Financial Q&A: The consequences of drawing on pensions at an early age

Submit your question to Steve Dinnen at: money@csmonitor.com

Q: I was downsized this summer. I'll soon be 50 and am looking for a new job. I have a pension from my previous employer. Is it better to leave the pension where it is until I'm older or is it better to begin receiving pension payments at a smaller amount? How can I find out if it's insured?

D.C., via e-mail

A: When you start collecting your pension, part or all of that money will be taxable income to you. If your employer contributed all of the money without including the cost in your taxable wages, the amount will be fully taxable, notes Susan Moore, a certified financial planner in Watertown, Mass.

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After you find a new job, you may not want to receive that pension payment, especially if it puts you in a higher tax bracket than you'll be in when you retire. For example, if pension payments push you into the 25 percent tax bracket now, but you expect to be in the 15 percent bracket after you retire, you'll lose more of your pension payments to taxes by starting the payments early.

While you could start the pension now and invest it for retirement, consider that it may take a fairly aggressive (i.e., risky) portfolio to break even with what you would have had if you started payments at retirement. If you consider that part of your payment will be consumed by taxes, you would need to make up for that tax loss by investing more aggressively. That means more risk, and if that risk didn't pay off, you could end up with less than you would have by taking the payments at retirement.

Ask your employer for your pension's "summary plan description" to determine if it is insured by the Pension Benefit Guaranty Corp., The PBGC is a federal agency that protects benefits in private-sector pensions known as defined-benefit plans.

Although PBGC insures most of these plans, some are not covered. For example, plans offered by "professional service employers" (such as doctors and lawyers) with fewer than 26 employees, church groups, or by federal, state, or local governments usually are not insured.

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