When you retire, your working life ends. But if you’ve been a member of a company pension plan your entire career, that doesn’t mean the money stops flowing. In fact, if you’re a part of an employer-sponsored retirement savings plan called a pension, then cash can continue to flow even after you stop working.
That means taking advantage of this financial perk before retirement is essential. After all, when it comes time to collect Social Security benefits and draw down your pension funds in retirement, it could make all the difference in terms of quality of life.
Fortunately, there are multiple ways to access funds from your pension before retiring. Let’s take a look at what that means for you and how much control you have over withdrawing money from your pension as early as possible in your retirement planning journey.
What is a Pension?
Simply put, a pension plan is a retirement savings plan that your employer contributes to regularly, either as a percentage of your salary or as an annual salary deduction. Depending on your job, you may have access to a company pension or an individual one.
A pension plan is an important financial tool that can boost your retirement savings. When you retire, your working life ends. But if you’ve been a member of a company pension plan your entire career, then cash can continue to flow even after you stop working.
That means taking advantage of this financial perk before retiring is essential. After all, when it comes time to collect Social Security benefits and draw down your pension funds in retirement, it could make all the difference in terms of quality of life.
How to Withdraw Funds from Your Pension Before Retirement
There are two ways to access funds from your pension before retirement. The first is a lump-sum withdrawal, which involves withdrawing a single large amount from your pension.
With a lump-sum withdrawal, you can withdraw funds from your pension immediately, and if you take a lump sum from your plan, you’ll have no income coming in. If you have a small pension with a small amount available, a lump-sum withdrawal may make sense.
You’ll pay income taxes on the amount withdrawn and you’ll lose any income that would have been received over the next few years. However, a lump-sum withdrawal also has its disadvantages.
For example, if there is a market decline at the time of withdrawal, then you could lose a lot of money. And, if you need access to funds quickly and are forced to withdraw a large lump sum, then it could be difficult to access funds again in the future.
The second way to withdraw funds from your pension is through a series of regular withdrawals over a few years. With a series of small withdrawals, you can withdraw smaller amounts from your pension over time.
The Pros and Cons of Withdrawing Funds From Your Pension
There are a few pros and cons to every method. With a lump-sum withdrawal, you’ll pay income taxes on the amount withdrawn and you’ll lose any income that would have been received over the next few years.
If you have a small amount available, a lump-sum withdrawal may make sense. You’ll pay income taxes on the amount withdrawn and you’ll lose any income that would have been received over the next few years.
And with a lump-sum withdrawal, if the market declines at the time of withdrawal, then you could lose a lot of money.
If withdrawal happens shortly before retirement, you may also miss out on tax-deferred compounding if you withdraw a large amount.
6 Things to Know Before You Withdraw Funds From Your Pension
- You must be at least 59 years old to make a withdrawal from your pension.
- You must take your withdrawals from your pension in order.
- You have a few years before you’ll be eligible to make withdrawals from your own Social Security benefits.
- You can withdraw $72,000 from your pension on a single-person plan and $117,000 on a joint-and-survivor plan.
- There are income taxes and penalties that may apply if you withdraw funds without a legitimate reason.
- You can always change your mind and withdraw more at any time.
Conclusion
With the right planning, you can take money from your pension as early as 55. And while getting as much as possible out of your pension may be tempting, you should also consider how it could affect you financially in the future.
There are significant penalties and taxes that come with withdrawing funds from a pension and before you do it, you’ll want to weigh both the pros and cons. At the end of the day, you have to decide if withdrawing funds from your pension is worth the risk.