Why Nov. 1 Might Be a Smart Retirement Date for Your Older Clients

The three segment rates, in turn, are determined by averaging the yields, over different blocks of maturity periods, of the Treasury high-quality corporate bond yield curves as measured over the prior 24 months. These rates are subject to additional criteria and have been affected by several amendments to the Internal Revenue Code, including recent changes under the American Rescue Plan Act.

However, as a general rule, the rates move in tandem with broader movements in Treasury yields. Given the significant increases in rates measured this year, Ferri says, it is reasonable to expect substantial upward movement in the minimum present value segment rates used by a given pension plan for 2023.

Why This Matters for Clients

As Ferri points out in written comments shared with ThinkAdvisor, among their various uses in pension plan operations, the determination of these rates has a direct impact on the calculation of lump-sum payouts. Ferri says the impact of year-over-year rate changes, in fact, can be much more significant than many near-retirees may realize.

“This is important because higher interest rates may cause a large negative impact on the calculated lump-sum amount,” Ferri says. “Retiring employees should discuss the options with their employer’s HR department to see if retiring in 2022 would provide them with a greater lump sum than waiting until 2023.”

And, as interest rates continue to rise, the possible impact on lump-sum amounts can be expected to grow through the end of the year.

“Different companies have different defined benefit plans,” Ferri notes. “Some may be affected and others not [depending on the plan design].”

In any case, it is worth looking into. Ferri points to one investor he worked with recently who would lose about $150,000 in lump-sum value if he retired as planned, on March 1, 2023, rather than on Nov. 1, 2022.