If you’re one of the 27 percent of U.S. households with a pension in place, you’ll have money you can claim once you reach a preset retirement age. Typically, you’ll have multiple pension options at 65 years of age, but what if you want to claim the money sooner? Although taking pension distributions early can help if you’re in a financial pinch, it reduces your overall benefits as well, so it’s important to get the full picture before you begin withdrawing funds.
About Collecting Pension Early
A pension, also known as a defined benefits plan, is governed by the rules set by the benefits administrator. One of those rules is the age at which you can begin taking distributions from the plan. It’s generally understood that 65 is the magic number for pension withdrawals, but some plans are set up to allow distributions as early as 55.
But an early pension cash out isn’t always the best move. The way most pension plans are designed, the longer the money remains untouched, the higher its value at the time you take it out. There are some advantages to taking distributions early, though, and those are worth considering if they fit your own circumstances.
Disadvantages of Taking Early Pension
The biggest drawback to an early pension is that it will reduce the amount you receive each month. At the age of 65, when others are enjoying a higher monthly payout, you may regret the decision to start taking payments early. Your HR team should be able to help break down how much you’ll get each month if you take it now versus waiting.
Another disadvantage of taking retirement early is that you may have far more pension options at 65 than you will at 55. At 55, you can begin taking distributions, but this will be in a monthly amount. A 65-plus distribution option will typically let you choose between a monthly payout for life or a lump-sum payment. The money will also be lower overall because of the extra years it won’t be sitting in the account.
Advantages of Taking Early Pension
The biggest advantage of taking your pension early is simply that you’ll have the money in hand now. If you’re unable to work, this extra income can come in handy today, when you need it. It’s just important to make sure you crunch the numbers and understand how much you’re reducing your monthly income for your 65-plus self.
There may be instances where collecting pension early makes good financial sense. If you’re in a financial bind and there are no other options, you could avoid a much worse situation, like defaulting on your mortgage and losing your home. However, if you’re going to reduce your pension and still end up losing the home or filing for bankruptcy, you’ll be better off leaving your pension intact.
Collecting Pension From Former Employer
When you leave an employer who offered a pension, your right to later collect that pension depends on how the plan is set up. As long as you’re fully vested at the time of separation, you’ll be entitled to that pension at a later date. Leaving that employer doesn’t allow that money to be withheld from you, but you’ll have to wait for it.
Unlike a 401(k), though, you can’t take a pension with you when you leave. This means you can’t roll it into another retirement account. You’ll have to leave it in place and when you’re ready to start taking contributions, get back in touch with your employer. If you don’t have the original documentation, you’ll need to ask the benefits administrator for details on the minimum age for distributions.
Collecting Pension From Closed Employer
If part of your pension cash out involves employers from long ago, things can get a little more complicated. When an employer is acquired or merges with another company, the legal obligation to pay you, the retiree, can be passed to the new company. This often means multiple phone calls on your end to track down the location of your plan.
But what happens if your employer completely folded years ago? In most cases, your pension is insured by the Pension Benefit Guaranty Corporation, which guarantees you at least the maximum guaranteed benefit. It’s important to check on this early, though, since your benefits may be reduced, and some smaller service providers don’t have this protection.
Pension at Full Retirement Age
Most likely, your pension plan will require you to be at least age 65 to begin taking distributions. Your pension options at 65 – or whatever full retirement age is with your benefits plan – will be much better than if you’d tried for an early retirement option. You’ll have two major options for taking your distributions: annuity or lump sum.
- Annuity payment: With an annuity, your employer crunches the numbers and determines a monthly payment amount. You’ll get a check each month for that amount for either the remainder of your life or a period of time laid out in the plan.
- Lump-sum payment: As the name implies, a lump-sum payout means you’ll get all the money at once. The idea of depositing such a check may seem appealing, but it comes at a cost. Typically, you’ll have two options with a lump-sum payment: take it as a pension cash out or have it transferred to an IRA. A lump-sum distribution means you have to pay taxes on the full amount at once. It’s also tough to resist the urge to spend it within a few years of receiving it, leaving you with nothing to fund the rest of your retirement.
Collecting Social Security Benefits Early
Your pension isn’t the only consideration if you’re planning an early retirement. Even if collecting pension early is an option for you, you still won’t get your Social Security until at least age 62. This is considered an early withdrawal, though, and will reduce your benefits a fraction of a percent for every month you claim benefits before the designated retirement age for your age group.
Unless you were born before 1943, 65 won’t even be sufficient for claiming your full benefits. Those born between 1943 and 1959 can start receiving Social Security at age 66, but everyone born in 1960 or later has to wait until the age of 67. That means you may find you’ll need every dollar of that pension you’ll get at age 65 since you won’t have Social Security as a supplement.
Age for Other Retirement Benefits
Whether through your employer or on your own, you may have non-pension retirement accounts that you’ll need to consider at retirement time. You’ll find that 59½ is the magic number where 401(k)s and IRAs are concerned. If your 401(k) was employer-sponsored and you voluntarily left between the ages of 55 and 59½, you may be able to begin taking distributions earlier.
It's important to note that you can, technically, access the funds in your 401(k) or IRA early, but it will come at a price. There is a 10 percent penalty for early withdrawals with these types of accounts, and that’s in addition to the tax hit you’ll take no matter when you withdraw. Due to this extra penalty, it’s worth considering if you really need that money early.
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