Will there be a big increase of people retiring in June due to the rise in interest rates?
Lump sums will take a hit July 1st and according to the trend, should take another hit in the next quarter.
Seems that Retirement Eligible people will be working for free if they stay.
Management claims that the amazingly high attrition since January is within annual norms but I think June will be a retirement spike that management did not predict when they fired so many people last December.
The real gain in retiring early is simply not having to work in a toxic cesspool
Attrition is normal
@1ops+1aTGfMIN:
I think the part you are missing about the negative correlation is:
Using the given interest rate and the mortality tables, the Lump Sum plus Interest is calculated to break even with a Monthly Pension (w/o a survivor) at demise. Let's pretend the monthly pension pays out $500,000 at the breakeven point, then the Lump Sum plus Assumed Interest must equal $500,000, too. Keep in mind, it is assumed that the lump sum is invested at a fixed interest rate, whatever that is at that time. You will invest it how you like and do better. If the assumed fixed interest rate is greater, the lump sum will need to decrease to equal $500,000. If the assumed fixed interest rate is less, the lump sum will need to increase to equal $500,000.
That's kind of a high level view of it.
Thank you very much for those great explanations. As a follow up question, why is the interest rate negatively correlated to the payout amount? One guess I had was that the company borrows this money and therefore the lower the interest rate the more money it can give back to you and vice versa. But that is not the case. The company does not borrow the money. The pension comes from a fund managed by the company. So what am i missing?
Should the lump sum interest rate be your only consideration, whether to pull that retirement pin now or later? Not necessarily. There are many other factors you might be considering as well. Let's say you were planning to retire a year from now but the lump sum interest rate moves some out of favor. Are you harmed by that? Maybe, maybe not. During the next twelve months you are still drawing a salary, building a greater pension, investing more, saving more and not dipping into your investment portfolio.
So if you weren't planning to retire yet and if there's nothing else making the exit door start to look good to you, a marginal increase in the lump sum interest rate might not be a big enough reason to make that jump. In the end, when you're ready to go, GO.
@qdb+1aTGfMIN
To add to the very good explanation by @mwt+1aTGfMIN:
Lump sums are discounted by an interest rate calculation that is declared for a certain period of time. Assume Pensioner A takes the lump sum and Pensioner B takes the monthly annunity and they are both the same age. If they die together on the magic date given on the mortality table, they both receive the same amount of money. Pensioner A's lump sum was discounted by the amount that the assumed interest rate would yield if invested there. If his interest rate is assumed to be lower, the lump sum needs to be greater. If the interest rate becomes greater, the lump sum will go down to stay equivalent with Pensioner B. Pensioner A Lump Sum + Assumed Yield = Pensioner B Monthly Annuity.
Pensioner A is a smart person, though. Pensioner A invests his lump sum in the stock market which has a long history of beating fixed income, including the assumed interest rate.
Don’t jump to conclusions about increased retirement in June. Yes, if somebody is already 60 they would absolutely retire in Q2 because their lump sum can only go down from here, but those over 60 are gone - the unlucky ones were thrown out through NSI last summer, the lucky ones retired in February.
If you’re between 55 and 60, the increasing interest rates lower your lump sum on one hand, but on the other the smaller discount for early retirement, increased years of service and even higher salary average for the last three years of work push the lump sum up each extra year you work. On top of that, if you succeed to work for another year (a big if), you still get your salary, which at the end of the career is likely high (and that’s exactly why the company uses the oversized MLRP to hunt down REs).
Individual calculations may vary, but it would take a way above average interest rate to get you at the point where if you work until mid 2022 you would work “for free” (the lump sum loss equals the salary earned during that time). It’s a possibility but we don’t really know how likely. Besides, by mid 2022 we might see the start of an upturn that would heat up the job market. That would explode EM’s attrition, which is high even today, with a lukewarm job market. That might force even the Dallas geniuses to reconsider getting rid of experienced workers, and it might be possible to retire normally at 61-62. By then the regular salary will overwhelm the lump sum loss.
Given all of the above, there’s little incentive to retire in June rather than wait to see if you get PIPed off and if so retire in September. Yes, the Q3 rates are worse than the Q2 ones, but you don’t loose that much for the lump sum, and you get extra three months of salary and a (slim) chance of eventual normal retirement.
Interest rate plays into the lump sum calculation for what you are paid out for the pension. The lower the interest rate, the higher the payout is.
What incentivizes people to retire is the lost opportunity by the interest rate going up. Say a person is making $100k/yr. If they retire at todays interest rate, they can potentially make $1000k with the lump sum. However, if the interest rate goes up next year, they could potentially only make $900k taking it the following year.
Comparing the two payouts would essentially mean that the employee can either walk away with $1000k today or work another year to walk away with $1000k. Obviously I'm making numbers up, but the point remains.
Can someone explain to me how rising interest rates incentivize people to retire? Thank you :)
Consultants have advised senior management that company needs to trim to 55,000 globally. So retirements, poor performers and people quitting will need to get company to 55k global workforce to be competitive and possible merger or buyout.
Yes - the potential alone to impact Lump Sums will help make Retirement decisions.
I suspect there are few looking for the monthly pension.
They were the best and brightest of their generation.
Most managers have already dropped the “attrition is normal” facade by now
Great, so the company gets more of what it is looking for.