(TL;DR – The 2024 November lock-in rate is better than the 2023 lock-in rate, so your lump sum pension will be worth more if you retire in 2025! It is still not as low as the 2021 rates, but we are heading the in the right direction.)
How AT&T Non-Management Employee Lump Sum Pension Amounts Are Calculated Using Minimum Present Value Segment Rates
For AT&T non-management employees, pension benefits can be received either as a monthly annuity or a lump sum payment at retirement. Many employees opt for the lump sum payment, but understanding how this amount is calculated is crucial for financial planning. One of the key components influencing the lump sum calculation is the Minimum Present Value Segment Rates. In this post, we’ll break down the process and factors that determine the lump sum pension amount.
What Are Minimum Present Value Segment Rates?
The Minimum Present Value Segment Rates are interest rates published monthly by the IRS. Whatever these rates are in November determines how the pension dollar amount will be calculated the following year.
Summary of Changes in Segment Rates with Emphasis on November Trends
The Minimum Present Value Segment Rates have shown notable shifts over the years, particularly around November, which often reflects significant adjustments. These changes highlight broader economic trends such as inflation, interest rate policies, and market conditions. Here’s a breakdown focusing on November rates and key observations:
1. Sharp Increase in 2022
• Rates jumped significantly in November 2022, with the first segment rising from 1.02% in 2021 to 5.09%, reflecting rapid inflation and aggressive Federal Reserve interest rate hikes. The dollar worth of the lump sum dropped dramatically at this time.
2. Peak and Decline in 2023–2024
• Rates peaked in late 2023 (5.50% in November) but began falling steadily through 2024, dropping to 4.66% by November 2024, suggesting stabilizing inflation and a possible easing of monetary tightening.
3. Annual Patterns and Trends:
• 2021–2022: Rates increased rapidly, driven by inflation and rising Treasury yields.
• 2022–2023: Rates remained elevated but stabilized by November 2023.
• 2023–2024: Rates declined, indicating a possible shift to lower inflation expectations or anticipation of interest rate cuts.
4. Implications for Pension Lump Sums:
• Higher Rates (2022–2023): Reduced lump sum values, as future payments were discounted more steeply.
• Lower Rates (2024): Increased lump sum values, as payments are discounted less aggressively.
Key Takeaway:
November has consistently marked turning points in interest rate trends, reflecting broader economic shifts. Employees nearing retirement should closely monitor these changes, as they directly impact the lump sum pension values offered under AT&T’s plan. Recent declines in 2024 rates could make this an opportune time for retirement to maximize lump sum payouts.
November Segment Rate Trends (2021–2024):
Month/Year Segment 1 Segment 2 Segment 3 Rate Movement (1st Segment)
Nov-24 4.66 5.25 5.57 -0.84% (↓ from Nov-23)
Nov-23 5.50 5.76 5.83 -0.41% (↓ from Nov-22)
Nov-22 5.09 5.60 5.41 +4.07% (↑ from Nov-21)
Nov-21 1.02 2.72 3.08 +0.15% (↑ from Nov-20)
How Rates Are Calculated
These rates are used by pension plans to calculate the present value of future pension payments. These rates are divided into three segments, each applying to different time periods within the expected payment timeline:
1. Segment 1 Rate – Covers the first 5 years of payments.
2. Segment 2 Rate – Covers years 6 through 20.
3. Segment 3 Rate – Covers payments beyond 20 years.
Since pensions involve future payments, the segment rates are used to discount those payments to today’s value (present value), which forms the basis for the lump sum amount.
Key Factors in Lump Sum Pension Calculations
1. Future Annuity Payments
• AT&T’s pension plan first determines the monthly annuity you would receive based on your years of service, salary, and a defined benefit formula.
2. Mortality Table
• The plan applies IRS-mandated mortality tables to estimate the probability that payments will be made over your lifetime. These tables account for life expectancy based on age and gender.
3. Discounting to Present Value
• Using the IRS segment rates, the expected future payments are discounted to today’s value.
• Lower interest rates result in higher lump sums (since payments are discounted less), while higher rates produce lower lump sums (as payments are discounted more heavily).
Step-by-Step Calculation Process
1. Estimate Monthly Pension Annuity
Example: Suppose your monthly pension benefit is $3,000.
2. Determine Annual Payments
Annual payments = $3,000 × 12 = $36,000
3. Apply Mortality Tables
Assume a life expectancy of 25 years post-retirement. Payments would span 300 months or 25 years.
4. Discount Each Segment
• Segment 1 (Years 1–5): Discount payments using the Segment 1 Rate.
• Segment 2 (Years 6–20): Discount payments using the Segment 2 Rate.
• Segment 3 (Years 21–25): Discount payments using the Segment 3 Rate.
If current rates are:
• Segment 1 = 5.00%
• Segment 2 = 5.50%
• Segment 3 = 6.00%
Payments are discounted based on these rates, reducing their present value relative to future payments.
5. Add the Present Values
Sum the discounted values from all segments to arrive at the total lump sum amount.
Example Calculation
Let’s assume:
• Monthly pension = $3,000
• Annual payments = $36,000
• 25-year lifespan post-retirement
If segment rates result in a present value factor of 15, then:
Thus, the employee would receive $540,000 as a lump sum based on the segment rates applied.
How Interest Rate Changes Affect Lump Sums
Interest rates are a critical factor in this calculation. When rates increase, the lump sum amount typically decreases because future payments are discounted more heavily. Conversely, when rates decrease, lump sums increase since future payments are discounted less.
Employees nearing retirement should monitor IRS segment rate trends and consider timing their retirement to maximize their lump sum payouts if rates appear likely to drop.
Key Takeaways
• AT&T uses IRS Minimum Present Value Segment Rates to calculate lump sum pension values.
• Lower rates lead to higher lump sums, while higher rates lead to lower payouts.
• The lump sum calculation considers future payments, mortality assumptions, and discounted values based on interest rates.
• Monitoring interest rates can help optimize retirement timing to maximize lump sum benefits.
If you’re an AT&T employee, it’s essential to consult with your HR benefits administrator or a financial advisor to evaluate your specific situation and ensure you make the best retirement decision.
