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 April 2022, Chevron would use the blended rate available through January 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.

 

April 2022_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900-04

 

In our April 2022 retirement example, the average of November 2021, December 2021, and January 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 $1.904 million if you started your pension in April of 2022.

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 2022 (one month later than the April 2022 scenario), Chevron would use the segment rates through February 2022. Those rates look back on the time period from December 2021 through February 2022:

May 2022 Segment Rates_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900-03

 

Using the same scenario from above, your expected lump sum pension value for a May retirement would be approximately $1.866 million. If you chose to retire one month earlier, you would have earned an additional $38,389 in your CRP payout.

April 22 v May 22 Lump Sum_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900

Let's consider a historic example: suppose you decided to start your pension in April 2021 (one year earlier than the April 2021 scenario), Chevron would use the segment rates through January 2021. Those rates look back on the time period from November 2020 through January 2021:

April 2021_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900-06

Using the same scenario from above, your expected lump sum pension value in April 2021 would be approximately $1.997 million. If you chose to retire a13 months earlier in April 2021 rather than  May 2022, you would have earned an additional $130,893 in your CRP payout.

The pension lump sum value decreased for an April 2022 retirement because of the increase 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 one final example that we frequently run with our Chevron clients. What if you retired back in April of 2019? Similarly, Chevron would look back at January of 2019 and December and November of 2018 to calculate the blended segment rates. 

April 2019 Segment Rates_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900-05

In  April of 2019, the lump sum was closer to $1.643 million, so pushing retirement out and waiting two years to take your lump sum would increase the difference by over $261,000.

April 22 v April 19_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900-07
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.

As of early 2022, the Federal Reserve recently raised interest rates for the first time in three years. Even more so, the Fed has plans to raise rates consistently this year and going forward as a way to put a damper on inflation. There is an idea that the FOMC will rate rates in the remaining 6 meetings of the year.

The 10-year Treasury yield is highly correlated to the segment rates used to calculate your pension amount. Current 10-year rates are around 2.50%. The last time 10 year yields were that high was in April of 2019, like in our historical example above. An April 2019 pension equated to a $1.643 million pension payout whereas the current April 2022 pension in our example equals $1.904 million. Based on the historical data, we believe the segment rates will continue to trend up.


10 yr treasury and segment rates over 12 months_Blog Graphic_Chevron Timing Pension Lump Sum Graphics_Chevron_WJA_2022_3_1600x900

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 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, you will be able to review rates from April 2022 or May 2022 to determine if it is financially advantageous to retire in July or August 2022. The IRS has recently published the February segment rates, which saw the short, intermediate, and long-term rates increase sharply from the previous month. 

While in this example, we've determined that a March retirement would equate to a larger lump sum pension than retiring in May, as rates continue to rise, it may be more advantageous to accelerate your retirement into early 2022 rather than waiting until next year for 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 March 2020, segment rates had been coming down since November 2018. Upon the release of March  2021 rates, we saw the intermediate and long-term rates jump significantly. Rates continued to rise pretty consistently during the first few months of 2021 before starting to trend back down in recent months. After substantial concerns about rampant inflation in the fall of 2021, interest rates began to rise to tamper inflation back to sustainable levels. 

 

Segment rates are based on broad market interest rates, which declined sharply from late 2018 to mid-2021— 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 2021, they've started to slowly creep upwards again. 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 a target range of 0.25 to 0.50 percent. With the war in Ukraine, inflation, and other factors in play, the 10-year treasury rates reached a 2-year high of 2.475% on March 25, 2022. 

 

With that, it may be more attractive to accelerate your retirement into the early months of 2022 instead of waiting until summer or fall. 

 

The primary reason for this increase is the economic outlook. As concerns surrounding inflation remain top of mind, the Fed faces 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 on the rise from decade lows, and trends and leading indicators point to continued increases 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 October could mean a substantially higher payout than if they decide to retire earlier in the year, but it's a gamble. 

 

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.

 

 

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.