Just like union employees, AT&T management employees can take a full lump-sum pension payout. Or, they can choose full monthly annuity. But, they also have the additional option of receiving a partial lump sum and residual monthly annuity.
This is not an easy decision, as there are pros and cons to each option. In some instances, unfortunately, you are given an offer with a short window of time to make a decision.
Ultimately, it depends on your specific circumstances such as other sources of income, life expectancy and estate wishes. So, consider your options carefully and, preferably, with the help of a knowledgeable adviser.
Here’s how to make your way toward the right decision:
First, learn how your pension is calculated
For management employees, there are two factors that help determine the size of your AT&T pension benefit: years of service and income level. The higher each of these factors, the greater your pension benefit.
You are eligible for a vested pension benefit after five years of service, but your benefit will be negatively affected if you do not reach the age and service breakpoints for your employment position. Additionally, you may receive a reduced pension benefit if you do not work 30 years or if you are younger than age 55.
Check the current year’s corporate rate change
One variable that may affect your decision is the corporate bond rate, which the AT&T pension plan uses to calculate your lump sum offer.
The simple way to think of the corporate bond rate is this: when the rate rises, your lump sum pension shrinks; when the rate drops, your lump sum pension rises. It grows or shrinks in relation to the rate. Therefore, depending on which direction the rate goes, a lump sum pension may be more or less attractive, as well as the prospect of retiring or working longer.
We can use last year’s corporate rate change as example. The rate used for a lump sum received in 2016 increased to around 3%. Here’s how that affected your lump sum portion:
If your lump sum in 2015 is:
Your projected lump sum in 2016 is:
Your pension is an important income source for retirement. These rate changes will likely affect what option is right for you, and may affect your decision whether to retire early. However, it is only one part of your overall financial picture. There are additional factors to consider before you decide.
Consider the case for the lump sum
The primary benefit to a lump sum is the flexibility that it offers. You can invest it in an IRA with your other retirement savings and choose from a wider variety of investments. It also offers greater liquidity. Instead of being locked up in an annuity, you can withdraw as much money as you need, whenever you need it, such as for an emergency.
Additionally, the monthly annuity is not indexed to inflation. If you plan to retire young, you could face a retirement of 20-30 years or more. And if inflation follows its historical average of 3%, your living expenses will double in 20 years. Another way of looking at it, your monthly pension would lose half its buying power.
Lastly, you have control over the beneficiaries to your lump sum. Only a spouse is eligible as a beneficiary to the monthly annuity. You can pass on what’s left from your lump sum to your children or a charity.
Consider the case for the full monthly annuity pension
With the full monthly annuity, you can worry less about outliving your money. You can expect a guaranteed check each month for as long as you live. Further, you don’t have to worry about market fluctuations.
While there are survivorship limitations, the full monthly annuity makes sense if your only beneficiary is your spouse. It allows you to leave a larger, guaranteed income stream.
Next, speak with a financial adviser
A financial adviser can look at your specific situation, including all of your available income sources. In addition, here are some good questions to ask yourself before making your decision:
Do I have an emergency fund in case of the unexpected?
How much income will I need to protect my spouse in case of death?
Do I even need any more income from my investments?
Will I need that income now or later?
Are there concerns about the strength of AT&Ts pension plan?
Do I care what is left behind for my children or charity?
Speak with an Advance Capital adviser. We consider ourselves AT&T experts, having been founded by former Bell employees and having helped many AT&T employees with their financial lives. Fill out the contact form here or call 800-345-4783.