Waiting a little can pay off big

Lump-sum payout rules to change for pensions

Dollars & Sense

October 13, 2002|By Julie Claire Diop | Julie Claire Diop,SPECIAL TO THE SUN

If you've been putting off the retirement you've been planning for decades, it might pay to wait just a little longer if you have an old-style pension fund.

The reason is that the tables and formulas used to calculate lump-sum payouts are set to change Jan. 1, and that could mean tens of thousands of dollars more for retirees.

The revisions apply only to defined-benefit plans, so named because employees get a specified amount of money in retirement based on employer contributions.

The federal government says about 44 million people are covered by such plans. The changes - and the windfall - don't apply to holders of the newer 401(k) accounts and other "defined-contribution plans" funded by employee contributions.

The updates affect two parts of the calculation used by companies to determine how big a payout is due. The first involves interest rates on 30-year U.S. Treasury bonds. Usually, the formula uses treasury rates as of October, November or December of the prior year.

The math is fiendishly complex, but the result is that lump-sum payments go up when interest rates go down, and interest rates are lower than they were last year. The result is that when the new numbers are plugged in after Jan. 1, it could boost payouts as much as 10 percent, said Ronald Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries in Washington.

What's more, federal regulators are updating old mortality tables, which used 1983 data to predict how long people will live. The new tables, which also take effect Jan. 1, use 1994 data, which show that people are likely to live longer. That means retirees would collect more money in their lifetimes from their pension funds, which entitles them to a bigger lump-sum payout.

"You're getting savvy people holding off retirement for a few months," said John Ehrhardt, a principal at Seattle-based Milliman USA, which advises employers on their plans.

The amounts at stake aren't small. A 65-year-old woman who has enough credit in her pension fund to collect $30,000 a year could instead take a $333,000 lump-sum payment. This is based on the 5.48 percent August 2001 30-year treasury rate. But if she waits until January, she'd get an extra $25,000 if treasury rates hold around the current level of 4.63 percent.

On top of that, she'd gain $8,000 from the updated mortality tables. That's because people were likely to live longer in 1994 than they were in 1983; a 65-year-old's expectancy increased from 83.7 years to 84.4 years, according to IRS tables. All told, the woman would get $366,000 - an extra $33,000, or 10 percent more - for a few months of extra work.

One-quarter to one-third of plans give participants the option of taking a lump-sum payout, Gebhardtsbauer said. Defined-benefit pension plans hold more than $1.85 trillion in assets last year, 17 percent of the money in retirement plans, according to the Employee Benefit Research Institute.

Planners caution that delaying retirement, even for a couple of months, is not always the best option. For starters, people who don't take a lump sum get a guaranteed monthly income for the rest of their lives. What's more, some companies may already have switched to the new mortality tables.

Julie Claire Diop is a reporter for Newsday, a Tribune Publishing Co. newspaper.

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