Thank you for tuning in to this latest Verizon retirement pop up video, I am your host Christina Hapanowicz and today we're going to be talking about interest rates and how they could potentially affect your Verizon pension lump sum. Today with me, I have two guests: Casey Gibb, who is our Managing Director of Financial Planning here at H&A. And also, Bobby Hapanowicz, who helps out on our Investment Committee. Thank you for being here. Today, we're going to be covering a very specific nuance of pensions. But if you would like to learn more about your pension or any other benefit available to you through Verizon, check out our YouTube channel. Search Hapanowicz & Associates on YouTube and click on the Verizon retirement playlist link. There's a bunch of content available to you as a resource. Okay, let's dive into it. Bobby, interest rates have recently increased. How could that potentially affect a Verizon employee? What is that relationship between interest rates and the Verizon pension lump sum?
Well, it's a direct relationship, Christina. The interest rates have an inverse correlation to pension lump sums. And by that, I mean, as interest rates fall, as they have generally - that has been the trend for the past couple of decades - pension lump sums will be expected to increase in value, holding all other factors constant. And the reverse is true as well: as interest rates increase, pension lump sums would decrease in value as a result. So, in our experience, we see folks who are getting closer and closer to retirement start monitoring pension interest rates - and more closely near retirement.
I want to talk about this in the context of the specific interest rates that can affect the lump sum pension calculation. So, Casey, why don't you talk to this?
Sure. For associates, the two rates are the GATT rate, which is currently in this quarter, 1.62%, first quarter of 2021, and also the PBGC rate, which is currently 0%. These change on a quarterly basis.
Okay, so how does this look compared to the past? Or as Bobby mentioned, over the last two decades, even further than back, in the last 40 years rates have been coming down causing these lump sum values to go up. And so, have interest rates increased at all yet? Is it the expectation that they will increase for the first time, or they just started to increase from last quarter back in 2020?
In the fourth quarter, the GATT rate was 1.36. And it did edge up in the first quarter to 1.62. The PBGC it stayed the same at 0%.
Okay, thanks, Casey. I want to talk a little more about looking into the future. What you're looking at here on the screen is a 12-month history of the 10-year Treasury yield which is a widely benchmark by investors and professionals to track the general direction of interest rates. Bobby will explain the significance of this.
Well, you hit the nail on the head, Chris. The 10-year is generally used as a tracking of general interest rates, the direction of general interest rates. So as Casey mentioned, the PBGC and GATT rates for the first quarter of 2021. Those were determined back in December of 2020. You could see back in December, the tenure was at roughly.9%, give or take. Since then, the 10-year Treasury has increased to nearly 12-month highs at 1.37% as of the 24th, a couple of days ago. Since then, Bloomberg News reported that the 10-year rate has touched briefly 1.6%. So again, why is that important? Because if these levels of interest rates are to persist or even increase, it's likely that the PBGC rate and GATT rates are going to increase as well. And that would have a direct result to your pension lump sum.
Thanks, Bobby. I want to round this out by asking the main question: How could this affect someone's retirement planning that's working for Verizon and thinking about maybe taking that pension lump sum? Casey, how would you answer that question?
It's a good question, since a lump sum is one of the pension plan payout options. You may want to monitor changes in these pension rates, especially as you get closer to retirement. You can do that a couple of ways. You can go online and get a pension estimate, or you can call the Benefits Center and they'll help you get the pension estimate. Sometimes it has to be manually calculated, which can take up to 30 days. Now, if you're planning on retiring after March 31, in this first quarter the lump sum payout, with everything else being equal, may be affected to the downside by the increase in interest rates I talked about.
So right, if one of your primary goals is to optimize that pension rate, you may consider reviewing this with your financial professional. Of course, there's a lot of other components that go into choosing when you're going to retire. So again, we encourage you to review that with your financial professional.
That's right. We do encourage you work with your advisor if you have any questions about how this could potentially affect you and your retirement planning. You are more than welcome to use us as a resource. Visit the Verizon Retirement Red Zone. It's a section on our site that will be your one stop shop for everything related to Verizon retirement benefits - all the resources available to you. Thank you for watching and we will see you next time.
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