How Pension Payouts Are Affected By Interest Rates

The prospect of rising interest rates this year could affect retirement payouts. If your retirement plan offers a choice between an annuity and a lump sum and you were planning to retire in the next year or two, pay attention now.

Lump sum payouts increase as interest rates fall and decrease as rates rise. The general rule is that a one percentage point interest rate increase reduces a lump sum by 10% to 15%. That could translate into tens of thousands of dollars over the next year.

That means it will pay some people to accelerate their retirement dates, since rates are likely to increase in 2005 and possibly 2006. Consider accelerating retirement if you planned to retire in the next year or two and all other factors are equal. In that case, taking the lump sum now instead of later could mean tens of thousands of dollars.

This advice applies to those with old-style defined benefit plans, not 401(k) plans.