Would You Work The Next Two Years 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, without realizing it, 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. We can help.
At 80/20 Financial Services, we are retirement planners and we specialize in working with electric cooperative employees. We can help you answer questions like:
- Should you take your cooperative's monthly pension or lump sum offer?
- Do you have enough money between your R&S and/or 401k to retire?
- Could you possibly retire at age 55?
- Is your cooperative 401k invested correctly for your retirement goals?
- Should you be investing in a Traditional 401k or a Roth 401k?
- Are you contributing too much or too little to your 401k?
- Should you quasi-retire from your cooperative?
- Should you accept an early retirement offer from your cooperative?
- When should you claim Social Security benefits?
- How can you lower your tax bill in retirement?
- How do you invest your retirement money so that you increase your income in retirement?
- How do you create an income stream in retirement that is similar to when you were working?
I started this firm specifically to help electric cooperative employees with retirement planning. I worked for an electric cooperative for 11 years and I know your profession and benefit plans better than any other financial advisor will. You have excellent retirement benefits available to you. I can help you optimize those benefits while creating a retirement income and investing plan that aligns with your retirement goals.
My goal isn't that everyone who visits my site or reads my blog decides to work with me. My goal is to help you make an educated decision as you work through this process.
Contact us to set up a consultation. The consultation is free and without obligation.
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Thanks for reading!
80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We help clients in Missouri and throughout the United States prosper in retirement. Being independent allows us to work exclusively for YOU.
Our specialty is retirement planning for electric cooperative employees within 5 years of retirement or already retired.
*We will also work with the families of cooperative employees.
Photo by American Public Power Association on Unsplash