Financial Intel Monthly

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In General

When considering retirement or a job change from Fortune 500, it is imperative to learn about your eligibility for a lump-sum payment offered by your retirement plan.

There are just a couple of things almost all Fortune 500 retirees need when they hit retirement: predictable income and protection against a cluster of risks, which include longevity risk, performance risk and sequence-of-returns risk.

If you are planning on taking the AT&T annuity, you will love taking the lump-sum and buying an annuity. When evaluating the best options for retirement, it is beneficial to plan ahead in order to avoid being left shorthanded. In an online survey of 1,911 Americans aging 50 to 75, 34% of retirees who took a lump-sum buyout from their defined-contribution plan depleted that sum within five years [1]. With that taken into account, if you are an AT&T employee being offered a lump-sum buyout, it may be worth looking into a better alternative. The purchase of an annuity using your lump-sum pension may prove to be a better option.

The mega backdoor Roth IRA is a strategy ‘highly compensated employees’ or HCEs at Fortune 500 can use to increase retirement savings and shelter investment growth from taxes in retirement.

New rates were just released for October 2022 and they increased 0.57% in the second segment!

AT&T recently sent a memo to their employees warning them about the impending pension drop. AT&T estimates employees will lose between 15% - 30% on their lump-sum value. Employees would lose a significant amount on their pension lump-sums if the lump-sum was calculated based on September's interest rates. The segment rates, used by AT&T, track the U.S. 10 Year Treasury rate, which means that as the U.S. 10 year Treasury rate increases, so do the segment rates. That is why the U.S. 10 Year Treasury rate is a great indicator of the IRS segment rates. The 10 Year Treasury rate has increased by over 2% since November 2021. When interest rates move up or down, an AT&T employee’s pension lump-sum amount will move in an inverse direction. A 1% increase in interest rates typically means a 10% decrease in lump-sum value. Our calculations show that lump-sums would drop by approximately 22% if AT&T used the current interest rates. This means that an employee with a $1,000,000 lump-sum would lose around $220,000, not including the interest they would have earned on the original $1,000,000. If rates continue to rise, this lump-sum loss will be substantially larger by the end of the year. The exact percentage an employee loses on their lump-sum will change depending on an employee's age, years of service, hire date, job title, and a few other factors. 

Could Lump-Sums for Grandfathered Southern California Edison employees be on the decline? The September interest rates, which Southern California Edison uses to determine lump sum values for everyone who retires in 2022 were released in October. We now have new monthly segment rates which show that interest rates are continuing to rise. Rates have been steadily increasing over the past year and with the recent announcement of next year's interest rates we are very likely to see a reduction in lump-sum values for Southern California Edison employees who retire in 2023. Southern California Edison interest rates decreased in 2020 causing 2021 lump sums to hit record highs. Based on the current trend of interest rates and monetary policy announcements it is likely that rates seen in 2020 will be the lowest for the foreseeable future - meaning that the Lump Sum Values for Southern California Edison employees who retired in 2021 will likely be the highest for the foreseeable future. When interest rates move up or down, your pension lump sum amount will move in an inverse relationship. 

The Markets (as of market close January 20th, 2022)

Interest rates are trending upward, and if this trend continues ExxonMobil lump-sum payments will drop again in the fourth quarter of this year. The IRS has recently released the Segment rates for the month of May, recorded at: 3.23% / 4.59% / 4.69%. May's segment rates saw an increase of about 0.3% (in the second segment), which is a substantial jump for a single month.  This ongoing trend upward looks to be an early indicator of bad news for ExxonMobil employees opting for a lump-sum in the future.

ConocoPhillips employees considering the lump sum option on their pension payment may have an opportunity to take advantage of lower interest rates in Q3 2022. With Q4 projecting to have higher rates, retiring during Q3 may be the last opportunity to avoid a reduced lump-sum. May's segment rates were just released and they are 3.23%/4.59%/4.69%. These rates increased by about 0.3% (in the second segment) since April, which is a very large increase for a single month. 

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