Decisions: Pension Lump Sum vs. Annuity
The decision to retire has numerous variables that need to be considered. Some are more emotional, and some are more financial. A retirement plan needs to address everything from cash flow scenarios, risk management needs, tax implications and sensitivities, etc.
The typical ExxonMobil household must incorporate all of these variables when planning for their pension and Benefits Commencement Date (BCD).
One of the many decisions is whether to take their pension as a lump sum or as an annuity. Every household will be different in this decision, but for those who are considering taking the lump sum, we wanted to discuss potential timing considerations.
Before making your decision on lump sum or annuity, we recommend a full review of your options with your financial advisor.
Grandfathered vs. Non-Grandfathered
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.”
“Grandfathered” Category
For the “grandfathered” individuals, we know that the discount factor for the 4th quarter of 2020 will be 1.25% based on the past performance of the 30-year Treasury rates, which is a new record low.
For those looking to retire and take advantage of fourth-quarter 2020 interest rates, the earliest your Benefit Commencement Date (BCD) can be is October 1, 2020, and no later than January 1, 2021.
The earliest someone can request their retirement package is 120 days out, which would be June 1, 2020 for an October 1, 2020 retirement date, and September 1, 2020 for a January 1, 2021 BCD.
The grandfathered category has a special provision that will allow them to retire at the end of the calendar year, have a BCD of January 1st, still get their vacation pay for 2021, but take advantage of 4th quarter 2020 interest rates.
“Non-Grandfathered” Category
For those in the “non-grandfathered” 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.
In summary, there is a decrease in the discount rates for the “non-grandfathered” category from the third quarter to the fourth quarter of 2020.
The “non-grandfathered” category of household’s rates are based on the last two months of the preceding quarter, so May and June are determining the 4th quarter rates, while April 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.
Planning Your Benefit Commencement Date (BCD)
For those looking to retire and take advantage of 4th quarter 2020 interest rates, the earliest your Benefit Commencement Date (BCD) can be is October 1, 2020, and no later than December 1, 2020.
The earliest someone can request their retirement package is also 120 days out, which would be June 1, 2020 for an October 1, 2020 retirement date, and August 1, 2020 for a December 1, 2020 BCD.
For planning purposes, the retirement package must be returned to benefits by October 27, 2020 in order to have everything process on time. That said, we have a complete arbitrage of the situation as we will know the 1st quarter rates prior to having to submit the 4th quarter rates if we know them.
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. So, if the 4th quarter 2020 is that low point, then we recommend a December 1, 2020 BCD.
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. Contact us at Bogart Wealth.
Learn more about our Interest Rates Outlook for Q2 2020.
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