annual report. Obviously you would like to see your plan as close to 100% funded as possible. However, as a lot of companies have reduced plan funding you should hope to find the ratio to be above 80%.
If the worst happens after retiring and your pension plan goes bust or the company decides whatever way legally to default on the obligations, the PBGC will take over and pay your benefits. But know your payment impacts by checking the PBGC site (http://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee.html) for the payout limits. Those limits are based on your age at time of any pension plan default.
Do not underestimate the power a monthly check from a pension plan will have in making early retirement a reality.
You then can use your non-retirement investments and/or your IRA savings to supplement your early retirement and later retirement funding. Especially in mitigating the future impacts of inflation on your pension.
I hope you find your pension plan fully funded and a no-brainer to retire early.