Interest rates

Will rising interest rates have an impact on your pension?

It’s no surprise that the Fed keeps raising rates in an effort to fight inflation, but what may surprise some retirees is the impact it can have on your pensions.

Interest rates and flat-rate pensions

As interest rates rise, capital pension redemptions decline significantly. So while you’re working, your salary and the number of years you’ve been employed influence the calculation of your flat-rate pension, but interest rates will also factor into this payment equation. Your life expectancy is also factored into this calculation, which many companies calculate using actuaries and mortality tables, much like an insurance company would.

However, the interest rate portion of this equation is calculated using the IRS’ minimum present value segment rates, which are adjusted monthly by the IRS and can vary depending on what the Fed does with the interest rate. When rates are low, package deals are usually higher. When rates are high, it impacts capital offers in the opposite direction – so your pension capital offer would be lower.

How the timing of your retirement may depend on interest rates

Rising interest rates could have a significant impact on when you retire if you rely on a lump sum pension. Since the current rates, at the end of the year, are calculated on the previous months, you could be in better shape to retire with a larger lump sum. However, if you wait a few months, your lump sum may decrease as rates increase and your offer is based on the value of the higher rates. Many plans change the rate in November, so you may be able to get your offer based on the older, lower rates, but you’ll need to check with your company to find out when they calculate the sum.

If you don’t know when to retire or if you need to move your retirement date, it’s best to consult a financial professional who can help you decipher your specific plan and options depending on your situation.

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