# Take My DB Pension Early?



## fraser (May 15, 2010)

Any thoughts on taking my DB pension early? My employer pension is stable so there are no issues there. I am aware of the tax implications, ie splitting etc. I am 58. I can take full DB pension at age 62. I do not need the money until age 62 but I am working on a plan that we see me start withdrawing 2-2 1/2 years early. The penalty is 5 percent/year. The DB plan has no inflation or COLA provision. I no longer work for this company. I view taking the DB early as a way to get some of that 'commuted value' without actually going whole hog. Any insights...is the 5 point penalty overshadowed by getting the money early and pension splitting with my spouse. Thanks for your insights.


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## MoneyGal (Apr 24, 2009)

I am sure you realize that taking the pension =/= getting the commuted value. 

That said, it seems to me that a 20% hit plus no indexation means the real value of this pension will drop considerably over time (compared to full pension - I know there's no indexation in any case).

In your shoes, I think the defining factor might be what proportion of retirement income you expect to come from this pension. If you expect a large proportion of retirement income to come from the pension, I would hold off on taking it as long as possible - especially as you say you do not need the money at age 58. 

You should also think about the tax implications, not just the income-splitting component. If you will take the pension at age 58 but (I presume) you are still working, it will likely be taxed at a higher rate than if you delay and take the pension in retirement (note that this assumes you will have a lower tax rate at retirement, which may or may not be the case). If you don't need the money and you are interested in income-splitting with a spouse, there are other ways to do so that don't affect your longevity-insured income. 

All in all, the two reasons you've put forward for taking the pension early don't seem that compelling to me. You "want the money now" (but don't need it), and you rationalize you can income-split some of the resulting income with your spouse. If you step back and look at the whole picture, you will almost surely see that over your [expected] lifetime, the decision to take the pension early has a big and very real cost. 

Just my opinion, given that you asked...


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## kcowan (Jul 1, 2010)

I took my DB pension (non COLA) at age 49. It was purely a financial decision. IOW I did not consider it to be a life sustaining amount and had to set about gaining real financial freedom.

After 18 years, it appears to have been a great financial decision. YMMV


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## Square Root (Jan 30, 2010)

I was almost in the same position and decided to wait till 62. 6% penalty in my case.


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## the-royal-mail (Dec 11, 2009)

What will you DO if you retire right now? Any plans?


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## steve41 (Apr 18, 2009)

There is an actuarial component to these "should I take my pension/cpp early" questions. When you run the numbers, taking tax into full account, it generally works out that taking the early option will benefit your estate should you die early, and is detrimental to your estate should you make it out to a 'riper old age'.


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## MoneyGal (Apr 24, 2009)

But why would you only look at the equation of from the POV of the estate value? Surely the sustainability of the desired income stream while the person is alive is at least as important - if not much more so.

OK, I'm coming back to this, because I'm not sure how "dying early" benefits your estate if you are only looking at a DB pension and/or CPP. I am assuming you are saying this is true when the person has no surviving spouse (because otherwise the SPOUSE benefits, not the estate) - but if the person has no surviving spouse, there is no remainder from the pension, whether CPP or DB. 

Can you explain what you are talking about here? I'm very familiar with the actuarial component.


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## Bupp (Nov 13, 2009)

moneygal,

the reason your estate benefits if you take db early and die young is that you receive a greater total dollar value of payments.

To take the example to the extreme, suppose you have the choice of taking cpp at 60 or at 65 and know that you will die on you 64th birthday.

You clearly benefit by receiving the extra four years of pension payments (even though at a reduced rate).

Conversely, if you knew that you would live to 120 you would give up the payments between age 60-65 in return for higher payments between age 65-120.

it is possible to calculate the exact age at which you break even between taking the early pension or waiting.

The decision to take early reduced pension depends heavily on family medical history + your own health.


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## MoneyGal (Apr 24, 2009)

Bupp said:


> the reason your estate benefits if you take db early and die young is that you receive a greater total dollar value of payments.


No, this doesn't make any sense. Leaving aside survivor benefits (which are not estate benefits, properly constructed; they are a residual living benefit which passes to a spouse), CPP and DB pensions provide no financial legacy (i.e. "estate") value at death. 

All other factors held constant, there is no way in which to "time" the DB pension decision or the CPP decision to maximize estate benefits. 

What you are describing is a situation in which you are optimizing or maximizing the payments *received while alive*, which is what I suggested was the appropriate metric earlier on in this thread; and which occurs on the opposite end of the curve from maximizing estate benefits. 

Finally, if you take your DB and/or CPP early and do NOT die young, you will in fact maximize the total payments from the pension/CPP. Nothing about the "take early to maximize estate value" argument makes sense. 

Off to make more coffee.


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## kcowan (Jul 1, 2010)

I think we are into semantics. If I retire and take CPP at age 62, I preserve my other savings as a part of my estate (that I would spend otherwise while waiting for CPP).


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## MoneyGal (Apr 24, 2009)

Yes, which is why I said "all other factors held constant." 

If the argument depends on other factors, then these other factors must be included in the argument (i.e. "Taking a DB pension plan early can increase the expected financial legacy of a retirement income plan when the retiree has wealth in excess of [some specified value]." This actually presents a solveable problem, not a vague position which doesn't give me any ground to grapple on.


