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 July 2020, Chevron would use the blended rate available through April 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 - july 2020 retirement

In our July 2020 retirement example, the average of the February 2020, March 2020, and April 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 $1.879 million if you started your pension in July 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 June 2020 (one month earlier than the July 2020 scenario), Chevron would use the segment rates from January 2020. Those rates look back on the time period from January 2020 through March 2020:

Chevron-june rate

Using the same scenario from above, your expected lump sum pension value would be approximately $1.873 million.

If you had retired one month later, you would have earned an additional $6,000 in your CRP payout. While this number is not substantial, we’ve experienced movements in segment rates in the past that resulted in $10,000-$20,000 swings in payouts.

For instance, let’s look at an April 2020 retirement — because segment rates were higher in the fall of 2019 contributing to an April retirement, the payout would have been approximately $25,000 less than a July retirement. The pension lump sum value increased for a July 2020 retirement because of the decrease in April segment rates that was factored into the blended rate equation. (Remember, when segment rates increase, your pension lump sum value decreases.)

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 fall, you will be able to review rates from May 2020 or June 2020 to determine if it is financially advantageous to retire in September or October.

The IRS has recently published the April segment rates, which dropped significantly when compared to the March rates. Rates increased in March for the first time since October of last year.  Amidst the COVID-19 pandemic, one would think rates would have fallen; however, concerns of liquidity and defaults in the bond market caused them to rise. Since then, the Fed has stepped in and added $1 trillion in liquidity as a form of quantitative easing which led to them dropping again in April. While in this example, we've determined that a July retirement would equate to a larger lump sum pension than retiring in June, if rates do continue to fall, it may be more advantageous to wait until later in the summer to retire for an even larger lump sum.

segment rates - apr

 

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 have been coming down since November 2018. Assuming the rates continue trending downwards over the next few months, 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 2018.

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 the lowest levels since October of 2016, in April of 2020. With the Fed keeping rates low, segment rates will follow suit holding constant or continuing to trend downward. 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 drop and, as expected, rates fell drastically in April. 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.

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.