Pension at these interest rates?

[Finance Dave]

We are both FIRE'd...I'm 61 and she's 64. We have enough liquid funds to live off, so don't "need" any additional money at this time.

A small portion of our retirement is a defined contribution Pension plan from a Fortune 500 company (it's about 10% of our overall savings). I was planning to wait until the latest date they will let me take this (age 65), and then annuitize it so that we have another "chunk" of income that will be there "forever" (in addition to SS).

But, the company website allows me to do projections of income based on the current balance and it has a note about the projections...

"Your benefit and forms of payment have been calculated using current interest rates. Interest rates are subject to change quarterly after they released by the IRS. The benefit amount you actually recieve will be based on the interest rate in effect for your Benefit Commencement Date per the terms of the Plan. (Note: Carefully consider the impact of interest rate changes when choosing your payment start date and form of payment especially if your payment start date is more than 60 days in the future.) "

I check the projection every 6 months or so to see how it moves with rates, and usually the change is very minor. But I checked today and the monthly amount went up $50/month...the largest jump I've seen. I've also done comparisons on other annuity websites, and it seems my company gives better rates...the monthly amount my company would pay is always higher than what I can see elsewhere.

Based on this, I'm wondering if I should/can somehow lock this in now given the higher rates. I'd have to talk with the benefits group, but I'm assuming that to get these higher rates "locked in", I'd have to start taking the annuity now. As I said, don't really need the money now, but could reinvest it.

Of course another option is to take the lump sum, but as I said...locking this annuity in (non-COLA'd) along with a COLA'd SS for both of us (both of us were relatively high earners) would mean that all our basic living expenses would be covered by annuities, and the rest of our savings would be available for "fun" things.

Thoughts?

 

[RobbieB]

Well, do you see interest rates rising in the future? If so then wait. If not, sign up now.

 

[oldtimer]

Compare it against numbers at www.immediateannuities.com to confirm your plan has the best rates.

 

[Finance Dave]

Compare it against numbers at www.immediateannuities.com to confirm your plan has the best rates.

Already did that as I mentioned in my original post...my company's plan has better rates.

 

[Sunset]

Too early, interest rates have not finished rising. How does your age affect the pension, check the documents as some pensions don't increase based on age. Meaning a person at age 60 get $X , if they wait until 65 they still get $X. In that case it's better to take it early.

 

[CRLLS]

I am a bit confused. You mentioned a "defined contribution plan". If so, then the quarterly estimate suggests it might be that they will "annuitize" it on an adjustable 3 month rolling interest rate. Not having had a DC plan, I have not heard of this method of withdrawal options before.

Could you not roll it over into an IRA and purchase an IRA annuity? That should lock in the current interest rates, no?

 

[jim584672]

I have a DB plan, the annuity amount always stays the same, the lump sum amount changes with interest rates. I have never heard of the annuity changing with interest rates.

 

[CRLLS]

The difference is a DC plan vs a DB plan. Reading a bit closer, I agree with you, the OP said:

Interest rates are subject to change quarterly after they released by the IRS. The benefit amount you actually recieve will be based on the interest rate in effect for your Benefit Commencement Date per the terms of the Plan.

That last sentence would imply that they assume the benefit is annuitized at a fixed rate throughout the payout period (life). Certainly, there must be other options and this is only one example. Could he not take a lump sum and open a "deferred" annuity to lock up the current interest rate and start the disbursement starting later?

 

[Omega]

The lump-sum payout is less when interest rates go up. The annuity basically stays the same.

 

[CRLLS]

The lump-sum payout is less when interest rates go up. The annuity basically stays the same.

This is true for a Defined Benefit (DB) plan. OP said his was a Defined Contribution (DC)plan. The value of the lump sum of a DC plan is fixed. The amount of an annuitized plan will change with interest rate changes.

 

[Finance Dave]

Too early, interest rates have not finished rising. How does your age affect the pension, check the documents as some pensions don't increase based on age. Meaning a person at age 60 get $X , if they wait until 65 they still get $X. In that case it's better to take it early.

