The theme this week on the One Minute Retirement Tip podcast is: Ask me anything! I’m answering your listener-submitted questions about what is weighing most on your mind as you prepare for retirement. 

Today, I’m answering the following question: Should I Take The Early Retirement Option With My Pension?

Gianna writes: 

I am 51 and I’ve been a city employee for 26 years. I have a pension plan and a 457 plan. I will be eligible to retire when I reach age 57. 

My pension plan offers a social security equated option for single retirees. I can opt to receive a higher pension payment option from age 57 to age 65. After 65, my pension payments will be permanently reduced. If I don’t choose the equated option, my pension will be around 80% of my income and the monthly income will remain the same for the rest of my life. 

I’m wondering if I should consider this early payout option. I’m considering retiring early and collecting my pension at age 57, and continuing to work somewhere else either part-time or full time. I’m also considering just staying at my employer. 

Ok, so what Gianna is talking about here with her equated pension option is meant to allow people who retire early to receive a consistent level of income, starting earlier in retirement. 

Here’s how these equated plans work: Let’s say you’re going to receive $2,500 in social security benefits at age 65. If you have a pension that has an equated option, you can begin to receive say $3,000 when you’re eligible...in Gianna’s case, it’s age 57. She’ll get $3,000 a month until age 65, then once Social security starts, she will get $2,500 from social security and her monthly pension will drop from $3,000 to $500 a month.  Big drop, but remember, she’s front-loading those pension payments and receiving more in the early years. 

While it’s nice to begin collecting your pension income at age 57, it comes with a BIG catch with permanently reduced pension income for the rest of her life by as much as ⅔ to ¾ less than what the amount would be if she waited to her normal retirement age to start her pension.

In Gianna’s case, she needs to understand the trade-offs of retiring earlier and taking the optional equated pension amount vs. working longer. And it is possible to do the math on these options, which is exactly what she needs to do. 

My guess is that it’s unlikely that Gianna will be justified in taking the early retirement equated option, unless she has some serious health issues. She will likely be giving up too much in lifetime income by taking the equated option, especially if her health is good and she has reasonable longevity. But she really needs to talk to a tax advisor or a financial advisor to compare her options and run the actual numbers. This is a major, irreversible decision that’s going to impact her income for the rest of your life. The good news for Gianna is that she has a few more years to decide whether or not to continue working. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance