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Have You Seen Interest Rates Lately?

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Economic Impact on Interest Rates

The COVID-19 Recession was extremely unusual. Market participants are well-trained at analyzing and forecasting economic and business cycles. A global pandemic resulting in numerous deaths and hospitalizations, millions of job losses overnight, and an economy forced to an immediate shutdown, is an entirely different matter.

Governments turned-off their economy to prevent further virus spreading. The result was a historic contraction in Gross Domestic Product that required “unprecedented” measures to support citizens and businesses. Politicians later turned-on the economy to an extent, and in similar fashion to the fast-paced decline, we experienced a V-shaped bounce off the bottom. However, some aspects of the domestic economy may still take years to recover, and therefore, additional support makes sense.

The U.S. Federal Reserve has guided for accommodative policies in 2021 and beyond. Although they see economic data like Continuing Jobless Claims (or ongoing filings for unemployment benefits) recovering, conditions are still worse than pre-COVID levels. As such, the monetary committee has stated they will maintain their benchmark interest rate near zero until 2023. How long they can stay the course will depend on pace of economic growth, and more importantly, inflation. Currently, price growth appears within the Fed’s “comfort zone,” but long-term market rates are starting to send a message given Coronavirus and political developments.

COVID-19 remains the true dictator of consumer behavior. The world has in some ways learned to cope with the virus which has provided some flexibility to limited economic reopening. However, the potential for stronger growth depends on the second wave of new virus cases versus the success of new vaccine breakthroughs and distribution. Additional fiscal stimulus will also play a part. Longer maturity yields are signaling traders anticipate robust growth ahead. Their bet is that vaccinations and ongoing government support will bring a quick return to normalcy. The expectation is that inflation will soon follow and invite higher interest rates. Optimism is high but so is uncertainty.

U.S. Continuing Jobless Claims (Thousands) & Unemployment Rate (%):

U.S. Continuing Jobless Claims Thousands Unemployment Rate | Bogart Wealth
Source: Bloomberg, as of 01/05/2021

What are the implications for ExxonMobil households?

As many of you know, there are two categories of employees when it comes to their pension/lump-sum options. Those who were born before 1958 and hired before 1998, they take 95% of the quarterly average of the 30-year Treasury Rates, these individuals are given the title of “Grandfathered” category. For those who were born after 1957 or hired after 1997, they use a combination of short-term, intermediate-term, and long-term corporate bond rates, and as you could guess, these individuals are considered “Non-grandfathered.”

For the grandfathered individuals, we know that the discount factor for the 2nd quarter of 2021 will be 1.50% based on the past performance of the 30-year Treasury rates, which is up from the low of 1.25% in the fourth quarter of 2020 and first quarter of 2021.  For those looking to retire and take advantage of first quarter 2021 interest rates, the latest Benefit Commencement Date (BCD) can be is April 1, 2021, assuming they retire on March 31, 2021.  The earliest someone can request their retirement package is 120 days out, which would be December 1, 2020 for an April 1, 2021 BCD. 

For those in the “nongrandfathered” category, it is difficult to easily see the overall impact when short term rates are moving at different speeds or even different directions. To address this, we estimate an equivalent “single rate” that makes comparison easier.  Here are the updated projections we have for interest rates.  The official numbers are now announced and listed below, or can be found here:

https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates

Summary and Key Dates

In summary, the discount rates for “nongrandfathered” category from the first quarter to the second quarter of 2021 stayed flat.  The “nongrandfathered” category of household’s rates are based on the last two months of the preceding quarter, so November and December are determining the 2nd quarter rates, while October had no impact.  These households also need to have a Benefit Commencement Date (BCD) within that quarter to take advantage of that quarter’s interest rates. 

For those looking to retire and take advantage of 2nd quarter 2021 interest rates, the earliest your Benefit Commencement Date (BCD) can be is April 1, 2021, and no later than June 1, 2021.  The earliest someone can request their retirement package is also 120 days out, which would be December 1, 2020 for an April 1, 2021 retirement date, and March 1, 2021 for a June 1, 2021 BCD.  For planning purposes, the retirement package must be returned to benefits 35 days prior to the Benefits Commencement Date (BCD), which is April 25, 2021 in order to have everything process on time.  That said, now that we know the second quarter discount rates are flat, dependent upon your situation, we might want to review options for delaying until the second quarter to monitor the third quarter 2021 discount rates outcome.

For those that are planning to retire prior to the age of 60, ExxonMobil imposes an early commencement discount on the pension program for commencing benefits early.  If this applies to you, we recommend considering delaying your pension if you have other funds to live off, and if interest rates are staying flat or continuing to trend down.  Once we see rates rising, we also recommend having a BCD that is the last possible within that quarter to minimize the imposed discount.

The pension/lump sum conversation is just one part of any household’s financial plan. We encourage all to review this in conjunction with their financial advisor. Please feel free to reach out if you have any questions.

We update these numbers, and email out weekly.  Please send an email to jbogart@bogartwealth.com if you’d like to receive weekly discount rate updates.

The pension/lump sum conversation is just one part of any household’s financial plan. We encourage all to review this in conjunction with their financial advisor. Please feel free to reach out if you have any questions.

Sincerely,

Bogart Wealth

Work with a financial advisor who puts your needs first.

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