Deciding When to Take Retirement Benefits

Because in a defined benefit plan, the benefit relates directly to the number of years you work for a company, the longer you work there, the greater the benefit during retirement.

The cost of early retirement on your pension throughout the rest of your life is something to consider as you make a decision about when to retire. When you reach the age of 50,your company may try to lure you into early retirement by offering incentives to retire. Consider your options carefully. In a defined benefit plan, early retirement lessens the years of service and may significantly reduce the amount of your lifetime fixed pension.

If you take early retirement, you’ll probably need to have an aggressive retirement savings and investment plan in operation to cover the difference between the lower fixed retirement benefit from your company and the amount of retirement income you need to maintain your lifestyle.

If you plan to take early retirement from your company with the defined benefit program and anticipate taking another job, consider this: Depending on how many years you work at the new company and how long getting vested in its system takes, the benefits of the move may not equal the benefit you would experience if you stayed with your previous company the same number of years you plan to work for the new company.

We can compare the high cost of taking early retirement for those with a defined benefit plan. This table assumes that the employee’s average salary for the five years preceding retirement is $40,000 at age 55 and grows with a 5 percent pay increase each year thereafter.

Actual figures for your situation change with salary changes and rates of pay increases and the formulas that determine the fixed retirement benefit. But a careful look at these typical figures suggest that if you are 60 and stay on the job for another five years, you can just about double the amount of your fixed retirement pension.