Personal Finance: The price of putting off a pension

Question:

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

- Gary, Baltimore

Answer:

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

Research shows that only about a third of people try to calculate what they will need in retirement before leaving a job or starting to take a pension. Years later, bad decisions can catch up with them: Once you take a pension, you cannot go back to your former employer and request a do-over when money is tight. And you might not be able to return 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 could have been avoided.

People generally do not 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 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 is simply the average; about half of women who were married at age 65 live to 90. That means married men must consider their longevity, plus the fact that their wife might need income longer than they will. And because 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) vs. the roughly $24,800 annual sum if you wait until age 65.

Assume that 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://go.philly.com/inflation2

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."

The difference between taking your $1,183 a month now or opting for the $2,071 in about 71/2 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, 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 71/2 years to 65, you will bypass a total of about $106,500.

Don't think of it as money bypassed, Farrell said. Before retiring, see how long you would have to live before recovering the $106,500, he said. Given that your pension at age 65 will be about $10,600 more a year than you would receive 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, and every year after that, you and perhaps a spouse will receive much more.

That is the basic calculation you need to see the difference. 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, the latter looks like a good deal.