Time To Retire?
If you're among the lucky minority of employees eligible for a pension when you retire, you may have a choice. You may be able to choose between taking your benefit as a lump sum or as a monthly annuity. In many cases, the lump sum value changes as interest rates move up or down.
Current interest rates are rising. You may be seeing your lump sum pension benefit decrease in absolute dollar terms. For long-service, well-paid employees, the dollars can be large. It can be tempting to use the lump sum interest rate as a kind of Rosetta Stone that aligns all the factors affecting the decision into a clear conclusion.
Before you jump ship, take a deep breath, and let's examine the retirement decision more closely. Our intention here is not to convince you to keep working or to ease you into retirement. Rather, consider retirement from three perspectives to make an informed decision about what's best for you.
Financial Perspective: With a little help from your benefits office, you should be able to compare the lump sum benefit under the two interest rate assumptions. But before you allow that difference to drive the decision, consider the impact of continued employment versus retirement.
Choosing work rather than retirement implies ongoing salary and benefits, which likely means you're going to continue to save for your retirement by contributing to your 401(k). You may continue to receive stock options or restricted stock. You'll get employee rates on health insurance. You won't forfeit your ability to use NUA tax treatment on low-cost employer stock when you finally do hang it up. You'll postpone the start of relying on your savings for your upkeep and welfare. But you will still have employment-related expenses like commuting and work clothes and employment taxes of Social Security and Medicare.
Your family budget might change in retirement—additional travel or hobbies, for example, or that trip to Disney World with the grandkids that you haven't had time for while at work. If you're inclined to believe retirement is a primarily a financial decision, take the time to consider both immediate and longer-term consequences.
Personal Perspective: Leaving employment impacts three aspects of who you are.
First, how do you feel about stopping the work you've devoted long hours to over many years? Have you accomplished what you wanted, have you left the legacy you intended, will your successor carry on well, or will those left behind view you as deserting a sinking ship? Can you leave it all behind, or are there things you want to accomplish before you go?
Second, how does your spouse (or significant other) view the prospect of spending more time with you--perhaps much more time--than in the past? Is your spouse looking forward to doing things with you, or dreading having you foot-loose at home, interfering in his or her routine? I continue to work in part because my dear wife told me long ago, "I married you for better or for worse, but not for lunch."
Finally, before you walk away from your job, consider the impact of retirement on yourself. To what extent are you ready to give up the status, the reputation, and the influence you have at work? Are you prepared to create a new identity for yourself? Upon retirement, you may feel that you've gone from "Who's Who" to "Who's he?" Are you prepared now for the shift that will eventually happen?
Plans for the Future: If you're in good health and anticipate a typical retirement of some 20 to 30 years, you need to think through a game plan for this next chapter. What are you going to do? Does the prospect of freedom to set you own agenda excite you or make you apprehensive? Have you begun the process of establishing contacts for what will occupy part of your time after retirement, or are you going to be starting from scratch? There are countless opportunities for healthy retirees, ranging from the golf course to volunteer activities to continuing education to travel and more—but our recommendation is to have thought through at least a few of these before actually setting off on your new life.
Because deciding to retire is so important and impactful, it's not uncommon to seek out an objective factor, like the lump sum interest rate, to help make up your mind. It's a tough decision. We believe the interest rate is important once you've made up your mind to retire—it can help you decide on specific timing. But we'd caution those contemplating retirement to consider non-financial factors as well. It's an important decision—make it a well-informed one.