Your NRECA R&S Lump Sum Pensions Are At All Time Highs Until The End Of 2022

It’s 2022 and interest rates that were at historic lows are steadily moving upwards. This means your NRECA R&S Lump Sum Pension Amounts are at all time highs until the end of 2022 but that could change drastically in 2023. This means if you have thought about retiring from your cooperative this could be the year to do it. However, you are running out of time! You could go the rest of your working career and not see lump sum pension payouts this high ever again!

The general rule I’ll be discussing applies to anyone that works for a company that offers a Defined Benefit Plan (also known as a Pension Plan) as part of their overall retirement benefits, but I'm specifically talk to electric cooperative employees eligible for the NRECA R&S Plan that are considering retirement this year or next year.

One thing that people seem to disregard when thinking about retirement is how current interest rates affect their pension plans. When interest rates go down everyone flocks to buy or refinance a home but very few ever consider the effect that interest rates can have on their retirement plans.

The one thing I want you to take away from this blog is that interest rates and pension amounts have an inverse relationship.

When interest rates go up, lump sum pension payouts go down.

Interest rates are important to your R&S pension plan

In recent years, people with pension plans that have an option to take the lump sum have seen the amount grow significantly because of low interest rates. Interest rates influence the value of a lump sum because it affects the value of your annuity payments. Click the link for blog I wrote explaining your monthly annuity options and please contact me for help on lump sum vs annuity payment math.

Generally speaking, if interest rates are low, a lump sum payout increases and is often a much better choice than the annuity option from NRECA. I'm repeating myself but it is imperative you remember that when interest rates are high, lump sum payouts go down. If interest rates are low, lump sum payouts go up.

Because interest rates are at all time lows at the end of 2021 your lump sum payouts will be at all time highs through 2022. And conversely, because interest rates are being raised every quarter in 2022 your lump sum payouts will be lower in 2023. If you are on the fence about retirement this could be the time to do it.

How much can interest rates affect my retirement?

Generally speaking, every one percentage point rise in interest rate reduces a lump sum’s value from 10% to as much as 20%.

For example, if your lump sum payout is $1,000,000, a one percentage point rise in interest rates could lower the amount by $100,000 to $200,000.

That's a significant dollar amount. Also, on average, every $1 of pension income translates to about $150 of lump sum payment. If your monthly pension payout is about $7000 a month, your lump sum amount would be approximately $1,000,000. (This is a ballpark number. Every plan differs slightly.)

Something else to keep in mind is that plans offering lump sum distributions usually reset the rate they use at least once a year. For example, NRECA set workers rates each December. Whatever the rate is in December, that rate will be used the entire next calendar year. The rates were low in December 2021 so that means for the rest of 2022 your lump sum payout will be calculated using historically low rates from the end of 2021. But that will change in 2023!

Should you retire this year?

Before running off early with your lump sum because of low interest rates, there are other things to consider than just the sum amount. Consider what company benefits you will be giving up and if you will need those in the near future such as health insurance. Keep in mind when you’ll be eligible for social security benefits and if you’re willing to live with reduced benefits by retiring early.

Interest rates affect so many things in our world today and it is extremely important to factor in how they can affect your retirement. Deciding on when to retire is never easy but you don't have to do it by yourself. We can help walk you through this decision making process. At 80/20 Financial we don't sell, we help. If you or someone you know is considering retirement, please share this blog with them. It could be worth several thousands of dollars to them.

What should you do right now?

As soon as you read this you should contact NRECA and tell them you would like to see your what your lump sum payment would be if you retire in 2022 and you would also like to see their estimate of what your lump sum would be if you retire in 2023. Do this immediately!

You need a plan

At 80/20 Financial Services, we are retirement planners and we specialize in working with electric cooperative employees. We can help you answer questions like:

Should you take your cooperative's monthly pension or lump sum offer?
Do you have enough money between your R&S and/or 401k to retire?
Could you possibly retire at age 55?
Is your cooperative 401k invested correctly for your retirement goals?
Should you be investing in a Traditional 401k or a Roth 401k?
Are you contributing too much or too little to your 401k?
Should you quasi-retire from your cooperative?
Should you accept an early retirement offer from your cooperative?
When should you claim Social Security benefits?
How can you lower your tax bill in retirement?
How do you invest your retirement money so that you increase your income in retirement?
How do you create an income stream in retirement that is similar to when you were working?

I started this firm specifically to help Electric Cooperative Employees with retirement planning. I worked for an electric cooperative for 11 years and I know your profession and benefit plans better than any other financial advisor will. You have excellent retirement benefits available to you. I can help you maximize those benefits by creating a retirement income and investing plan that aligns with your retirement goals.

For more articles about retirement planning and investing, click here. You may also sign up to receive our weekly retirement blog here.

Thanks for reading!

Brian Coleman-Owner/Advisor

80/20 Financial Services is an Independent Registered Investment Advisory Firm. We help Electric Cooperative retirees increase their income, protect their assets and minimize their taxes.

Photo by Paula Guerreiro on Unsplash