Rising Rates Pushing Early Retirement Age 'Works Against' Those with Lump Sum Payouts

By Grant, Tim | Pittsburgh Post-Gazette (Pittsburgh, PA), September 20, 2013 | Go to article overview

Rising Rates Pushing Early Retirement Age 'Works Against' Those with Lump Sum Payouts


Grant, Tim, Pittsburgh Post-Gazette (Pittsburgh, PA)


Workers with pension plans that offer a lump sum payout watched their balances grow as low interest rates helped push up bond prices over the last few years. Now that the pendulum is swinging in the other direction, those same workers are starting to see the cash value of their pension lump sum fall.

"This is one more way rising interest rates will affect people in ways they don't even realize," said Bob Hapanowicz, president of H&A Wealth Advisors, Downtown. "We are at the beginning of what many think could be a pretty sizable increase in rates over the next few years.

"While interest rates are low, a lump sum payout can be more attractive than a monthly annuity payment from a Fortune 500 company," he said. "But if interest rates go up to 5, 6 or 7 percent, the monthly annuity payment can look a lot more attractive than a lump sum payout."

Interest rates are a major factor in determining the value of a pension lump sum payment because it affects the projected value of future annuity payments. With rates still near historic lows but expected to rise, workers who are close to retirement with a defined benefit pension plan should take a hard look at how their lump sum payout will be affected if rates go higher.

They may wish to retire sooner or choose to take the lifetime monthly annuity payment instead of the lump sum.

Mr. Hapanowicz said one of his clients, a 62-year-old female who has worked for a company for 40 years, stands to lose $90,000 in her lump sum payout if she stays on the job another year due to her age and due to higher interest rate projections being used by the Pension Benefit Guaranty Corp., a federal government agency that oversees pension plans.

After age 60, a worker's age begins to work against them in the lump sum payment calculation because it is based partly on life expectancy. As life expectancy decreases, so does the lump sum amount.

While the 62-year-old worker could opt to receive a monthly annuity of $3,724 a month for life, her lump sum payout in September 2013 is $742,000. By September 2014, it is estimated to be about $652,000. If she waits even another month, Mr. Hapanowicz estimates it will cost her about $48,000 in lump sum payments.

"If she's thinking about retiring this year, she's probably going this month," Mr. Hapanowicz said. "Rising interest rates are causing her to evaluate very closely her options and her retirement plans. …

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