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Are you nearing retirement with a pension?

There’s one major factor you should consider.

We’ve been talking a lot around here about the rise of interest rates and its effect on everything from markets to loans, but an under-discussed aspect of rate hikes is the effect on your retirement. 

Some folks have a pension plan through their employer that either pays out a lump sum benefit or a stream of monthly payments based on calculations that include years of service and average earnings, among other items. The interest rates used to calculate your lump sum pension benefit are likely tied to the 30-year treasury yield, which has gone from under 2% to nearly 4% over the past year and a half. Traditionally, a 1% rise in the interest rate calculation translates into approximately a 10% decrease in the value of a lump sum pension benefit, which means that your payout could drop by as much as 20% if you delay your retirement and interest rates remain at current levels, or continue to rise. On a $1 million pension, that would cost you approximately $200,000 that you could instead use now to invest and potentially grow while you work a new job until you want to fully retire or need access to the funds. 

However, the annuity option for your pension is not without risk either. Some companies that still have pension plans do not offer an annual cost-of-living adjustment, meaning your monthly payment will not increase every year with inflation like a Social Security check.

I’ve been having conversations about this situation with my clients nearing retirement age, and many have no idea how much they might be affected. So, with that being said, I encourage all of my clients to simply consider their options on their pension plans and how they could impact their retirement plans. Finding the right time to retire is a big decision — there’s life-changing money out there if you navigate it wisely. I would love to help you make that decision for yourself. Contact me or anyone on our team today, and let’s look at your portfolio to make that decision together. 

Article by Dillon Harper, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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