It’s 2021 and interest rates are at historic lows. This means your NRECA R&S Lump Sum Pension Amounts are at all time highs. This means if you have thought about retiring from your cooperative this could be the year to do it. I know I keep repeating this but you could go the rest of your working career and not see pension payouts this high ever again.
The general rule I’ll be discussing applies to anyone that works for a company that offers a Defined Benefit Plan (also known as a Pension Plan) as part of their overall retirement benefits, but I'm specifically talk to cooperative employees eligible for the NRECA R&S Plan that are considering retirement this year.
One thing that people seem to disregard when thinking about retirement is how current interest rates affect their pension plans. When interest rates go down everyone flocks to buy or refinance a home but very few ever consider the effect that interest rates can have on their retirement plans.
The one thing I want you to take away from this blog is that interest rates and pension amounts have an inverse relationship. Much like the seesaw pictured above when interest rates are lower, lump sum pension payouts are higher and vice versa.
Interest Rates Are Important To Your R&S Pension Plan
In recent years, people with pension plans that have an option to take the lump sum have seen the amount grow significantly because of low interest rates. Interest rates influence the value of a lump sum because it affects the value of your annuity payments. Lump Sum versus Annuity math.
If interest rates are low, a lump sum payout looks rewarding, usually much better than the annuity option from NRECA. I'm repeating myself but it is imperative you remember that when interest rates are high, lump sum payouts shrink. If they are low, lump sums grow.
Because rates are at all time lows, it could be wise to retire early. If you are close to retirement age or have considered retiring early this might be your chance to do so as we may never see rates this low again. They don't have room to go much lower.
How Much Can Interest Rates Affect My Retirement?
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, a one percentage point rise in interest rates could lower the amount by $100,000 to $200,000. That's a significant dollar amount. Also, on average, every $1 of pension income translates to about $150 of lump sum payment. If your monthly pension payout is about $7000 a month, your lump sum amount would be approximately $1,000,000. (This is a ballpark number. Every plan differs slightly.)
Something else to keep in mind is that plans offering lump sum distributions usually reset the rate they use at least once a year. For example, NRECA set workers rates each December. Whatever the rate is in December, that rate will be used the entire next calendar year. This means for the rest of 2021 your lump sum payout will be calculated using historically low rates from the end of 2020.
Should I Retire This Year?
Before running off early with your lump sum because of low interest rates, there are other things to consider than just the sum amount. Consider what company benefits you will be giving up and if you will need those in the near future such as health insurance. Keep in mind when you’ll be eligible for social security benefits and if you’re willing to live with reduced benefits by retiring early.
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, please share this blog with them. It could be worth several thousands of 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 turn that money into something that could change your family legacy.
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.
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Thanks for reading!
80/20 Financial Services is an Independent Registered Investment Advisory Firm. We help Electric Cooperative Employees create their retirement income and investment plans.