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October 26, 2023

AT&T Interest Rates Heading in the WRONG Direction

AT&T pension lump-sum values have plummeted In recent years. The financial landscape has been anything but stagnant. For AT&T employees eyeing the golden shores of retirement, the rise in Minimum Present Value Segment Rates since November 2021 has stirred the waters significantly, notably impacting the value of their pension lump-sums. AT&T employs a formula tethered to these interest rates to calculate the lump-sum value of an employee's pension, applying the November rates to all retirements in the ensuing year.

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Let's delve into the heart of the matter: the more substantial the interest rates, the less the lump-sum value. Specifically, a 1% rise in interest rates equates to roughly a 10% drop in lump-sum values for AT&T employees. The most impactful of these rates, the second segment rate, leaped from 2.72% in November 2021 to 5.66% as of September 2023 — a nearly 3% increase.

Now, let’s illustrate this with a couple of practical examples:

Consider an employee who had a $1 million lump-sum value in 2022. With the almost 3% increase in the second segment rate, the lump-sum value would plummet by about 30%, settling at around $700,000.

Similarly, for an employee with a $500,000 lump-sum value in 2022, the new lump-sum value would shrink to approximately $350,000, given the same rate increase.

These scenarios underscore a stark reality: the tide of rising interest rates is pushing the boat of retirement savings farther from the desired haven.

However, there’s another route on the retirement journey that might appeal to some – opting for an annuity instead of a lump-sum. An annuity provides a steady stream of income throughout retirement, which can act as a financial buoy in the turbulent waters of fluctuating interest rates. While the lump-sum value decreases with rising rates, the annuity option might offer a steadier, albeit potentially lower, income. It’s a choice between a fixed, reliable income and a potentially higher, but fluctuating, lump-sum that requires careful consideration.

Picture this: the lump-sum and annuity options are two different boats. The lump-sum boat is faster but affected significantly by the currents (interest rates), while the annuity boat is steadier, offering a calm sail towards the retirement horizon despite the changing tides.

As AT&T employees near the cusp of retirement, these financial currents demand navigation with foresight and strategic planning. The choice between a lump-sum and annuity, against the backdrop of rising interest rates, will significantly steer the course of their post-work life voyage. Making an informed decision requires a keen understanding of the financial waters and, perhaps, consultation with a financial advisor to chart the most favorable course towards the serene shores of retirement.