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 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 December 2020, Chevron would use the blended rate available through September 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-BlendedRates- dec 2020

 

In our December 2020 retirement example, the average of the July 2020, August 2020, and September 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 $2.006 million if you started your pension in December.

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 November 2020 (one month earlier than the December 2020 scenario), Chevron would use the segment rates through September 2020. Those rates look back on the time period from July 2020 through September 2020:

Chevron-BlendedRates- nov 2020

Using the same scenario from above, your expected lump sum pension value would be approximately $1.99 million.  If you had retired one month later, you would have earned an additional $16,400 in your CRP payout.

The pension lump sum value increased for a December 2020 retirement because of the decrease in September segment rates that was factored into the blended rate equation. (Remember, when segment rates increase, your pension lump sum value decreases.) Let’s consider for a moment that you’d retired in October 2020 instead -- In October, the lump sum was closer to $1.95 million so just waiting two months to take your lump sum would increase the difference by over $50,000.

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..

 

When's the worst time to retire from Chevron? 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.

  • 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 in the winter, you will be able to review rates from October 2020 or November 2020 to determine if it is financially advantageous to retire in January or February 2021. The IRS has recently published the September segment rates, which saw the intermediate and long term rates increase for the first time since March. Rates have been coming down since the end of last year outside of the March rates.

While in this example, we've determined that a December retirement would equate to a larger lump sum pension than retiring in November, if rates begin to rise, it may be more advantageous to retire before the end of the year and not wait till next year for an even larger lump sum.

13 month look at segment rates - sep 2020

 

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. Assuming the rates continue trending upwards over the next few months, it may be more attractive to retire in the final quarter of 2020 instead of waiting until early in 2021.

Segment rates are based off broad market interest rates. Interest rates have declined sharply since late 2018 -- whether you’re looking at short-term rates (segment 1) or long-term rates (segment 3), but after the record lows we saw in July of this year, they’ve begun to slowly creep upwards. The primary reason for this is the economic outlook. With the spread of the coronavirus affecting the global economy, we have seen our first recession-like correction since 2008. Interest rates dropped in kind by hitting record lows in every segment in July 2020.

In response to the COVID-19 virus’ impact on the economy, the Fed cut interest rates down to 0-0.25% as a way to encourage the flow of credit to consumers and small businesses. Normally, we would see the segment rates follow suit and fall as well. However, concerns of an increase in bond defaults and a lack of liquidity pushed rates back up in March to the highest levels since July 2019. The Fed again stepped in and flooded the bond market with $1 trillion in liquidity. Since then, we have seen rates consistently drop but, as of August and September’s rates, are beginning to level off and increase for longer rates. Remember, segment rates and lump sum pension amounts have an inverse relationship.

We haven’t seen segment rates at these lows in over a decade, so 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 November or December could mean a substantially higher payout than if they decided to wait. We believe rates will remain depressed (as compared against 2019’s rates) for the foreseeable future as the United States continues to try to get a grip of the coronavirus. While 2020’s segment rates have been substantially lower than in previous years, we’ve seen the 10-year treasury rate begin ticking upwards in recent months. 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 may be beneficial to choose a retirement before the end of the year rather than to wait until early 2021.

Chevron-QuickReference Rates - Nov Dec 2020-1

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.