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## MoneyGal (Apr 24, 2009)

Also: that isn't what Bupp said.


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## steve41 (Apr 18, 2009)

Further to the actuarial aspect. Here is a simple example of a 59 yearold with $750K in his RRSP and full CPP and OAS expectations.

If he waits to take his CPP at 65, his 'die-broke at 95' lifestyle solves at $37,049. Which means he can live a constant 37049 aftertax/afterinflation spending level of 37049 annually before his capital just runs out. 
Should he live that same 37049 lifestyle but instead take his CPP early, at 60 instead of 65, his capital will run out at age 93.... 2 years earlier.

Here is his net worth plotted over time... for the two scenarios (CPP at 60 and CPP at 65) When to take CPP

You can see, that if he takes his CPP at 60 and makes it past age 78 (roughly) then his estate will be disadvantaged and vice versa.


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## MoneyGal (Apr 24, 2009)

OK, yes; but you must specify in your argument that the person has other assets and you assume a constant and equal withdrawal rate in both cases. 

I just think this whole argument is very poorly specified, and it doesn't actually help anyone think through this problem properly. 

In addition, I think it is much more useful to assign probability weighting to these outcomes. 

You've given me two examples, one for age 95, and one for age 93. But what is the probability that a Canadian man aged 59 will live to the age of 93 or 95? 

In both cases, it is less than 10% (closer to 5%, but I have not run the specific calculation). 

So why are you futzing around with a calculation that gives you an outcome with only a less than 10% chance of being realized? 

Seems to me this is what you are saying: IF you live to age 93, then you would be worse off than if you live to age 95: _but guess what - you have about a 5% chance of making it to EITHER age_, so why don't we focus on outcomes that have a higher chance of being realized? The 93/95 path does not lead to any useful outcomes for the planner or the retiree.


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## steve41 (Apr 18, 2009)

What I get from that comparison is that the cutoff age is 78. If he makes it past age 78, then his estate will be ahead of the game if he had waited to collect his CPP at 65. If he dies before then, then his estate will net more. Since his life expectancy is close to 82, then it appears that taking the later CPP is preferable.... to his estate. In both cases, his after tax incomes are identical.


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## MoneyGal (Apr 24, 2009)

Well...I think we are reaching the same point, but coming at this from slightly different angles and (as I have reiterated to death at this point) I think the way these kinds of questions are typically specified is not very useful. However! I suspect we mostly agree, as I've concluded before, and likely will again.


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## Bupp (Nov 13, 2009)

MoneyGal said:


> Yes, which is why I said "all other factors held constant."
> 
> If the argument depends on other factors, then these other factors must be included in the argument (i.e. "Taking a DB pension plan early can increase the expected financial legacy of a retirement income plan when the retiree has wealth in excess of [some specified value]." This actually presents a solveable problem, not a vague position which doesn't give me any ground to grapple on.


To simplify the decision let us pretend tax does not exist and that a future dollar is worth the same as a dollar today.

Since you lose 1/20th of your pension if you take it one year early You would need to die within the next 20 years to come out ahead by taking the early pension. (you start with a 19/20th's of a payment headstart, but the delayed pension catches up by 1/20th each year. If you live 21 years then you would have been better off waiting.

Of course money today is worth more than money tomorrow. So in fact the breakeven point is more than 20 years away..

Also, if you can earn a 5.25%+ return by investing the first years pension payment you will always be better off taking the early pension.


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## OhGreatGuru (May 24, 2009)

fraser said:


> Any thoughts on taking my DB pension early? My employer pension is stable so there are no issues there. I am aware of the tax implications, ie splitting etc. I am 58. I can take full DB pension at age 62. I do not need the money until age 62 but I am working on a plan that we see me start withdrawing 2-2 1/2 years early. The penalty is 5 percent/year. The DB plan has no inflation or COLA provision. I no longer work for this company. I view taking the DB early as a way to get some of that 'commuted value' without actually going whole hog. Any insights...is the 5 point penalty overshadowed by getting the money early and pension splitting with my spouse. Thanks for your insights.


This may be a non sequitor, but have you looked at taking your CPP early, but leaving your DB pension until age 62? If your DB pension has integrated benefits with CPP (and most do), it will be reduced at age 65 by an amount approximately equal to your CPP. For most people in this situation it pays them to take their CPP early.


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## fraser (May 15, 2010)

Yes, I am considering taking CPP early, at 60. I will not need the money but will invest it. 

In answer to your question, my DB pension benefits stand alone and are not integrated w/CPP.


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## kcowan (Jul 1, 2010)

My DB pension included a bridge to retirement which was an add-on to account for the CPP that they included until age 65. But I took CPP at age 62 and that had no impact on my DB pension.


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## Square Root (Jan 30, 2010)

This thread got me thinking if I should take CPP early. I checked with my previous employer and they said taking CPP early would have no impact on my DB pension-ie the decision to take CPP early stands on it's own. The pension I am expecting at age 62 has already taken CPP into account and will not go down further when I start CPP.


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## fraser (May 15, 2010)

I have reviewed my tax position and it would would not be prudent to consider an early DB until 2012. Current low interest rates and market uncertainty re-inforce this. Not sure about CPP, but that is a non issue until I reach 60-in two years. Thank you for your comments.


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