Why Pension Recipients Are Thinking About Early Retirement
Rising interest rates have an inverse relationship with pension values. Find out why you may want to consider early retirement.
If you’re one of the lucky individuals with a pension—or know someone who is—you need to read this article.
Consider that while many Americans are focused on how rising interest rates are impacting their mortgages, bond portfolios or the markets in general, those with pensions may want to consider retiring early. Why? It’s simple.
Rising interest rates have the same inverse relationship with lump sum pension values that they have with current bond values. And with today’s rising rates, the value of your pension could be reduced significantly.1
The ABCs of pensions
Pensions typically offer retirees two options—receiving a one-time lump sum payment or monthly annuity payments that can provide a steady lifetime stream of income.
Many retirees select lump sum payments with the plan to have their Wealth Advisor manage the assets. But did you know that even a 1% increase in interest rates could cause a 10% reduction in the value of your lump sum payout?2 It’s true. When you consider the velocity of interest rate increases in 2022, future pension recipients would be wise to re-run their calculations and see if their lump sum value has declined by single or double digits.
The good news
Many companies have not yet factored higher interest rates into their pension formulas for 2022 but are planning the adjustment beginning January 2023. So, if you act quickly, you may still be able to collect the current value of your pension.
What to consider
Now, perhaps you are thinking of selecting the monthly annuity payment option. You should know, however, that while interest rates may not affect these payments, inflation does—eating away at the value of your payment over time (and inflation is at a 40-year high right now).3 So, this choice may not work out any better than the lump sum option.
Before making any decisions, you may want to consider:
Asking your company | Asking yourself and your Wealth Advisor |
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While retiring now may not have been in your immediate plans, perhaps it should be. Contact your CI Private Wealth Advisor to discuss what might be the best option for you.
1 https://www.kiplinger.com/retirement/rising-interest-rates-change-pensions-for-some-retirees#:~:text=Rising%20interest%20rates%20have%20an,holder's%20lump%20sum%20could%20decrease
2 https://www.kiplinger.com/retirement/rising-interest-rates-change-pensions-for-some-retirees#:~:text=Rising%20interest%20rates%20have%20an,holder's%20lump%20sum%20could%20decrease
3 https://www.bloomberg.com/news/articles/2022-10-13/core-us-inflation-rises-to-40-year-high-securing-big-fed-hike#:~:text=A%20closely%20watched%20measure%20of,to%20stamp%20out%20persistent%20inflation
ABOUT THE AUTHOR
Lisa Brown
Lisa is a Partner, Wealth Advisor in our Atlanta office. She joined legacy firm Brightworth in 2005 and became a Partner in 2010. In addition to working with clients, Lisa has published three books: Girl Talk, Money Talk. The Smart Girl’s Guide to Money After College; Girl Talk, Money Talk II. Financially Fit and Fabulous in Your 40s and 50s; and legacy firm Brightworth’s first book, Building Your Wealth Inside Corporate America. Lisa has been featured in The New York Times, The Wall Street Journal, YahooFinance, CNBC.com, and many more, and frequently speaks at seminars across the country.
Wesley Wood, CFP, CIMA
Wesley Wood is a Wealth Advisor at CI Brightworth Private Wealth, where he works with executives as they navigate complex compensation structures. Wesley joined CI Brightworth in 2017, and previously worked in Silicon Valley with tech executives and startup founders. Wesley is a CERTIFIED FINANCIAL PLANNER practitioner and holds the Certified Investment Management Analyst certification, administered by Investments Wealth Institute and taught in conjunction with the Yale School of Management.
