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.
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 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 2021, Chevron would use the blended rate available through January 2021 (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.
In our April 2021 retirement example, the average of the November 2020, December 2020, and January 2021 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 Recent Interest Rates Affect Your Chevron Pension Lump Sum?
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 $1.997 million if you started your pension in April.
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 October 2020 (six months earlier than the April 2021 scenario), Chevron would use the segment rates through July 2020. Those rates look back on the time period from May 2020 through July 2020:
Using the same scenario from above, your expected lump sum pension value would be approximately $1.954 million. If you had retired six months later, you would have earned an additional $43,000 in your CRP payout.
The pension lump sum value increased for a April 2021 retirement because of continued decreases in segment rates from May through December of 2020 that factored into the blended rate equation. (Remember, when segment 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, perhaps in June or July 2021, you will be able to review the rates from March and April 2021 to determine in which month it's financially advantageous to retire. The IRS has recently published the January segment rates, which saw the intermediate and long-term rates increase for the first time since October. Rates have been coming down since the end of 2019, with March as an exception, and we are starting to see indications they may begin to rise in coming months. While in this example, we've determined that an April retirement would equate to a larger lump sum pension than if you'd retired six months ago, if rates begin to rise, it may be advantageous to retire sooner rather than waiting in order to receive a larger lump sum.
What's the outlook on segment rates and how should you choose your retirement date?
Before the rise in rates in March 2020, segment rates had been coming down since November 2018. Upon the release of January 2021 rates, we saw the intermediate and long-term rates jump significantly. For those looking to maximize a lump sum payout, it may be more attractive to retire early in 2021 to leverage the lower segment rates of late 2020 instead of waiting until later this year. After the record-low interest rates we saw in July of 2020, segment rates have begun to slowly creep upwards. The primary reason for this is the economic outlook.
Within two months of winning the election and announcements of multiple COVID-19 vaccines, we've seen our first big jump in interest rates under the Biden administration. Why? President Biden obtained guarantees from Pfizer to double COVID-19 vaccinations as part of his proposed vaccine rollout which gave many Americans confidence that an economic recovery is on the horizon. This accelerated vaccine rollout comes alongside the possibility of another Coronavirus fiscal relief package which has many giddy at the prospect of returning to normality almost a full year after the initial transition to quarantine. In response to these hopeful prospects, we've seen a temporary uptick in inflation, though the Fed is unlikely to raise rates to abet the increase.
Back in March of 2020, the Fed significantly increased its spending (approximately $2.9 trillion in less than three months) and announced its intention to continue spending if that's what it takes to get the U.S. economy back on track after the chaos following the Coronavirus pandemic. Meanwhile, the Fed has also announced its intention to push the average inflation to be about 2% to maximize employment and price stability across the nation as part of its strategy for a post-pandemic economic recovery and that keeping interest rates low was a part of the same strategy. Segment rates are based off broad market interest rates, which have declined sharply since late 2018 -- whether you’re looking at short-term rates (segment 1) or long-term rates (segment 3).
2021’s segment rates are still substantially lower than in previous years, but we’ve seen the 10-year treasury rate continue its upward trend, pushing close to its one-year high of 1.4% as of 2/22/2021. The 10-year treasury rate is typically a leading indicator of where segment rates are headed. Since the 10-year treasury rates have started climbing upward in recent months, we believe it’s likely for segment rates to begin trending upward in coming months as well. If this continues, it's likely beneficial to choose a retirement date earlier in 2021 than to wait until the summer and fall months. Remember, segment rates and lump sum pension amounts have an inverse relationship.
Segment rates are lower than we've seen in over a decade, but trends and leading indicators point to an upcoming climb. It’s crucial to be keeping an eye on these rates to determine which retirement date can maximize your lump sum pension amounts.
For many executives at Chevron, taking their lump sum pension in April could mean a substantially higher payout than if they decide to wait, but it's a gamble. We believe rates will remain depressed (as compared against 2019’s rates) for the foreseeable future until we reach the Fed's targeted long-run inflation rate of 2%.
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.