What about a "Lump Sum"?

We all got a letter recently describing the changes to the lump sum payout, blamed on the federal Pension Protection Act (or as I call it, the federal Bailout of Corporate Responsibility to Their Employee’s Act). The letter explained everything well in a general vague way, except the only thing most people want to know - “exactly how will it effect me”. But that’s a rant for another day.

This year (2009) your lump sum is calculated by a formula that is MOSTLY meaningless for decision making purposes. There are only 2 elements of the formula you need to look at to decide whether to jump or hang on.

1) Years of service - the longer you work for KP the bigger your payout (same as for the annuity)

2) The current Interest Rate used in the calculation. NOTE THE GATT RATE DOESN'T EFFECT YOU IF YOU TAKE THE ANNUITY (mostly true, but not quite that simple). Until they make the Pension Protection Act change mentioned above, the rate used is called the "GATT" (General Agreement on Tariffs & Trade), another federal scheme to confuse the public to the point that we'll pay our taxes rather than try to undestand it. The GATT rate is essentially the 30 Treasury Bond rate.

Here's where you need to go to the KP retirement site & start playing with the numbers.

http://myretirement.kp.org/

It's very important to set up your access (takes weeks to initiate) & then you must spend some time (sweat equity) working the numbers. This will begin to give you a feeling for the significance of the variables.

Be sure to print out the various scenarios - you will be locked out of the site once you declare your intention to retire.

Let's look at some examples from former employees.



Comparison of various dates of retirement shows that the lump sum payout increases by $5,000 per month over the next few years. So “Jane” earns $60,000 more in her lump sum for every year retirement is delayed.

Sounds plush, right? So what does Jane get to live on? ‘Couple of years ago, we’d say to guess a 6% return on investment. So for each additional year of service, Jane would have $3600 / year more or $300 / month to live on.

One year of your life = $300 / month more for what’s left of your life.

Meditate on that at second level.

Try it again, at a more micro degree. Each additional year working adds - $1.73 / hour to your pension.

Remember that we are assuming a consistent 6% return. Have you noticed the financial realities out there lately?

Let’s look at GATT rates:

Jane plays around on the retirement website some more. This time testing various GATT interest rates, leaving the retirement date unchanged.

She compares rates in several variations & notices that each 0.01% change in rate impacts her lump sum by $1000. Let me repeat that.

EACH ONE ONE-THOUSAND’S OF ONE PERCENT change in GATT rate increases or decreases her lump sum by $1000.

Let’s go back over this: Jane works 1 year more to get $3600 more lump sum pension, but an interest rate change of 0.036% would match that difference.

So how much do GATT rates fluctuate over time? There’s the question of the century or year or, lately, month. That’s the rub. Let’s look at rates over last six month:

2009 GATT Rates
March 3.64
February 3.59
January 3.13
2008 GATT Rates
December 2.87
November 4.00
October 4.17
September 4.27

{Be clear about what rate you get based on when you retire - to be covered in another posting}

>>>>>>>>>>>>>>>>>>

Everything below is now wild guestimating.

Let's say Jane took the 4.27% rate instead of waiting for the 2.87%. Difference is 1.4%, which comes to a loss of $140,000!

'Course by waiting the three month she did earn $900 for longevity.

Now Jane decides to wait. Rates are going down, which is good, right?

The next month the rate goes to 3.13% Oops. it went UP. Now she "lost" $26,000 from the last months rate, but is still ahead of the 4.27% rate by $114,000.

Jane decides to wait.

The next rate goes to 3.59% Shoot. It went UP AGAIN. Now she "lost" another $46,000 from the last months rate, but is still ahead of the 4.27% rate by $68,000.

Confused?

So is Jane. What IS the trend?

Let's re-look at a predictor of the GATT rate trends from last month. It's hard to read in this format:

30 Year U.S. Treasury Bond Yield Forecast
30 Year Maturity Secondary Market Rate. Percent Average of Month.
Month Date Forecast

0 Feb 2009 3.590 0.00 0.00
1 Mar 2009 3.78 0.40 0.90
2 Apr 2009 3.93 0.49 1.10
3 May 2009 4.10 0.56 1.25
4 Jun 2009 4.29 0.61 1.36
5 Jul 2009 4.49 0.65 1.45
6 Aug 2009 4.70 0.68 1.53
7 Sep 2009 4.90 0.72 1.61
8 Oct 2009 5.10 0.75 1.67
Updated Thursday, March 12, 2009

It predicts the March rate as 3.78%. The rate came out today as 3.64%. Not as bad as predicted, BUT LOOK AT THE TREND.