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Would You Work For Free? Thumbnail

Would You Work For Free?

The co-ops are a great place to work, no doubt about it, and I'm sure you love your job but would you do it for free? Because if you are considering retirement soon and wondering if you should retire this year or next year that may be exactly what you are doing.

One thing I've found that people totally disregard when they think about retirement is interest rates. Interest rates directly affect your R&S Pension amounts and the dollar amount between retiring this year versus next year could mean that you end up working for free when you could have retired.

What do I mean by working for free?

In the current interest rate environment, generally speaking, every one percentage point rise in interest rate reduces a lump sum’s value from 10% to as much as 20%. For example, if your lump sum payout is $1,000,000 if you retire in 2022, a one percentage point rise in interest rates could lower the amount by $100,000 to $200,000.

If your salary is $100,000/year and you choose not to retire this year because next year just "feels" better, then you have effectively told your cooperative you love them so much that you decided to work for free the next year or possibly two years! That's very noble of you if you meant to do that, but did you mean to do that?

How does an interest rate affect my retirement?

The calculation that NRECA uses to determine your lump sum payout includes what is known as the GATT rate. It's only one part of the calculation but it does directly affect your payout. The lower it is, the higher your lump sum. The higher it is, the lower your lump sum.

GATT stands for General Agreement on Tariffs and Trades. That sounds stupid complicated so let me simplify this for you. The GATT rate is the 30-year Treasury bond rate. They are the same thing. You can find the history of that rate here. Look at the column on the far right labeled 30-yr TSR and specifically look at the rate in December each year. The December rate is the rate used to calculate your lump sum amount. 

Whatever the GATT/ 30-yr TSR rate is in December, that rate will be used to calculate your lump sum the entire next calendar year.

This means for the rest of 2022 your lump sum payout will be calculated using historically low rates from the end of 2021. The rate for December 2021 was 1.85. That's the second lowest rate ever used in the calculation of your lump sum amount. The only time it was lower was in December of 2020 when it was 1.67. The rate as of June 6, 2022 is 3.14. And the Fed has already said they plan to continue to raise rates to combat inflation. As we mentioned before, a one point percentage rise in that rate can decrease your lump sum amount by 10-20%.

What should you do?

If you are a co-op employee that is or was considering retirement this year or in the next 3 years please call NRECA today and request an estimate of your lump sum amount if you retire in 2022 and an estimate if you retire in 2023. Put them side by side and look at the amounts. Then you can determine if the difference in the amounts has you working for free.

Interest rates affect so many things in our world today and it is extremely important to factor in how they can affect your retirement. Deciding on when to retire is never easy but you don't have to do it by yourself. We can help walk you through this decision making process. At 80/20 Financial we don't sell, we help.

If you or someone you know is considering retirement soon, please share this blog with them. It could be worth several hundred thousand dollars to them.

You Need A Plan

A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services we specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you achieve your desired financial outcomes in retirement.

If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and accomplish any other retirement goals you might have.

The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing click here. 

Brian Coleman/Electric Cooperative Retirement Specialist

80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We help electric cooperative employees in Missouri and throughout the United States transition into retirement. Being independent allows us to work exclusively for YOU.


Photo by ray sangga kusuma on Unsplash