Recalculation Date (Pensions): What It Is, How It Affects Your Pension

Read this if you're thinking about retiring and taking the lump-sum option

When it comes to pensions, the recalculation date is the day when the lump-sum amount that you are offered for retirement is re-figured out. This happens every year, and the recalculation is based on several factors, including interest rates set by the IRS called minimum present value segment rates.

The reason this is important is because the recalculation date affects the size of the lump sum retirees will receive if they choose that option instead of a monthly pension payment when they retire. Because interest rates have risen, people who retire in 2022 will receive a higher lump sum-offer than those retiring in 2023.

There are other recalculation dates—for example, there's one for Pell Grants, which provide financial assistance with college—but this article concerns the recalculation date for pensions.

Key Takeaways

  • The recalculation date is the date when the lump-sum offer for a pension plan is recalculated.
  • The recalculation date is at the beginning of the year. Factors such as recent interest rates, mortality tables, and your age are used to figure out the lump sum you are offered.
  • Even though interest rates change throughout the year, lump-sum amounts are usually only calculated once a year.
  • If interest rates change drastically from one year to the next, the recalculation date could make a big difference in the size of your lump-sum offer.
  • If you're going to retire soon with a pension, be sure to factor in the recalculation date if you're planning to take the lump sum rather than a monthly pension payment. For example, it might be more beneficial to retire before the end of 2022 than in 2023, based on current economic factors.

How the Recalculation Date Affects Your Pension

When people retire with a pension, they generally are offered the choice of a monthly payment or a single lump-sum option. The amount of the lump sum is based on a formula that your pension provider determines using factors including IRS-mandated interest rates, your age, and mortality tables. The lump-sum offer is supposed to equate to taking your monthly pension payments as one large sum. Because interest rates can vary, the lump-sum amount is recalculated every year.

Instead of recalculating the lump-sum amount every month with the monthly change in interest rates, the calculation is generally done once a year, at the beginning of the year and is based on recent interest rates. Linda K. Stone, senior pension fellow at the American Academy of Actuaries, explains: "Most companies don’t change it month to month because, administratively, it’s very difficult to do.”

For the most part, interest rates don't make drastic swings from one year to the next, so there isn't a huge impact to your lump-sum offer. But as 2022 comes to a close, interest rates are significantly higher than they were last year. Higher interest rates equate to a lower lump-sum offer for 2023. That's why the recalculation date matters more than usual for people planning to retire in 2022 or 2023.

Stone elaborates: “The reason you haven’t heard about this before—we’ve been in a very-low interest–rate environment for many years. The rates just weren’t moving that much.” So while the recalculation date doesn't usually have a huge impact on your lump-sum offer, going into 2023, the lump-sum amounts offered are going to be affected much more than they usually are. Stone says, “It’s a much more complex decision.”

Recalculation Date Example

It's easiest to understand how the recalculation date will affect your lump by seeing how the numbers can change from one year to the next when going from a low-interest–rate year to a higher-interest–rate year.

The IRS provides minimum present value segment rates that companies generally must use when determining their lump sum amounts. Linda K. Stone explains: "Generally, the IRS has mandated the interest rates that have to be used for lump-sum distributions. Companies don’t have discretion there."

Stone provides a hypothetical example comparing September 2022's segment rates (the most recent ones available) to September 2021's segment rates to demonstrate how drastically the lump-sum offer can be effected. Keep in mind that the segment rates in 2021 are used to calculate your lump-sum offer in 2022, and the segment rates in 2022 are used to calculate your lump-sum offer in 2023.

First, second, and third segment rate during the month of September 2021 Monthly offer for retirement in 2022 Lump sum offer for retirement in 2022
0.70, 2.55, and 3.06 $1,000 $191,000
First, second, and third segment rate during the month of September 2022 Monthly offer for retirement in 2023 Lump sum offer for retirement in 2023
4.48, 5.26, and 5.07 $1,000 $150,000

Source: Internal Revenue Service

The offer drops more than $40,000 going from 2021 to 2022, largely due to the higher interest rates. That's a pretty significant drop, especially seeing as the lump-sum offer generally doesn't change year to year when interest rates are steady.

With this in mind, if you're planning on retiring soon, consider all your options. It might make more sense to retire before the end of 2022. Whatever is offered for your lump sum at the beginning of 2023 will likely not change again until 2024, even if interest rates decline next year.

But you need to act fast. For those who plan on taking the lump sum when they retire, Stone says, "The window is closing very quickly for participants that want to take advantage of this. You can’t wait until the last day of the year to make decision."

Each company's pension plan has its own rules for when an employee can choose to retire and take the current offer of the lump sum, with some as early as mid-November. “Everybody needs to go back to their own plan provisions and find out this information.” If you're considering retiring before the end of the year to get the higher lump sum offer, start talking to HR at your company now.

The Bottom Line

Retiring is a big decision, and your personal situation will ultimately be the biggest factor that determines when is the right time for you to leave work. However, if you have a pension and are considering retiring, comparing your lump-sum offer for the this year to what your offer might be next year based on current economic factors is worth doing if you're considering that option.

Speaking with HR at your company will help you clarify your deadline to decide, and accessing resources such as the Pension Assistance List at the American Academy of Actuaries website can help make what might be a confusing topic much more understandable. Being as educated as possible about it will allow you to make the most informed decision.

Article Sources
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  1. Internal Revenue Service. "Minimum Present Value Segment Rates."

  2. Society of Actuaries. "Lump Sum or Monthly Pension: Which to Take?," Page 3.

  3. Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement: September 21, 2022."

  4. Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement: September 22, 2021."

  5. Wealth Enhancement Group. "How Inflation Impacts Pension Plans in Retirement."

  6. U.S. Code. "26 USC 417: Definitions and Special Rules for Purposes of Minimum Survivor Annuity Requirements: § 417(e)(3) Determination Of Present Value."

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