Federal Reserveís move to inch up interest rates for
the first time in nine years wonít immediately hand
seniors the decent yields theyíve been craving on safe
money, but it may prompt some new pension and
companies with defined benefit pension plans ó already
reeling from higher pension insurance premiums ó will
likely try to entice participants into taking lump-sum
distributions instead of keeping their monthly
retirement income, said Jania Stout, co-founder of
Fiduciary Plan Advisors at HighTower, a consulting firm
in Owings Mills, Md.
because as interest rates rise, companies can assume
participants will earn a higher return on their
cash-outs over time, and they can thus pay out lower
retirees I would say, youíre probably going to see
companies pull the trigger a little more on these
cash-outs," she said. "Youíre going to see
more options for taking lump sums and companies being
more aggressive about pulling liabilities out of the
the more rates rise, the smaller the lump-sum offers
will become over the next two to three years, said Chris
Karam, chief investment officer for Sheridan Road
Financial in Northbrook, Ill. In other words, he said,
the next lump-sum offer current retirees get could be
the best one theyíll see.
rising rates, (pension plans) will have a better funded
status, but the lump-sum number put in front of a
participant will start to decline," he said.
rush out to lock in a lump sum without considering the
overall value of an annuitized income stream you canít
outlive, however. If a pension you hold represents even
a modest percentage of your overall retirement
portfolio, consider hiring a financial adviser with
expertise in pension valuations to help you sort it out.
And donít settle for guidance on this from your former
employer, as companies generally donít provide much
beyond the printed offer.
you are terminally sick or have other substantial
guaranteed sources of retirement income, the value of a
pension shouldnít be discounted in your overall income
plan. Just for a quick back-of-the-envelope idea,
calculate 4 percent of your lump-sum offer. It isnít
precise and there are a lot of caveats, but 4 percent is
a rough guide to a first-year nest egg withdrawal, and
that amount isnít guaranteed, remember.
also a good idea to make sure the fixed income portion
of your retirement money is ready for a series of
further rate hikes, experts said.
on your time horizon and risk tolerance, it may be time
to avoid very short-term bonds, for example, notes Karam.
we get this slow and steady rate climb, investing in
intermediate-term bonds may not be as big a problem as
was once perceived," he said. "Most of those
portfolios have issues with five and 10-year maturities.
In a rapidly rising rate environment itís harder for
managers to reinvest at a higher rate and get that
working," he said. But in a more slowly rising
market managers can reinvest and reap the benefit of
higher yields, he said.
when will bank savings and certificates of deposit be
back to even reasonable levels? Karam isnít holding
going to take some time" because banks waived
savings and money market account fees as interest rates
plummeted in recent years, so they will be looking to
recoup those first, he said.
payout levels should improve, but it will also take
time, said Stan Haithcock, author of several short books
on annuities, including one on deferred income or
will be consumer demand for better pricing" as
rates rise, he said. "But the life expectancy
tables will change in 2016, so they could offset each
other." As life expectancy rises, annuities
generally pay out smaller annual installments.