Q: My husband's place of business closed down two years ago. He had worked there for 30 years and is eligible to receive a pension (he's...

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Q:

My husband’s place of business closed down two years ago. He had worked there for 30 years and is eligible to receive a pension (he’s 55 years old). He’s not drawing the pension, which will increase by 5 percent for every year that he does not draw it, up until he reaches age 62.

A new company (in the same type of business) bought the building where the old business was located. My husband works for them now, making a good wage. His co-workers, many of whom also worked with him at the other business, tell him he is crazy to not be drawing his pension.

They say that he could invest it and make more than 5 percent a year. My husband doesn’t agree — he’s not convinced he could invest the pension and make more than 5 percent a year. What do you think?

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— C.C., Brainerd, Minn.


A:

Your husband should take the pension now. You can understand by walking through the math with me.

A pension is a guarantee of a lifetime income. The younger you are, the greater its value because you will receive monthly income for a longer period of time.

Suppose that your husband’s pension, were he to take it at 55, was $1,000 a month for his lifetime. If you visit www.immediateannuities.com, you will find that it would take $176,929 to buy a life annuity to yield $1,000 a month at that age.

Since he knows his pension income will grow by 5 percent a year, he would be eligible for a monthly income of $1,407 if he waits until he is 62. It would take $227,795 to buy a monthly income of $1,407 for a 62-year-old male.

By waiting, the value of his pension, seven years from now, increases by $50,866.

A more practical calculation is to ask how much he would need to have in hand to increase his $1,000 pension by $407 a month at 62. Answer: $65,894.

Can his early pension income be saved at a high enough return to accumulate that amount?

Easily. Suppose he has to pay 25 percent income taxes on his $1,000 a month pension at 55. That leaves him $750 a month to invest. If he earns no interest at all, $750 a month for 84 months will accumulate to $63,000.

If he put that money into I Savings Bonds, which currently earn 1 percent plus the rate of inflation, or 3.67 percent, it would be absolutely safe.

If inflation remained the same over the next seven years, his monthly savings would accumulate to $71,708, of which $63,000 would be after-tax money.

Bottom line: Taking the pension now is a good idea for you and your husband. It will increase your personal security and flexibility over the next seven years. It will increase the sources of your final retirement income. And it will increase your retirement income.

The same exercise could have different results for other people.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.