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Pension Alert! That Lump Sum Estimate Is About To Go Down!

Pension Alert! That Lump Sum Estimate Is About To Go Down!

September 16, 2022
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For a number of Americans, having access to a qualified pension plan has been the golden meal ticket to retirement. Whether you're a county, state or private company employee, having a pension was your reward for sticking with the company. And if things go as planned (which they almost never do), you received guaranteed income for the rest of your life. 

With a pension, every year you receive a pension estimate. It would tell you two things: your monthly estimated payout at "normal retirement" age (generally 65) and a lump sum payout estimate if you decided to take your money and run. As an advisor the decision depends on the financial circumstances of the individual or family beyond the pension. In essence, there is no general "rule of thumb" when it comes to taking your pension. 

Lump sum payout estimates are based on assumed interest rates. The actuaries who calculate these estimates use IRS published rates, life expectancy tables and your wages to determine a number. That number, theoretically would last you the rest of your life expectancy. It's just like the lottery: lump-sum or annual payouts?

Here's where it gets tricky and why it may get ugly.

Those IRS-published interest rates are based on corporate bond yields at the time. Corporate bond yields are reactionary to Federal Funds rates. In the last decade or so, interest rates have been historically low. That translates to a high lump-sum estimate (a lower assumed rate means it takes more money). That's a good thing for employees! 

Now that the Federal Reserve has been aggressively raising interest rates, the yield curve is following suit. Guess what happens next? The IRS published rates are going up as well. Before you get excited, that is NOT a good thing. A higher assumed interest rates means it takes LESS money to accomplish the same. This is advantageous to the company and disadvantageous to the employee. Now factor in rising inflation and you can see where this is going!

Over the next year, lump sum estimates are about to go down. This only applies to people who have not yet retired. If you're retired and taking or took your pension, you're good. 

If you or someone you know is near retirement and have a pension, it's time to consider your options before it's too late. It doesn't mean you have to act today but it may affect your decision to wait just a few more years hoping for that extra bump. 

Click here to schedule a call with me so we can discuss your options. And please forward this email to friends, family, co-workers or colleagues especially anyone who is near retirement. They may not have a pension but they might know someone who does.