Higher interest rates are inevitable. Keep in mind interest rates are rarely if ever this low and so that means, using the mean revision theory, which sooner or later interest rates will rise. I predict when a solution is found for student loan debt the Federal Reserve will begin to increase interest rates. Until then neither the Fed, the President nor the Congress can raise the interest rates. Because to do so would destroy consumer spending, which accounts for too large a portion of the U.S. economy.
But before we get the cart ahead of the horse let’s get back to how interest rates affect your workers’ compensation benefits.
Higher inflation and interest rates are in your future. And so what are the effects of each on the amounts you receive in Iowa workers' compensation weekly benefits?
Iowa’s weekly compensation rates are stagnant, the weekly amount will never change because there is no cost of living adjustment permitted or required by law. And so, if the weekly amount your receive today is $400.00 then in twenty years it will still be $400.00. The amount doesn’t change. So what does that mean to you? It means that inflation eats away at the purchasing power of the widow’s weekly compensation payments. If today a loaf of bread costs $1.50 and in twenty years $4.50 you can see that the same $400.00 per week doesn’t buy as much as it will today.
Interest rates are at an all-time low which means sooner or later they will have to rise. And so as they rise what does this mean to you if at some point in the future you want to convert to a lump sum?
The relationship is simple. The higher the interest rates go, the smaller the amount you will receive in a lump sum. The lump sum amount is directly related to how much income it will take to pay the $400.00 per week. If you are earning 2% on $1,000,000.00 sitting in your bank account the income per year is $20,000.00. Divide $20,000.00 by 52 weeks and you can pay out $384.62 every week. Now if you could earn 4% on that same million dollars then you’d be able to payout twice what you could at 2%. And so at 4% you only need half a million dollars to be able to pay out the same $384.62 per week.
Now look at this in reverse. If to discount your weekly check into a lump sum that $400.00 per week payment requires a million dollars at 2% but only $500,000 at 4%.
Now widows and widowers lump sums are further adjusted for the likelihood of remarriage, but that is for another day. Today let’s just understand the relationship between interest rates and lump sum amounts.
So I gave our readership examples in a previous blogs.
- GET ONE LUMP SUM OF YOUR IOWA WORK COMP BENEFITS
- WC: LET US SEE JUST HOW RISING INTEREST RATES REDUCE YOUR LUMP SUM SETTLEMENT
In all fairness some people should not have a lump sum because their ability to handle money is so bad that they would waste it. Other people receiving weekly benefits for life just want the weekly supplement and find the idea of managing money too much work. That’s okay, if you are satisfied with weekly benefits don’t change, but know what you are giving up.
So to conclude today’s blog, get advice about the risks and benefits of converting your weekly workers’ compensation check into one lump sum of money. Then you will be able to decide which is right for your and know when to act if your marital status might change.