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Why pension recipients are thinking about 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

  • When will the company be adjusting pension calculations?
  • How do you anticipate the formula changing?
  • What is the deadline—and the process—for me to take my lump sum pension before the calculations change?
  • How much will the new pension options affect me based on my planned retirement date?
  • How much longer would I need to work (at this job or another) to make up for the difference in my pension?
  • Can I afford to retire now and what are my options?

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

Brightworth is a nationally recognized, fee-only wealth management firm with offices in Atlanta, GA, and Charlotte, NC. The wealth advisors at Brightworth have deep expertise across the financial disciplines, allowing us to provide ongoing, comprehensive financial advice to families across the country.




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