Mine increases only to the extent that a) the lump sum grows (albeit by a tiny amount via accrued interest) b) Taking payments for a shorter period causes the monthly amount to increase...but yes it changes based on age taken...up to age 65

I am a bit confused. You mentioned a "defined contribution plan". If so, then the quarterly estimate suggests it might be that they will "annuitize" it on an adjustable 3 month rolling interest rate. Not having had a DC plan, I have not heard of this method of withdrawal options before.

Could you not roll it over into an IRA and purchase an IRA annuity? That should lock in the current interest rates, no?

Yes, I could roll into an IRA and purchase an annuity...I mentioned this, but the rates my company offers look more competitive.

I have a DB plan, the annuity amount always stays the same, the lump sum amount changes with interest rates. I have never heard of the annuity changing with interest rates.

See the comment I posted from the benefits website.

The difference is a DC plan vs a DB plan. Reading a bit closer, I agree with you, the OP said:


That last sentence would imply that they assume the benefit is annuitized at a fixed rate throughout the payout period (life). Certainly, there must be other options and this is only one example. Could he not take a lump sum and open a "deferred" annuity to lock up the current interest rate and start the disbursement starting later?

There are two "basic" options: 1) Lump sum 2) Annuity. But there are about 8 different forms of the annuity, such as 25% survivor, 50% survivor, 50% survivor with pop-up, etc. All slight variations but essentially similar. I've been using the 50/50 joint/survivor annuity with pop-up as the standard.

This is true for a Defined Benefit (DB) plan. OP said his was a Defined Contribution (DC)plan. The value of the lump sum of a DC plan is fixed. The amount of an annuitized plan will change with interest rate changes.

ok, so let me describe the plan...it is described in the SPD as a "DC" plan, although at the company they refer to it as a "cash balance" plan. While working, the company contributes a percentage of your pay to the plan. This balance builds, and earns interest. While employed, it earns prime rate + 1/2%. Once separated from employment, it earns prime - 1/2%. The risk of future payments changing is minimal, as they have reserved for the lump sum on their balance sheet.

Hope that helps, any additional feedback knowing this? One of you said rates are not done going up...but I don't want to wait too long and have them drop a lot...maybe wait another bit to see if the next "quarterly" rate changes things? I guess I could call the administrator and ask them the date on which the new quarterly rate is applied?

I did not contribute anything to this plan, it was all by my employer. I was not able to choose the investment though...it's just the interest rate +/- 1/2% as I mentioned.

Here is an excerpt from a web article that may clarify more...

"A Cash Balance Plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC)."

 

[Finance Dave]

Ok, I've done some additional research. I still think I need to do a bit more.

The annuity amounts DO change with interest rates, but it's not as simple as one rate.

I can post more quotes from the documents on the company's website later...but the site is broken right now. But I do have this text...

"The IRA requires that a series of interest rates known as "segment rates" be used in the conversion of any monthly annuity benefit to a lump sum value, or from any lump sum value to a monthly annuity. The IRS updates segment rates monthly."

Seg1 - Values plan benefits for years 0-5 from BCD (Benefit Commencement Date)
Seg2 - Values plan benefits for years 6-20 from BCD
Seg3 - plan benefits for years >20 from BCD

I also found this website:
https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates

So I did a "projection" with the company calculator, and then I noted the segment rates my company used:
Seg1 - 3.64%
Seg2 - 4.80%
Seg3 - 4.78%

If you look at the IRS link above, those rates correspond to June 2022. I THINK it said somewhere on my company's website that they change the segment rates quarterly even though the IRS updates them monthly...so I'm thinking they may update them soon. If so, I'm wondering whether my annuity amount will go up.

I requested an "appointment" with the benefits group, now scheduled for next Wednesday, so hopefully during that call I can get firm answers.

Any other input welcome.

 

[target2019]

Take the monthly pension payment, and invest what you don't need into your own lump sum plan.

