How to hedge against loss in lump sum value due to GATT rate rising?

[Texas Proud]

I'm pretty sure the mortgage intrest rate is 3% .

The dropin the jump sum is on July 2nd and I wont be able to make that decision that fast. I planned on retiring in 4 yrs then heard about the drop in lump sum for a few guys at work that decided to retire now. One problem I have is my emergency fund isn't as high as I would like it to be or to the level that my wife is comfortable with either. The calculate the lump sum using the rate in thev2nd mo of ea quarter. So come Aug I will know what it will be ea mo for the next quarter.

But if you lose about $50,000 every time the ST interest rate is raised by .25% you have another $100,000 lose coming this year and maybe $75,000 next... it really will not be that much as the losses will get smaller as you balance gets smaller, but ignoring the potential loss could be big money....


It might be more advantageous to quit, take the lump sum and get a job somewhere else... even for less money you would be ahead of the game..

 

[Sunset]

But if you lose about $50,000 every time the ST interest rate is raised by .25% you have another $100,000 lose coming this year and maybe $75,000 next... it really will not be that much as the losses will get smaller as you balance gets smaller, but ignoring the potential loss could be big money....


It might be more advantageous to quit, take the lump sum and get a job somewhere else... even for less money you would be ahead of the game..

+1
If s/he waits 4 years, s/he will OWE them money as a lump sum when s/he retires

 

[flimmy]

Well I did it , I retired yesterday.

 

[pb4uski]

Congratulations!

 

[Texas Proud]

Well I did it , I retired yesterday.

If this saved you the $51K, then that is a very smart move...


And as mentioned before, if you think you still need to work then find another job somewhere else for a few years... OR, just wait a few months and go back to your company... if they need skilled workers they probably would take you back and you still have your money...

 

[pb4uski]

So... that means... how to hedge against loss in lump sum value due to gatt rate rising = retire!

 

[gauss]

I always liked the concept of "it's not retiring, the company is just paying you a lot not to come to work". In other words you could find another job.

-gauss

 

[Helena]

Besides the better answer by braumeister .

How to hedge would be to NOT take the lump sum. I am guessing that their lumpsum is going down as interest rates go up. The idea being that the lumpsum would equate to some pension amount over X years.

That is exactly how my company pension lump sum payout worked.

.

 

[Big_Hitter]

Anybody know the current rate? I tried to look it up but April is the latest rate I can find... and it did not change much from the previous months..






2018 GATT Rates % December
November
October
September
August
July
June
May
April 3.07
March 3.09%
February 3.13%
January 2.88%

GATT is a constructed 30 year treasury rate

 

[Big_Hitter]

GATT rates were standard practice when I worked in the biz. They take your immediate monthly benefit and multiply it by the GATT rate for the month you retire. Where I worked the actuaries determined the GATT rate. Rates are so low that even a small change will make a big difference as noted above.

the minimum lump sum is equal to the benefit at NRD times a deferred annuity factor using 417e interest and mortality

 

[Big_Hitter]

I'm wondering if if any of you smart FIRE people can tell me if there is any way for a person to protect against this?

yes, take the annuity

 

[Big_Hitter]

This is why I need to find out exactly how the lump sum amount is figured out, because I seem to be losing $45k on only a $619K lump sum. This seems excessive.

the present value of your pension has a duration that actually increases when interest rates decrease, this is called convexity

when interest rates are low, a small change in interest rate can cause a large change in a present value

if you want to find out exactly how your lump sum is calculated you can try the plan administrator, or you can hire an employee benefits actuary

the theory behind using "current" interest rates to calculate lump sums is that it theoretically allows one to take the lump sum and purchase an equivalent annuity from a third party, although that seldom happens

 

[Helena]

So... that means... how to hedge against loss in lump sum value due to gatt rate rising = retire!

But what about a possible inverted yield curve ?
Interest rates are going up now... but...

.

 

[Texas Proud]

GATT is a constructed 30 year treasury rate

Constructed by what? The 30 year treasury is not changing much either... heck, going down the last 2 months..


Jan 2.98
Feb 3.13
Mar 2.97
Apr 3.11
May 3.00
Jun 2.97

 

[Big_Hitter]

Constructed by what? The 30 year treasury is not changing much either... heck, going down the last 2 months..


Jan 2.98
Feb 3.13
Mar 2.97
Apr 3.11
May 3.00
Jun 2.97

after GATT became effective for lump sump calculations, which I believe was in 97 or so, they stopped selling 30 year bonds so the rate was essentially made up until they started selling them again. that's why I said constructed

do you guys think I just make this stuff up?

 

[Texas Proud]

after GATT became effective for lump sump calculations, which I believe was in 97 or so, they stopped selling 30 year bonds so the rate was essentially made up until they started selling them again. that's why I said constructed

do you guys think I just make this stuff up?

No, just wondering how it was done... and if it is based on 30 year then why would the lump sum be going down if the interest rate is going down the last two months...


BTW, it was a bit later when they stopped and it was not that long either... from Wiki...

The U.S. Federal government suspended issuing 30-year Treasury bonds for four years from February 18, 2002 to February 9, 2006


​

Edit to add..... looks like they do a 4 month lookback at the rate... so if you keep up with it you will know when it is the best time to retire... looks pretty flat for the next few months.... but, not sure if this is for everybody...



http://hr.bpglobal.com/LifeBenefits...Interest-Table-Comm-update-current-rates.aspx

 

[Big_Hitter]

No, just wondering how it was done... and if it is based on 30 year then why would the lump sum be going down if the interest rate is going down the last two months...

depends on the lookback or stability period used to determine the rate

 

[Big_Hitter]

BTW, it was a bit later when they stopped and it was not that long either... from Wiki...

not many plan sponsors stuck with the gatt rate, but i remember that treasury stopped issuing 30 year debt during the gatt interest rate era

typically when the statutory lump sum basis is changed there is no requirement to grandfather the prior basis

 

[Winemaker]

My mega corp used the PBGC rate for lump sum for as long as I can remember.

https://www.pbgc.gov/prac/interest/vls