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Case Study: Rising Interest Rates and Pension Lump Sum Values

As a Verizon retiree, you are probably aware of pension lump sum values and their effect on your retirement income. With rising interest rates, it is essential to understand how these changes can impact the value of your pension lump sum.

The decision of when to start receiving your pension might have far-reaching effects. In 2022, many Verizon employees decided to retire and begin receiving pensions in the second quarter based on advice from our (Hapanowicz & Associates) seasoned understanding of the effect of rising interest rates on pension lump sum values.

Because of that, a number of them had better returns, with some netting as much as $100,000 higher lump sum values than if they had waited until the third or fourth quarter of 2022 to retire and start receiving their pensions.

In this article, we look into a case study to show how rising interest rates can affect your pension lump sum value and how you can leverage rising interest rates to boost your retirement income.

What are the impacts of rising rates?

The pension lump sum option you receive as a Verizon retiree is equivalent to the single life annuity they would pay you over your lifetime, after factoring in the current interest rate.

The key takeaway is that pension lump sum values are higher when interest rates are low, and lower when interest rates are high.

The Federal Reserve has gradually raised interest rates since early 2022 to curb inflation. Over the last several years, rising inflation has affected everyone, primarily through increased food and gas prices.

Unsurprisingly, the Fed is raising interest rates to fight inflation, but how this may affect pensions is news to many retirees. Verizon adjusted the interest rates used to calculate pension lump sum values due to the Fed’s rate hikes.

Therefore, rising interest rates should affect when you decide to retire if you want maximum returns on your pension lump sum to fund your golden years.

In early 2022, Verizon began increasing the pension rates used to calculate lump sums. The most significant rate change occurred in the third quarter of 2022, when the GATT rate increased to 3.07% from 2.25 % in the second quarter.

The PBGC rate rose to 1.80% from 0% in the second quarter. During the fourth quarter, the GATT rate was 3.13%, and the PBGC rate was 2.10%.

How can I maximize my retirement benefits?

Since rates used to calculate your pension lump sum depend on the date you commence your retirement, there are opportunities to make wise, strategic decisions regarding the date you set for retirement.

In some instances, adjusting your retirement date by just a few weeks can significantly impact the total pension lump sum you receive.

For Verizon Mid-Atlantic Associates, the rates change on a quarterly calendar basis. You will know the rates for the next calendar quarter in the last month of the current calendar quarter. You can always find the current rates on the main Verizon page of our website.

For instance, you would know the GATT and PBGC rates for the calendar quarter starting in July in June. Knowing these changing rates in advance creates significant opportunities for planning when to retire in order to take advantage of the best possible rates.

Case Study

Joan, 62, is a Verizon retiree with a defined benefit pension plan thanks to her 30 years of service. She had planned to retire by the end of 2022.

Joan had to choose between an $625,000 lump sum value or $2,300 monthly for the rest of her life. Due to her lack of knowledge about the effects of inflation on pension lump sum values, Joan could not make an informed decision about when to start her pension.

However, after talking to her adviser at H&A, and completing a cash flow financial plan taking into account all her sources of income, assets, debts, including her desire to work in a part-time capacity, Joan felt confident and decided to retire and start receiving her pension in the second quarter of the year.

Interest rates were increasing then (higher rates mean lower lump sums), but because she switched the date she elected and commenced benefits by just a few days, Verizon paid out to a higher lump sum to her.

What if I plan to retire earlier than planned?

You can retire earlier than planned, but that may come with serious financial ramifications. These include loss of future earnings, the company match on your 401(k), and those may negatively impact your pension and Social Security benefits.

Final Word

As a Verizon retiree, deciding when to retire can have significant financial effects. The best way to approach this and maximize your benefits is by understanding how increasing interest rates can affect the value of your pension lump sums.

It would be in your best interest to consult a specialist financial advisor, such as Hapanowicz & Associates. Thanks to the sound advice of H&A’s professionals, who understand the impact of rising interest rates on pension lump sums, a number of Verizon retirees received a bigger pension lump sum in 2022. You have everything to gain, and nothing to lose.

If you are considering retiring soon but unsure how to go about it and maximize your pension lump sum value, speak to one of our advisors today.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Investing involves risk including loss of principal. No strategy assures success or protects against loss.

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Talk with an advisor.

Engage with a qualified partner for financial guidance built on loyalty, empathy, and integrity.