Segment rates may have come up in emails from AT&T or conversations around the office. For good reason, these rates are once again gaining popularity.
The IRS released the segment rates that are used to determine lump sum pension payouts in November 2024, and the trend for 2025 indicates that these rates will continue to rise. These modifications may significantly affect your pension benefits if you are an AT&T employee considering retirement.
What Are Segment Rates and Why Do They Matter?
The IRS computes segment rates, which are averages of the yields on premium corporate bonds. They are vital in calculating the lump sum value of defined benefit pensions, such as the pension provided by AT&T.
Rather than receiving a steady annuity income for life, some AT&T employees opt for a one-time lump sum payout. This payout is calculated using the segment rates, which are split into three categories:
- Segment 1: Short-term (1-5 years)
- Segment 2: Intermediate-term (6-20 years)
- Segment 3: Long-term (21 + years)
Because pension plans must ensure they have enough funds to cover retirees for decades, they use conservative investment assumptions based on these rates. When these rates go up, the present value (lump sum) of future payments goes down. And that's exactly what we've been seeing.
What's Happening Now with the IRS-Published Segment Rates?
Interest rates surged in 2022 and continued climbing through 2023 and 2024. By November 2024, the IRS-published segment rates used by AT&T for lump sum calculations reflected some of the highest levels we've seen in over a decade:
- Segment 1: 4.51%
- Segment 2: 5.49%
- Segment 3: 6.07%
Compared to earlier years when rates were in the low 3% range, these new numbers have significantly reduced the value of lump sum payouts. Some employees have seen their lump sum values drop by 20-25% compared to 2021 or 2022 levels, translating into tens or even hundreds of thousands of dollars in lost value.
What Do the Segment Rates Mean for AT&T Employees?
If you're planning to retire in 2025 or within the next 12-18 months, now is a critical time to review your pension strategy. The lump sum option may not be as attractive as it was just a couple of years ago, and the trend of rising interest rates appears to be continuing into 2025.
For employees several years away from retirement, the impact is less immediate. Rates will likely fluctuate again before you're ready to make a decision. However, staying informed and planning is still wise.
Act Now: Evaluate Your Retirement Plan
Your AT&T pension is a valuable benefit, it's crucial to understand how it fits into your overall financial plan, especially in light of interest rate fluctuations. The best option for you will depend on a number of factors, including your age, years of service, pension band, and financial goals.
It is strongly advised that you consult a financial advisor who is familiar with AT&T's retirement plan structure and how segment rates affect your payout. Because not all advisors are familiar with the unique features and complexities of AT&T's pension, choose one with experience.
Ready to Talk?
Let's schedule a call to review your pension options and determine the best time for you to retire to maximize your benefits. Understanding your options now could mean thousands more in your retirement pocket later.
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Disclaimer: The tax rate information referenced in this article is based on data from the IRS as of January 2025. Please note that rates and regulations may have changed since then. For the most current information, consult the official IRS website or a tax professional.
