Will Your Pension Change Due To Rising Interest Rates?
Some retirees may be surprised to learn how rising interest rates may affect their pensions. It’s no surprise that over the past year, the Federal Reserve has been increasing interest rates in an effort to combat inflation – but what may be surprising to seniors is how their pension is impacted.
Rising Interest Rates and Lump-Sum Pensions.
When interest rates go up, lump sum pension buyouts decrease significantly. While you are working, your income and the number of years you’ve been employed affect your lump sum pension payout, interest rates are also taken into account. Your life expectancy is one of the things that insurance companies use actuarial and mortality tables to determine, just like they would for a mortality calculation.
The IRS’s Minimum Present Value Segment Rates are used to calculate the interest portion of this equation, and those rates are updated monthly by the IRS. When interest rates are low, lump-sum offers are typically higher. When interest rates are high, lump-sum offers are negatively impacted, leading to lower offers.
Interest rates may play a role in determining the timing of your retirement.
The jump in interest rates could have a big effect on when you retire if you are relying on a lump sum pension. Because rates at the end of the year are calculated using earlier months’ data, you may be able to retire with a larger lump sum. However, if you don’t retire for a while, your lump sum will shrink as rates increase and your offer will be based on the previous, higher rates. Because November is when most plans change rates, you might be able to get your offer based on old, lower rates – but you must check with your company to see when they compute the amount.
It’s best to consult a financial professional if you’re unsure about when to take your pension, or if you need to move your retirement date. Your plan’s unique characteristics and options can be deciphered based on your situation.