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Honda Associates: Changes to Your Lump Sum Pension

Honda Associates: Changes to Your Lump Sum Pension

January 03, 2023
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It’s that time of year again… That time of year when Honda lump sum rates are declared.  The good news is that you have a little bit of time to weigh what makes more sense to you - but no later than March 1st  (i.e. when to retire and if you should take the lump sum vs. pension payments).  The challenge is that time is quickly running out to make these decisions…. And the decisions are much more impactful this year than any other year I can remember.  

The background to this lump sum change is in interest rates and how aggressive the Federal Reserve has been this last year in changing these rates.  For example, the last time we had an interest rate hike of over .75% was in 1994.  This .75% rate increase happened 4 times in this past year (apart from other hikes of lesser rate increases).  The Federal Reserve has been very aggressive in their policy to try to stem off inflation. 

Generally speaking, if segmented interest rates go up in a declared period, then lump sum rates go down, which is the case in April of 2023 (however, you need to have your commencement date in March of 2023, or before, to not see this drop).  We are seeing calculations of between 25% to 30% drops in pension lump sums, if you wait too long.  To me, this is historic, as I don’t remember a time when there was such a large swing in lump sum declared rates.

Another way to think about this is, “do I want to work for another 1-2 years for free, because I took such a hit on my pension lump sum?  If you lose, let’s say, $150,000 in your lump sum post April, and your salary is $75,000, you are, in essence, working for free for two years.  Keep in mind that these figures are flat (no increase in salary, other type benefits such as health insurance, and the lump sum rate doesn’t change in the following years.  All these are variables that can, and will, change). For the purpose of illustration and simplicity however, the above illustration should help you in your own analysis of if you should retire.

As a caveat, please keep in mind that this decrease next year is for the lump sum amount only.  If you choose to take monthly draws from the pension, and not the lump sum, this big swing will not affect those monthly pension amounts.  There are other risks associated with monthly pension draws however, such as inflation risk due to no cost-of-living adjustments to the monthly draws, estate preservations, etc. 

I know this seems like a lot, which is why I urge you to give our office a call to go over and to know your options.  I appreciate your time in reading this and we look forward to helping you!

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