By helping people get the most from their AT&T retirement benefits, we tend to focus on the things we can control. How much to save in the AT&T 401(k) plan. What funds to invest in. Which pension to choose – lump sum or monthly annuity. What about the things we can’t control?
In that case, we help AT&T employees explore every option and then take the most appropriate action for their specific situation.
Case in point: rising interest rates and their impact on AT&T pension payouts. During rate hikes, it’s important for AT&T employees nearing retirement to take a close look at when it’s most advantageous to retire and what’s the most appropriate pension to take. With those goals in mind, we’ve found it helpful when AT&T employees understand the relationship between interest rates and their pension decisions.
The rate AT&T uses to calculate pensions
The interest rate used to calculate AT&T’s pension payouts is the Composite Corporate Bond Rate, which generally follows the direction of interest rates tied to things like loans, credit cards, etc.
Essentially, there’s an inverse relationship between the Composite Corporate Bond Rate and AT&T lump-sum pension payouts. When rates increase, lump-sum payouts decrease; when rates decrease, lump-sum payouts increase.
The impact of higher rates
Now that you understand the relationship between rates and your lump-sum pension, you know that rate hikes are not good news for your pension. Again, higher rates mean lower lump-sum pension payouts.
For example, the June 2022 Corporate Rate came in at 4.41%. That's a significant increase from the November 2021 rate of 2.27%. This means AT&T pension lump sums using the June 2022 rate would be down around 20%. Under this scenario, a $500,000 lump sum could potentially decline by $100,000.
Hopefully, this gives you a good idea as to how even small changes in the rate can impact the size of your AT&T pension.
How rate hikes may impact your decision to retire
AT&T uses the November Corporate Rate to set the following year’s pension calculation. So, it’s important to stay informed about rates throughout the year. If you wait until November, you have a short window of time to make a decision.
Here are three key things you will want to consider:
- Whether to retire sooner or later
In a rising rate environment, you may want to retire sooner and take a larger pension before the rate hike locks in lower pension payouts the following year. Or, you may want to consider working a little longer with the expectation that rates eventually decline and your pension payout increases along with the benefit of extra years of service.
- Whether to choose a lump-sum or monthly annuity AT&T pension
The AT&T pension plan lets you choose between different payout options. A monthly annuity gives you a consistent monthly paycheck for the rest of your life. With a lump-sum payout, you get all or a portion (only available to managers) of your pension that you may then roll over into an IRA. There are pros and cons to each payout option. For example, the monthly pension provides income for life but without a cost-of-living increase, so your buying power will decline over time. Meanwhile, you have greater flexibility with a lump-sum payout, both in how you use it and how you can pass it on, but that freedom comes with risk of market declines when invested.
- How pension payout changes affect your decisions about other income sources (AT&T 401(k), Social Security, etc.)
If you take a lower pension payout, can the funds in your 401(k) and other retirement accounts make up for the shortfall? If you retire soon to take a higher pension payout, does that mean you must take Social Security earlier?
So, with rising rates, should you consider leaving AT&T earlier or later? It depends.
There is no one, right answer for all AT&T employees. What is most appropriate for you depends on your specific situation. A good way to know for sure is to have your personal situation evaluated with the help of a financial adviser.