 

[single2019]

Impact of Minimum Segment Rates

At my (ex) Megacorp, annuity doesn’t change with the interest rates, but the lump some does. They use the November rates. A lot of people are leaving NOW to be able to utilize the Nov 21 rates. Recently IRS published the September 22 rates. They are likely to be higher in Nov 22. My colleagues are looking at a 30% reduction if they leave next year.

https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates

 

[Finance Dave]

At my (ex) Megacorp, annuity doesn’t change with the interest rates, but the lump some does. They use the November rates. A lot of people are leaving NOW to be able to utilize the Nov 21 rates. Recently IRS published the September 22 rates. They are likely to be higher in Nov 22. My colleagues are looking at a 30% reduction if they leave next year.

https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates

That's what I'm thinking, that they will improve. Our company updates quarterly, so I need to find out when that is. It's looking like the smart thing to do is go ahead and take the annuity now/soon at these higher rates, and simply reinvest the proceeds since we don't need them to live on.

We are so thankful that we planned well for retirement and saved hard, and are now in a position where we have enough funds that things like this are not critical to keep food in our mouths.

 

[2HOTinPHX]

Interesting timing on this thread. I was just reading article below on Why you might want to retire soon if you have a pension. Basically due to rising interest rates lump sum benefits would decline. Example in the article shows 500K declining to 337K, about 163K lower. That's a huge hit. That's slightly more than 30%. Not sure how or where the calculations are coming from? Can any one explain in simple terms?

I was planning on hanging it up towards the end of this year or early next year. Just waiting to see if things were turning around or perhaps a company downsize due to slow down. I have a small lump sum benefit of 31K I was planning on taking. 30% hit on that would be like 9K if I am reading things right? That might be enough to hang it up now and avoid waiting any longer. It's not a huge amount but it feels like another slap in the face like when they froze our pensions back many years ago. It feels like I would be working the next couple
months for free..

https://ofdollarsanddata.com/why-you-might-want-to-retire-soon-if-you-have-a-pension/

 

[2HOTinPHX]

Interesting timing on this thread. I was just reading article below on Why you might want to retire soon if you have a pension. Basically due to rising interest rates lump sum benefits would decline. Example in the article shows 500K declining to 337K, about 163K lower. That's a huge hit. That's slightly more than 30%. Not sure how or where the calculations are coming from? Can any one explain in simple terms?

I was planning on hanging it up towards the end of this year or early next year. Just waiting to see if things were turning around or perhaps a company downsize due to slow down. I have a small lump sum benefit of 31K I was planning on taking. 30% hit on that would be like 9K if I am reading things right? That might be enough to hang it up now and avoid waiting any longer. It's not a huge amount but it feels like another slap in the face like when they froze our pensions back many years ago. It feels like I would be working the next couple
months for free..

https://ofdollarsanddata.com/why-you-might-want-to-retire-soon-if-you-have-a-pension/

So this explains how we lose lump sum dollars.....
Interest Rate: Threat and Opportunity. Because of the mathematics, interest rates have a major effect on a lump sum calculation, particularly considering the rising rate environment. The mathematics of lump sums are a present value calculation, meaning the lump sum is the present value of a stream of payments at an interest rate for a period of time. Think of a mortgage – a mortgage loan is the present value of the payments. A $3,000 monthly mortgage payment on a 3%, 30-year mortgage would sustain a mortgage loan of $711,518. If the rate was 5%, the amount of a mortgage loan would be $558,845. If these were pension lump sums, the higher interest rate causes the lump sum to decrease substantially (by over 21%).
https://www.forbes.com/sites/leonla...mp-sums-timing-is-everything/?sh=67a5d5926bf5

 

[Finance Dave]

Interesting timing on this thread. I was just reading article below on Why you might want to retire soon if you have a pension. Basically due to rising interest rates lump sum benefits would decline. Example in the article shows 500K declining to 337K, about 163K lower. That's a huge hit. That's slightly more than 30%. Not sure how or where the calculations are coming from? Can any one explain in simple terms?

