One factor of retirement planning that may often go unnoticed is interest rates. The highs and lows of Interest rates can have a huge effect on your pension. Before you make any major decision concerning your pension, learn how interest rates can help or hurt your payout amount.
In recent years, people with pension plans that have an option to take the lump sum have seen the amount grow significantly because of low interest rates. Interest rates influence the value of a lump sum because it affects the value of the annuity payments.
If interest rates are low, a lump sum pay out looks rewarding, even better than an annuity from a big company. In short, when interest rates are high, lump sums shrink. If they are low, lump sums grow.
Because of this, some choose to retire early when they see the interest rates begin to creep up. This may not be a bad idea if one is close to retirement age with a low chance of being able to see interest rates lower again.1
In the current interest rate environment, generally, every one percentage point rise in interest rate reduces a lump sum’s value by 10% to 15%. For example, if your lump sum payout is $500,000, a one percentage point rise in interest rates could lower the amount by $75,000. Also, typically every $1 of pension income translates to about $140 of lump sum payment. If your monthly pension payout is about $1,500 a month, your lump-sum would be about $210,000.2
Something else to keep in mind: plans that offer lump sum distributions usually reset the rate they use at different times throughout the year. If a worker wants to retire in a certain month, some companies will look back one to three months to calculate the rate. Other companies use different tactics for calculating the rate. To find out specific details about your company’s rate, consult with your company’s HR representative.
Before running off with your lump sum early because of low interest rates, there are many other things to consider than just the sum amount. Consider what company benefits you will be giving up and if you will need those in the near future. Keep in mind when you’re eligible for full social security benefits and if you’re willing to live with reduced benefits by retiring early.3
Interest rates affect so many different parts of finance but it’s extremely important to factor in how they will affect your retirement. Figuring out how they will affect your plans isn’t always easy but you don’t have to do it alone. Our team of financial architects can help you figure out how interest rates are affecting your pension and guide you on what action you should take.
FOR MORE INFORMATION REGARDING INTEREST RATES AND YOUR PENSION CONTACT MIRAMONTES CAPITAL.
1 Grant, T. “Rising Rates Pushing Early Retirement.” Pittsburgh Post-Gazette.
2 Opdyke, J.D. “How the Fed’s Moves Affect Your Pension.” Wall Street Journal.
3 Opdyke, J.D. “How the Fed’s Moves Affect Your Pension.” Wall Street Journal.
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