Mayo Clinic is offering a one-time choice to make regarding your pension benefit from 8/14/2023 through 9/15/2023. Here is a summary what you need to know:
- What is changing
- You have the option to change how your future pension benefit is calculated to the new Stable Lump Sum Formula by logging into www.mayoemployees.org between 8/14/23 and 9/15/23
- Changing your pension formula will impact your benefit payout amounts depending on which payout option you choose and what interest rates are when you retire
- What is not changing
- You will will still have the ability to choose either a lump sum, or monthly payment when you retire
- Your pension benefit accrued prior to 2024 will still be calculated under the Annual Accumulation Formula
- If you do not make an election, you will remain on the Annual Accumulation Formula after 2024
Pension Formula Choices (What you need to decide now)
- Annual Accumulation Formula (Current Method)
- Accrue 1.4% of your monthly pay (2% for pay above the Social Security wage base $160,200 in 2023)
- Example: Earn $150,000 salary for 10 years. You will receive credit for $175/month so after 10 years, your benefit is $1,750/month starting at age 65.
- Your monthly payment will be stable, and not impacted by interest rates
- Can be converted to a lump sum instead of monthly payment at retirement
- A relatively high interest rate when you retire will result in a lower lump sum when compared to if you select the Stable Lump Sum Formula
- A relatively low interest rate when you retire will result in a higher lump sum when compared to if you select the Stable Lump Sum Formula
- If you do nothing, you will remain on this formula
- Stable Lump Sum Formula (New Option)
- Accrue 18% of your pay (26% for pay above the Social Security wage base $160,200 in 2023)
- Example: Earn $150,000 salary for 10 years. You will receive credit for $27,000 so after 10 years, your lump sum benefit is $270,000.
- Your lump sum payment will be stable, and not impacted by interest rates
- Can be converted to a monthly payment instead of lump sum
- A relatively high interest rate when you retire will result in a higher monthly payment when compared to if you select the Annual Accumulation Formula
- A relatively low interest rate when you retire will result in a lower monthly payment when compared to if you select the Annual Accumulation Formula
- You need to login to mayoemployees.org between 8/14/23 and 9/15/23 to elect this option if you wish to switch to the Stable Lump Sum Formula.
So which choice is best? It comes down to a variety of factors, the biggest one being what interest rates are when you retire. Since interest rates are impossible to predict, it is advisable to choose the formula based on which pension payout choice (discussed below) you plan to select when you retire. If you think you will take the monthly payment, stay with the Annual Accumulation Formula. If you plan to take the lump sum payment, switch to the new Stable Lump Sum Formula. By aligning how your payout is calculated with how you plan to take it, you will have the most predictability in what your final benefit will be.
Pension Payout Choices (What you will decide when you retire)
Regardless of which formula you choose now, you can still choose either a lump sum or monthly payment from your pension when you retire. You are only electing how your future payment will be calculated starting in 2024. You are not electing if you will be taking the lump sum or the monthly payout now.
Since it makes sense to align your pension formula choice (now) with how you plan to take your pension benefit (later), it is worth thinking about the pros and cons of the monthly payment or lump sum payout options. It will be important to revisit this question again when you retire since that is when you will make your final pension payout choice.
Download my free lump sum vs. monthly payment decision guide from the Retirement Readiness Resource Library here. Some of the biggest considerations when deciding to take a monthly payment or lump sum of your pension benefit are:
|Stable under the Annual Accumulation Formula.
|Stable under the Stable Lump Sum Formula.
|Guaranteed monthly payment for your lifetime provides protection against longevity risk.
|Low investment returns plus a long lifespan can result in lump sum being completely drawn down.
|Monthly payments stop upon death unless you choose survivorship options. Survivorship options reduce your monthly benefit. Short lifespan results in not collecting much of your pension benefit.
|Remainder of lump sum is inherited by your beneficiaries.
|No investment risk
|Lump sum value will fluctuate depending on your investment performance.
|Potential for your money to continue to grow depending on your investments.
|Taxable as income year received
|Withdrawals are taxable, but highly flexible. Allows Roth conversion strategies. Required Minimum Distributions do not begin until age 73-75 allowing for continued tax-deferral and tax planning strategies until you reach RMD age.
|Access to all your funds if needed for medical bills or other large expenses
|If employer goes bankrupt, may be unable to meet pension obligations for benefits not covered by the Pension Benefit Guaranty Corporation (PBGC).
|Considered your money when taken out of the pension plan and generally protected in bankruptcy if rolled into a qualifying ERISA plan
|Those that are risk averse, expect to live a long time, and like the idea of a guaranteed monthly payment.
|Those that want their retirement funds to continue to grow and allow funds to be passed on to beneficiaries. Those that have other retirement investments and want to maximize tax efficiency. Willing to accept risks that come with investing to potentially get a higher return.
As you can see, you will want to factor in your income needs, longevity, estate plan, taxes, liquidity needs, risk, and personal preferences into your financial plan when making the final decision of how to have your pension paid out.
Although which formula you choose now will impact your final benefit payout, the good news is you will still have the flexibility to choose either the monthly payment or lump sum when you retire.
I understand there is a lot of information here to digest. If you still have questions – I’m here to help.