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.

 

What Data is Your Chevron Retirement Plan 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 on 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 February 2023, Chevron would use the blended rate available through November 2022 (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.  

Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2021_9_1600x900-February 2023 Retirement

In our February 2023 retirement example, the average of November 2022, October 2022, and September 2022 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 $1.94 million if you started your pension in February of 2023.  

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 May 2023 (just three months later than the February 2023 scenario), Chevron would use the segment rates through February 2023. Those rates look back on the time period from December 2022 through February 2023:   

Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2021_9_1600x900-May 2023 Retirement

In this instance, the lump sum actually increases to approximately $2.02 Million. 

That’s a difference of over $74,000 by waiting three months to retire.   

Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2021_9_1600x900-May 2023 vs February 2023 Retirement

The pension lump sum value increased for a May 2023 retirement because of the decrease in segment rates that was factored into the blended rate equation. (Remember, when segment rates increase, your pension lump sum value decreases.)   

Let's consider a different example from a lower interest rate environment, just one year ago. Suppose you decided to start your pension in May 2022 (just one year earlier than the May 2023 scenario). For the May 2022 retirement, Chevron would use the segment rates through February 2022. Those rates look back on the time period from December 2021 through February 2022:  

Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2021_9_1600x900-May 2022 Retirement

Using the same scenario from above, your expected lump sum pension value in May 2022 would be approximately $2.44 million. 

If you chose to retire 12 months earlier, in May 2022 rather than May 2023, you would have earned an additional $423,000 in your CRP payout.  

Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2021_9_1600x900-May 2022 vs May 2023 Retirement
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.

What are the 6 Most Common Chevron Retirement Mistakes? Find out here.  

 

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.  

Early in 2022, the Federal Reserve raised interest rates for the first time in three years. Since the first meeting of the FOMC in 2022, the Fed has continued to raise rates to try to fight inflation. The latest inflation numbers available in April 2023 put U.S. inflation around 5%, and the Federal Open Market Committee projected that rates would remain around 4% for the remainder of 2023.  The 10-year Treasury yield is highly correlated to the segment rates used to calculate your pension amount. Back in May, the 10-year treasury rates hovered close to 2.50%, but in early 2023 they stayed closer to 5%. The last time 10-year yields were in this range was in 2007! Based on the historical data, we believe the segment rates peaked in late 2022 and may begin to trend downward in the coming months.   


Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2021_9_1600x900-01

Segment rates correlate with US Treasury rates; when Treasury rates are on the descent, segment rates will decline accordingly. And, as mentioned, lowering interest rates means a higher 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 we continue to see rates trending downward in the coming months, that has a positive impact on pension calculations and could give you a reason to postpone your pension election date to get a larger lump sum pension payout. Time your retirement date to take advantage of the best rate/pension scenario for you. 

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 in the summer of 2023, you will be able to review rates from March 2023 or April 2023 to determine if it is financially advantageous to retire in June or July 2023.  

While in this example, we've determined that a May retirement would equate to a larger lump sum pension than if you’d retired in February, if rates continue to decline, it may be more advantageous to delay your retirement into late 2023 rather than accelerating it to receive an even larger lump sum. 

 

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

Before the rise in rates in 2020, segment rates had been coming down since November 2018. Upon the release of March 2022 rates, we saw the intermediate and long-term rates jump significantly. Rates drastically rose throughout 2022, however, in early 2023, we’ve begun to see a tapering off and the early start of a downward slope. With continued and substantial concerns about rampant inflation, we expect to be in a high interest rate environment for the coming months.   

Segment rates are based on broad market interest rates, which declined sharply throughout the COVID-19 lockdowns— whether you’re looking at short-term rates (segment 1) or long-term rates (segment 3) — but sharply increased throughout 2022 from a range of .25%-.5% up to 4.25%-4.5% by year-end. The Federal Reserve Chairman, Jerome Powell, announced in March of 2022 that the Fed would be raising interest rates and bumping the federal funds rate to combat inflation as it rose to over 9% in the summer of 2022. However, as the Fed continued raising interest rates into 2023, we’ve begun to see inflation start receding. One of the factors we’re watching closely is housing and rent costs, which factor into Core CPI – an inflation indicator that’s been slower to come down in recent months – and have stayed stubbornly high in late 2022 and early 2023.  Only time will tell if the Fed’s efforts to combat these elements of inflation will prove successful and lead to rates lowering in 2023’s later months. 

With that, it may be more attractive to prolong your retirement into the later months of 2023 instead of accelerating your pension election date. 

The primary reason for this increase is the economic outlook. As concerns surrounding inflation remain top of mind, the Fed faces continued pressure to raise interest rates to alleviate pressures on the everyday consumer. Remember, segment rates and lump sum pension amounts have an inverse relationship.

Segment rates are far from the decade lows we saw in 2020, and trends and leading indicators point to potential tapering in the coming months. 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 May could mean a substantially higher payout than if they decided to retire earlier in 2023. However, interest rates could remain high for many months while the Fed fights inflation, so if you have flexibility in your retirement planning, waiting until interest rates drop again may be more beneficial.   

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 process and the ways we can support you in preparing and positioning yourself for retirement. 

 

Alexis Long, MBA, CFP®

Alexis Long, MBA, CFP®

MANAGING DIRECTOR, WEALTH MANAGEMENT

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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.