How to to counteract rising interest rates lowering your potential lump sum pension payout?

Archived From: Finance
  • Page :
  • 1
  • Text Only
Voting History
rated:
I apologize in advance if this question is beyond the scope of these boards, but I know there are some smart people here who might have some suggestions.
Is there something you can specifically do to counteract rising interest rates lowering your potential lump sum pension payout? I'm 51 and currently have 30 years of service with a big corporation. This corporation offers a lump sum pension payout. Even though I'm not even close to retiring I do like to go onto the company pension website on a monthly basis just to model what my lump sum payout would be if I were to retire. So when I went on the website today I noticed that if I were to retire today ( 3/2/17) my lump sum payout would be $560K, but if I should retire next month that figure is only $520K, So, POOF! $40k disappears just like that. Not a small amount of money! The reason for this drop is an anticipated interest rate hike this month. So my question is - can/should a person be doing anything using their other investments to hedge against interest rate hikes giving a big haircut to their pension amounts, or does this not matter if you are not close to retirement?  I guess I should mention that I also have a 401k and rollover IRA, but neither has anything comparable to the pension lump sum amount in it. Thanks in advance for ideas and suggestions.

Member Summary
Staff Summary
Thanks for visiting FatWallet.com. Join for free to remove this ad.

Why would your pension payout lower with higher interest rates?

I really doubt the lump sum payout estimates are taking rising interest rate forecasts into account. Those kinds of estimates aren't going to be that smart nor would they bank on uncertain interest rate futures.


DO you have a birthday or work anniversary around March or April? I'm wondering if something else in the formula is impacting the different payout figures for just 1 month.

jerosen, yes a birthday in March.

Mystery solved! The mystery of the decreasing pension payout.

jerosen said:   I really doubt the lump sum payout estimates are taking rising interest rate forecasts into account. Those kinds of estimates aren't going to be that smart nor would they bank on uncertain interest rate futures.


DO you have a birthday or work anniversary around March or April? I'm wondering if something else in the formula is impacting the different payout figures for just 1 month.

  
Correct, those pensions estimators are just that.  They only take a couple of things into account when spitting out a number.

But as for the OP, yes, you've now learned the reason why.  As you get older (birthday) and get closer (anniversary date at company) to retirement, the numbers it spits out will become more accurate.

3750myfw said:   jerosen, yes a birthday in March.
  
Right. 

So the change in value of the lump sum is because you're 1 year older and so the pension figures assume you'll live 1 year less.   THerefore the value of the pension is less.  Your lump sum drops.

 

rufflesinc said:   Mystery solved! The mystery of the decreasing pension payout.
  
They would have gotten away with it too if it weren't for us meddling FWF'ers
 

gnopgnip said:   Why would your pension payout lower with higher interest rates?
  
The pension lump sum should be set to the amount which, if invested today at the pension fund's expected rate of return, would allow the promised pension payments to be made until the forecasted death of the plan participant, leaving a zero balance.  Higher interest rates would raise future expected returns, and hence lower the required initial investment.  

Whenever you decide to retire, make sure to do it in February. Take the extra $40k and throw yourself a bday party.

imbatman said:   Whenever you decide to retire, make sure to do it in February. Take the extra $40k and throw yourself a bday party.
  
I wish to subscribe to your newsletter.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017