Could You Bust Your Own Pension?
Forget United Airlines. The Real Risk To Your Retirement Security Might Be You.
By Walter Updegrave

(MONEY Magazine) – If you're one of the 23 million or so people who work for a company with a traditional pension--that is, a plan that gives you a monthly check based on your salary and number of years of service--you may think the main threat to your retirement is your company defaulting on its promise to pay. That's what bankrupt United Airlines did in May.

The odds of that happening to you aren't very high, however. The plans most at risk of default are those in struggling industries, such as airlines, autos and car parts. And even if your company should go bankrupt and renege on its promises, the federal Pension Benefit Guaranty Corp. will pay your pension up to certain limits.

But there is a threat to your pension that you may have overlooked. Namely, you could cost yourself hundreds or even thousands of dollars a month for the rest of your life by making a poorly timed exit from your job.

This risk is greatest if your company's pension has special early-retirement provisions that can trigger a huge spike in your payout once you've put in enough years at your company (usually 20) and have reached a certain age (typically 55 or 60). Sometimes the rise in benefits is so dramatic that it's referred to in actuarial circles as the "hockey stick" effect because the steep trajectory resembles the shaft of a hockey stick angling up from the blade.

For example, a 58-year-old who earns a little more than $100,000 a year and leaves her job with just over 20 years of service might be eligible for pension payments of slightly less than $33,000 a year that would start when she reached age 65. Typically, she would also have the option of taking that pension immediately, but the payment would be reduced to about $21,000 to reflect the fact that she'd be collecting her payments for an additional seven years. (See the chart.)

» EARLY RETIREMENT But let's say her plan has a provision that allows her to begin drawing her full age-65 benefit without any reduction as long as she works to age 60. By staying on the job to that age, this person might qualify for a lifetime pension of just under $39,000 a year, instead of the $21,000 she would have gotten had she left at 58. That means she would increase the size of her pension more than 80% by staying only two more years.

Put another way, had she left at 58, she would have given up roughly $18,000 a year for the rest of her life. Says Michael Archer, an actuary with pension consultant Towers Perrin: "If your plan has one of these provisions, leaving soon before that extra benefit kicks in usually isn't a wise decision."

Of course, plans that have early-retirement subsidies aren't always so generous. If anything, companies have been scaling back such inducements lately in an attempt to hold on to experienced workers. But even if your plan doesn't have such a provision, staying a few more years at your job can still make sense since the combination of a higher salary and extra years of service can significantly boost your pension.

» BEFORE YOU LEAVE Be sure to find out how your exit will affect the benefits you'll receive. You can start by reviewing what's called the summary plan description, a document available from your company's human-resources department that spells out the details of your plan, including any big bumps up in payments.

Some firms will also provide projections of the amount you might receive at various ages and numbers of years of service. Or you can hire a financial planner to crunch the numbers for a variety of different scenarios, including whether the pay and benefits at a new job would compensate you for what you give up.

Just make sure you do this before you quit. The last thing you want to do in your retirement is spend your time thinking how much better off you would be if only you hadn't shortchanged yourself on your pension.