Thinking about Retirement? I’ve had the privilege of working with Merck employees for 17 years, and one of the best benefits Merck offers is the Pension plan.
How Does the Interest Rate Affect Your Merck Pension?
In a traditional pension plan, your retirement benefit is often offered as a choice between a lifetime monthly payment or a one-time lump sum. The lump-sum value is calculated based on factors like your age, life expectancy, and—critically—the interest rate at the time of calculation. Here’s how it works: the higher the interest rate, the lower your lump-sum payout will likely be. The typical ratio is a 1% increase in rates reduces the lump sum by 10%. The rate used to calculate the lump-sum payout is based on a 3-month average, and any changes are applied quarterly—in January, April, July, and October. Depending on the projected rate, it might make sense to retire just before or after those updates to maximize your payout. Here’s a link to the IRS Segment Rates.
This happens because, with lower interest rates, the present value needed to generate a given future payout increases. For example, if you’re expecting $1,000 per month in retirement, a lower interest rate means your employer needs to set aside more money upfront to meet that commitment.
Why Now May Be the Time to Take Action
If you’re nearing retirement and considering a lump-sum payout, keeping an eye on interest rates could be key to maximizing your benefit. As we’ve seen in recent years, even small rate changes can lead to noticeable shifts in pension lump-sum values. By strategically timing your retirement, you could potentially lock in a higher payout if rates are trending down.
Planning Ahead with a Financial Advisor
Choosing between a monthly pension and a lump-sum payout is a major decision, especially with interest rates in flux. That’s where partnering with a financial advisor familiar with your company retirement plan can be invaluable to help plan and see the impact of choosing a monthly pension payout or the lump-sum.
Whether it’s about your 401(k), pension, RSUs, taxes, investments or anything else, I’m happy to help.
Advisory services are provided by Apollon Financial, LLC (“Apollon”), an investment adviser registered with the Securities and Exchange Commission.