Have you looked at the AT&T memos (see below) recently discussing how rising interest rates will drop some AT&T employees pensions by 30%? If AT&T is putting this in a Memo it must be important.
Every news site that you visit, the headlines are plastered with "LUMP SUMS FALLING". " MORTGAGE RATES SURGE", “HISTORICAL INFLATION RATES HIGHEST IN 40 YEARS” or “HIGHEST INTEREST RATES IN THE 15 LAST YEARS”.
As an employee of AT&T, what does this actually mean for you, your net worth and your pension as you approach retirement?As inflation increases it affects interest rates. Higher interest rates at most divisions of AT&T cause the lump sum to fall. In order to track the directions of interest rates you first need to understand and track inflation.
So let us start with the definition of Inflation. Inflation is known as the increase in general price levels of goods and services. Inflation is measured through the CPI, the Consumer Price Index, which is produced by the Bureau of Labor Statistics.
Inflation is an expected occurrence and many people who retire tend to expect a consistent rate over their life span and calculate their retirement expenses with this in mind. However, these calculations quickly change when there are abrupt increases in inflation. Unexpected inflation can have devastating effects on a AT&T employee’s savings as it whittles away at your spending power faster than you expect it to. Today, you might be able to buy groceries within a certain budget, but during an inflation spike, groceries will outpace your budget and soon enough, you’ll find yourself spending considerably more for your normal grocery bundle.
In order to control the rapid rise of inflation, the Federal Reserve uses interest rates to dissipate inflationary pressures. As interest rates increase, inflation generally decreases. This relationship is caused by how interest rates affect the rate of borrowing money. When interest rates are low, people will borrow money as they pay less in interest. This fuels the economy and increases inflation. As interest rates rise, people will borrow less and the markets will move slower as there is less fuel to add to the fire. These factors go hand in hand in an economic balancing act.
You may be wondering: “How does this affect my AT&T pension? Should I be choosing lump-sum or annuity?” As pension lump sum amounts are calculated using the current segment interest rates on the IRS table, choosing lump-sum versus annuity can be a difficult decision. With interest rates rising big next year, the lump sum option has been as attractive as ever and with looming pressure on the Fed to raise rates, this decision will be less cut and dry. Since lump-sum pensions are inversely affected by interest rates, the higher interest rates rise, the less you will receive from your AT&T lump-sum pension. As interest rates rise however, annuity pensions become a lot more attractive as they use current interest rates to calculate your lifetime monthly payments. The issue with the annuity is you are then married to AT&T for the rest of your life
In regards to healthcare, it is currently lagging behind the country’s 8% inflation rate and has only risen 5% over this past year. However, we are seeing a labor shortage in the healthcare sector, which can lead to a rise in wages to attract workers and would ultimately increase prices and insurance premiums for patients. Many AT&T retirees typically rely on Medicare to support them in their healthcare costs, however, Medicare rarely covers all costs and patients are required to pay a premium on top of out-of-pocket expenses. These premiums will increase as inflation continues to increase, leading to an overall increase in expenses for healthcare. For the upcoming year, Medicare Part B premiums increased by 14.5%, pushing the standard monthly premium to $170.10. Even though, as a whole, healthcare costs have not risen in line with inflation, we have seen very high inflation for those nearing or at retirement age.
With increasing prices in drug expenses and Medicare premiums, the Employee Benefit Research Institute (ERBI) found in their 2022 report that couples with average drug expenses would need $296,000 in savings to cover those expenses in retirement - a 10% increase from the year prior. Couples with higher drug expenses would need $361,000 to cover those healthcare costs - an 11% increase from the year prior.
Overall, the landscape of the economy is rapidly changing and these recent developments have been shifting people’s expectations and forecasts for retirement. Understanding how inflation and interest rates will affect your retirement is a vital step in crafting a successful retirement plan.