Early retirement reduction: what retiring early costs

Most defined benefit pension plans let you retire before the date you qualify for a full pension. If you do, the plan lowers your pension for life. That lowering is called an early retirement reduction.

Your unreduced date

Every plan has a rule for when you can retire with no reduction. This is your unreduced retirement date. Common rules are:

• An age, such as 65.
• A points rule: your age plus your years of service reach a number, such as 85. Some plans call this a factor, as in "the 85 factor".
• A service rule: a set number of years of service.

Many plans use more than one rule, and you qualify on the earliest date you meet any of them. Your annual statement or plan booklet says which rules apply to you.

How the reduction works

If you retire before your unreduced date, the plan pays your pension for more years, so it pays less each year. Plans set the reduction in one of two ways:

• A percentage for each year or month you are early. For example, a plan might take 3% off for each year. In that example, retiring four years early lowers the pension by 12%.
• A table of amounts. Some plans don't use a simple percentage. They quote the reduced pension for each retirement date instead.

Plans also differ in where they count from. Some count from a set age, and others count from the date you would have met a points rule. This can change the answer by a lot, so check your plan's wording.

The cost is more than the reduction

Retiring early usually lowers your pension in two ways:

1. Less service. Your pension is built on your years of service. Stop sooner and you have fewer years.
2. The reduction. The percentage comes off the smaller pension.

The reduction is permanent in most plans. It does not go away when you reach your unreduced date.

What early retirement gives you

A lower pension is not the whole picture. Retiring early also means you collect a pension for more years, and many plans add a bridge benefit until 65. Whether that trade suits you depends on your own situation, and this page can't answer that for you.

What to look for on your statement

• Your unreduced retirement date, and the rule that sets it.
• Your pension at that date.
• The early retirement reduction, as a percentage or as amounts for each date.
• Whether there is a bridge benefit, and when it ends.