I was planning on hanging it up towards the end of this year or early next year. Just waiting to see if things were turning around or perhaps a company downsize due to slow down. I have a small lump sum benefit of 31K I was planning on taking. 30% hit on that would be like 9K if I am reading things right? That might be enough to hang it up now and avoid waiting any longer. It's not a huge amount but it feels like another slap in the face like when they froze our pensions back many years ago. It feels like I would be working the next couple
months for free..

https://ofdollarsanddata.com/why-you-might-want-to-retire-soon-if-you-have-a-pension/

Yes I can tell you where the calculations are coming from…a present value calculator such as this one.

https://www.calculator.net/present-...additionat1=end&x=97&y=17#periodical-deposits

In your case, you have a defined benefit plan that pays monthly, so they are calculating the present value of those payments over 30 years.

In my case, it’s the opposite…I have a lump sum in a trust, and they are using interest rates to calculate the annuity payments. Therefore, my situation is exactly opposite…my annuity goes UP as rates increase.

 

[Big_Hitter]

Can any one explain in simple terms?

the present value of annuity payments decrease when interest rates increase

section 417e of the IRC requires that qualified pension plans use "applicable" interest rates and the "applicable" mortality table to calculate present values of decreasing (including single sum) annuity payments

the applicable interest rates are based on corporate bond yields for a month ending as specified by the plan document - these interest rates must be updated at least annually

the applicable mortality table is a blended, statutory table that is updated annually, with generally small impact

 

[Big_Hitter]

In your case, you have a defined benefit plan that pays monthly, so they are calculating the present value of those payments over 30 years.

lump sums are calculated on the whole of life, not a fixed period

 

[Big_Hitter]

Take the monthly pension payment, and invest what you don't need into your own lump sum plan.

correct - I started my mega at 55 and have used it to immunize my mortgage, both non-colad

 

[Finance Dave]

lump sums are calculated on the whole of life, not a fixed period

Yes, thus the segment rates…I get that.

 

[Big_Hitter]

Yes, thus the segment rates…I get that.

the present value calculation is a mathematical expectation that discounts payments that are expected to be made, until you die

the calculation assumes a little piece of you dies each year, until you are 100% dead and your expected payment is $0. That can be age 100, 110, 120 or whatever the end of the mortality table specifies.

 

[Rianne]

"There are two "basic" options: 1) Lump sum 2) Annuity. But there are about 8 different forms of the annuity, such as 25% survivor, 50% survivor, 50% survivor with pop-up, etc. All slight variations but essentially similar. I've been using the 50/50 joint/survivor annuity with pop-up as the standard."

We were offered almost exactly the same scenario. Lump sum > $500K. Because the interest rates are what they are, we took the lump sum payable early next year. Going into the tIRA, at the highest 5, maybe 10-year treasury. The rest of our portfolio will carry us through til 90 yrs. old or so.

 

[Chuckanut]

From an article in the 11/01/2022 WSJ:

Wall Street Journal

The Math Is Changing On Pension Lump Sums

As usual the article is behind a paywall so here are some quotes....

Many pick the lump sum, and those payout amounts have generally increased in recent years. But now, as interest rates rise, lump-sum payouts are dropping by as much as 30%, financial advisers say, sparking a wave of early retirements.

Unfortunately for those nearing retirement, lump-sum payouts fall, because they are calculated based on what future benefits cost today. Monthly pension checks don’t change with interest rates.

The situation has created a dilemma for employees: retire soon to lock in a lump sum, or remain on the job and risk reduced payouts if interest rates continue to rise.

He said his clients may instead use some or all of their lump sum to purchase an annuity. At current interest rates, an immediate annuity would pay the couple about $2,600 a month, versus $2,150 for the pension. The gap between the annuity and monthly pension payment is likely to narrow once the client’s pension plan updates the lump sums, and payouts decline.