Physicians Pensions Would Drop About 22% If Rates Were Calculated Today

Physicians 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 Physicians, 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 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 Physicians 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. 

Luckily for Physicians employees, there is still time to avoid this drop in the value of their lump-sum. Physicians uses November’s segment rates to calculate employee lump-sums for the next calendar year. Therefore, Physicians employees who retire in 2022 will be able to take advantage of the low November 2021 interest rates. However, those who decide to retire in 2023 will use the November 2022 rates, and likely lose 22% or more on their pension lump-sum. This rise in rates may motivate some employees to retire earlier than they had previously anticipated. For those expecting to retire in the next few years, many have come to the conclusion that they would be working for free if they chose to stay. 

We are now offering a complimentary cash flow analysis for Physicians employees to help determine their preferred retirement date. By receiving a cash flow analysis, Physicians employees can potentially avoid making big retirement mistakes. With a cash flow analysis, Physicians employees will have a better idea of how rising interest rates will impact their retirement. 

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With interest rates rising significantly over the past few months, we suggest that Physicians employees discuss their options with an advisor. Our advisors track the interest rates and keep employees updated on any changes that may impact their retirement plans. 

Keep in mind that no matter how attractive the pension lump-sum looks, the annuity option may be a better fit for certain individuals. Every situation is unique and a cash flow analysis will allow employees to compare all pension options. 

*22% is an estimate and the actual number could be higher or lower depending on the individual.