Shrinking Pensions


As you know, interest rates are on the rise and more increases are coming. This is not good news for my situation because we are still in the “construction loan” phase of building our house. We won’t be able to get a permanent loan until the house is complete. I spoke with our builder on Monday and he thinks he can get us in the new house by Thanksgiving. If he can do this, we will be incredibly thankful!!

What will my rate be at that time? I don’t know for sure, but I know it will be much higher than it would have been a few years ago. Gone are the days when we could get a 3-4% mortgage. However, if I look at things historically, the rate will be reasonable and we’ll be grateful to be in the house. I do believe that interest rates will go down in the future and we’ll refinance at that time.

Mortgage rates and car loans are two of the obvious areas that folks are feeling the effects of rising interest rates, but it doesn’t stop there.

For those of you who are entitled to a lump sum pension in the future, the chances are high that your estimated pension amount has been affected too.

One of the things that many people haven’t really considered is how interest rates can affect the value of the projected lump sum pension.

Interest rates have been high in the past and in all likelihood, your projected pension was affected at the time. However, you may not have known it because retirement and your future pension weren’t on your radar.

Now that you are older and retirement is much closer, you pay more attention to retirement related things.

I’m not sure I could explain how companies calculate the future value of a present dollar. This is a very complicated formula that is based on a variety of different factors, but one of them is the current interest rate.

Even if your pension is “frozen”, the value of that pension can change based on interest rates.

Most companies will look at that rate one time per year, and then recalculate the values of pensions after that date.

Georgia Farm Bureau employees have been affected by this and some of our clients have seen substantial decreases in their estimated pension amounts. I met with a Georgia Farm Bureau employee about 2 weeks ago who told me her lump sum pension amount had dropped by over $100,000 when the recalculation happened on June 1st of this year. Based on the current interest rate trajectory, her pension estimate could drop again in June of 2023.

This employee is now re-considering her retirement date and will probably retire in May of 2023 rather than the end of next year.

GEICO employees have seen the same thing happen. I have seen similar decreases with several clients over the last few weeks. I have been told that GEICO recalculates their pensions based on interest rates on December 1st of this year. I suspect many GEICO employees will reconsider their retirement dates as well.

As the old saying goes, the one thing that remains constant is change. Sometimes change is good, and sometimes the change isn’t positive.

As I type this, the Fed has announced it will likely raise interest rates another 75 basis points (or 3/4 of 1%) . I don’t really like it, but there is nothing I can do about it. However, I am very confident that rates will decrease at some point in the future. I just don’t know when.

It’s much like how we see the stock market behaving right now. I don’t really like what is going on, but it’s all cyclical. Like my pastor says, I believe the best is yet to come.

My encouragement to you this week is to hang in there and don’t consume too much news. The media doesn’t have our best interest at heart.

Have a wonderful week!