How to Pick Your Retirement Date to Optimize Your Chevron Pension

Your retirement date can evoke a multitude of emotions. Your last day of work may make you feel excited, nervous, nostalgic or a combination of all three. You may not be thinking about strategically choosing your retirement date.

As a Chevron employee, you should be aware of the impact various savings and investment options have on your retirement planning. Your Chevron Retirement Plan (CRP) Lump Sum pension is one of the many tools at your disposal.

You should be aware and knowledgeable regarding the way your CRP Lump Sum is distributed, so you can make a wise, strategic decision regarding the date you set for your retirement. In some cases, adjusting your date by a few weeks can make a significant financial impact when it comes to the total pension amount to be distributed.

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What Data is Your Chevron Pension Calculation Based on?

Your pension will be calculated based on your last date of employment and benefit start date. The IRS regularly releases spot segment rates that are used to calculate the CRP Lump Sum.

Your CRP Lump Sum — “your pension” — is not solely based on interest rates. However, looking at recent interest rates over time can give you an idea of how your lump sum will be affected in the calculation and better educate your decision for when to retire.

Interest rates have an inverse relationship with a lump sum pension. When interest rates increase, lump sum pension values will decrease and vice versa.

How Chevron lump sum pension is affected by national interest rates

 

How Does Chevron Calculate the Total Amount of Pension Funds You Should Receive?

While the calculation is fairly complex, the following charts can provide you with an idea of the rates used to calculate your CRP Lump Sum and how they can affect the overall pension funds available to you.

When Chevron employees elect the month they would like to begin their pension, Chevron looks back three months to calculate the rate used for the pension disbursement.  

For example, if you are planning to retire and start your pension in April 2020, Chevron would use the blended rate available through January 2020 (three months prior to your month of retirement). This example shows three months of rates and how they are blended to determine your rates for various segments of your pension.

Chevron-April Rates

In our April 2020 retirement example, the average of the November 2019, December 2019, and January 2020 rates comprise the blended rate.

The segments refer to distinct periods of pension distribution:

  • The first segment rate is used to discount (calculate the present value) the first five years of pension cash flow.
  • The second segment rate is used to discount years six through 20 of pension cash flow.
  • The third segment rate is used to discount years 21+ of pension cash flow.

Together, these rates and terms are used to calculate the lump sum pension value.

 

How Might These Calculations Affect Your Chevron Pension?

Because pension pricing is based on interest calculations, making a slight adjustment in your retirement date may have a significant financial impact on your pension.

As a basic example, consider the following scenario:

  • Your single life annuity pension amount is $10,000/month.
  • You retire at 65.
  • The life expectancy Chevron uses to calculate your pension is age 85.

Based on this information and the segment rates above, your expected lump sum pension value would be approximately $1.854 million if you started your pension in April 2020.

However, your pension calculations will shift depending on the month you choose to retire. As a comparison, if you decided to start your pension in March 2020 (one month earlier than the April 2020 scenario), Chevron would use the segment rates from October 2019. Those rates look back on the time period from October 2019 through December 2019:

Chevron-BlendedRates

Using the same scenario from above, your expected lump sum pension value would be approximately $1.847 million. While that may still appear to be a substantial sum, it is actually $7,000 less than the pension you would have received by waiting one additional month (until April) to retire. This may seem like a small number, but in comparison, if you would have retired in November of 2019, you would have received almost $50,000 less than an April retirement.

The pension lump sum value increased because of the drop in January interest rates that was factored into the blended rate equation. (Remember, when interest rates decrease, your pension lump sum value increases.)

Depending on your pension numbers, the changes in interest rates may have a significant impact on the lump sum value you receive in retirement and could impact your overall retirement planning.

 

How Can You Plan Strategically to Take Advantage of the Best Pension Calculation Time Frame?

There are various trends you can evaluate to help you plan the best date for your retirement, including reviewing rates published by the Treasury Department.

  • Segment rates correlate with US Treasury rates; when Treasury rates are on the rise, segment rates will increase accordingly. And, as mentioned, rising interest rates mean a lower pension calculation.
  • By looking back over a 12-month period and reviewing their predictions, you may be able to get an idea of which direction rates will head in the future. As an example, if during the past several months, rates have trended upward, that has a negative impact on pension calculations.
  • Time your retirement date to take advantage of the best rate/pension scenario. The look-back window gives you an opportunity to set a time period that’s most financially appealing to you.

For example, if you intend to retire later this summer, you will be able to review rates from January 2020 or February 2020 to determine if it is financially advantageous to retire in June or July. The IRS has recently published the January segment rates, which have continued on a downward trend. While in this example, we've determined that an April retirement would allow for a larger lump sum pension than retiring in February or March, if the trend of lowering segment rates continue, it may be more advantageous to wait until later in the summer to retire for an even larger lump sum.

Chevron-SegmentRates-Chart-JD-01

 

What's the outlook on segment rates and how should you choose your retirement date?

Segment rates have been coming down since November 2018. Assuming the rates continue trending downwards over the next few months (which we don’t see a reason to believe otherwise), it may be more attractive to retire later in the year than right now. 

Segment rates are based off broad market interest rates. Interest rates are going down generally -- whether you’re looking at short-term rates (segment 1) or long-term rates (segment 3), they've been declining since about November 18.  

The primary reason for this is the economic outlook. With the spread of the coronavirus affecting the global economy, we have seen our first 10%+ correction since the end of 2018. We feel like there is a strong chance that the Fed will drop interest rates again as a way to try to stimulate the economy.  With the Fed keeping rates low, segment rates will follow suit holding constant or continuing to trend downward. If this continues, it may be beneficial to choose a retirement date later in the year as rates get lower to maximize your lump sum pension payment.

JD- Chevron-QuickReference

As you prepare for retirement, your pension is designed to provide a valuable means of ongoing support. It’s important to ensure you’re maximizing the value it provides. Our financial advisors can offer advice and feedback on your pension planning dates, as well as on additional avenues for making the most of your pension, such as tax-planning strategies. Review our investment process and the ways we can support you in preparing and positioning yourself for retirement.

 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.