Rick Ferri, founder and CEO of Ferri Investment Solutions, is well known for his emphasis on passive investing and his focus on calling out what he sees as fundamental flaws in the way most people invest.
According to Ferri, most long-term investors will do best by selecting a few low-cost index funds that match the returns of the markets and doing whatever it takes to remain disciplined.
Ferri also has a passion for financial planning, and he works with clients to incorporate family needs, tax considerations and distribution decisions into the investment process. In a moment when interest rates are surging and the financial markets are gripped by volatility, he is taking time to warn near-retiree clients about a potentially overlooked consideration that could rob them of significant retirement wealth.
The consideration applies to any client who would answer the following question in the affirmative: "Are you retiring next year taking a lump sum from a pension?"
If so, Ferri warns, the client should figure out when their employer changes the IRS-specified "minimum present value segment rates" used in the operation of the pension plan in question— and why both the date of the change and the rate itself matter for their financial future.
What Are Minimum Present Value Segment Rates?
As noted on the IRS' website, for a pension plan to qualify for tax-exempt status, the plan sponsor must arrange sufficient funding for the plan's future liabilities, including future pension benefits. Determining sufficient funding requires calculating the present value of future benefits which is, in part, based on discounting those benefits with interest.
The IRS, on its website, provides the interest rates a plan actuary must use to apply this discounting for a single employer defined benefit pension plan. Generally, for single-employer plans, for funding purposes, the rates for discounting are three 24-month average segment rates, though special rules apply in certain cases.
