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 December 2019, Chevron would use the blended rate available through September 2019 (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-Dec Retirement Rates

In our December 2019 retirement example, the average of the July 2019, August 2019, and September 2019 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 $1.83 million if you started your pension in December 2019.

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

Chevron-Nov Retirement Rates

Using the same scenario from above, your expected lump sum pension value would be approximately $1.81 million. While that may still appear to be a substantial sum, it is actually $20,000 less than the pension you would have received by waiting one additional month (until December) to retire.

The pension lump sum value increased because of the drop in August and September interest rates (when compared to June and July's 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 by the end of 2019, you can review rates from August 2019 or September 2019 to determine if it is financially advantageous to retire in November or December. The IRS has recently published the September segment rates, which have held pretty consistent with August rates, which means that a December retirement would allow for a larger lump sum pension than retiring in November, but a January retirement may still yield a higher lump sum pension amount.

Chevron-SegmentRates-Chart-JD (2)

 

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 2018. 

The primary reason for this is the economic outlook. While inflation has decreased, economic growth has been slow, stable, and steady. With the ongoing trade war between the US and foreign countries having no foreseeable resolution in the near-term, we don't believe the economy will encounter the growth required to drive interest rates back up in the near future. Additionally, the Fed announced in January that they weren’t planning to raise rates anytime soon. With the Fed keeping rates low, segment rates will follow suit holding constant or continuing to trend downward. If that continues, it's beneficial to choose a retirement date later in the year as rates get lower to maximize the lump sum payment in your pension.

If you're considering retiring this fall, the rates for an December retirement are more favorable than November, but holding out until January of next year may yield an even higher pension payout.

JD- Chevron-QuickReference - Nov Dec (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.