4 Steps to Evaluating Your Chevron Severance and Maximizing Your Benefits

Step 1: Determine if you can retire

One of the biggest questions we get from our clients when they're offered a  severance is: can I retire? What they're really asking is — do I have enough money to make retirement work in case I'm unable to get another job? The right amount of retirement savings differs by person, but working with a financial advisor who can show you cash flow projections for various scenarios can ease much of the anxiety surrounding the question, "is it enough?" 

Yes. I feel comfortable that I'm financially independent or I continued to work because I enjoyed it.

Congratulations! After taking your severance package, you can focus on transitioning into a tax-efficient retirement lifestyle —  one where you begin to live off of your hard-earned assets rather than continuing to accumulate more. Three considerations before moving into retirement are:

1. Now that you need your investment income for living expenses, consider how your investment allocation should change accordingly.
2. The most commonly asked questions we get from retirees is "where do I pull from first?" It's important to develop a tax-efficient strategy for pulling money from the various savings vessels you've accumulated while employed. Understanding where your retirement income will come from and what the tax implications are both now and in the future for withdrawals is pivotal to enjoying your early retirement. 
3. If you are considering receiving your pension as a lump sum,  it's important to consider how interest rates will affect its value. You can choose to start your pension immediately upon separation from Chevron or to defer it to a later date. Understanding how these interest rates affect your pension calculation and choosing a date accordingly can make a huge difference in strategically optimizing your pension payout.

No. I’m not sure that I am able to retire, even if I receive a severance package. 

Unfortunately, the timing of severance doesn't always align with an employee's retirement plan. Many executives facing the decision to retire don't feel ready unless they've reached a specific age or amount in their bank account; however, when working with these professionals, we work to determine how much income they need, how many more years they need to work, or if they can retire simply by reducing monthly expenses.

If retiring after separation isn't an immediate possibility, it's important to realize that returning to full-time employment isn't the only option available to you — depending on your long-term goals and existing cash flow, you may be able to consider part-time, freelance, or consulting work as options to supplement your income until you're able to retire. 

Many executives leave major corporations, whether by choice or as part of a layoff, only to return as independent consultants. Doing so allows them to continue working and deferring withdrawals from retirement accounts or taking Social Security distributions. While consulting is often a great option for employees who can't afford to retire just yet, there are hidden costs and considerations that need to be evaluated beforehand.

Learn What Should You Consider When Starting a Consulting Business

If consulting doesn't seem like the best next move for you, consider working with a professional to build out a cash flow plan to determine when retirement is possible. A financial advisor can help you determine how much income you need to make for how long or if you could retire earlier than you expect simply by reducing your expenses. By having an extensive understanding of the Chevron benefits, our team of advisors can help you determine how to leverage your benefits from Chevron to reach your financial goals.

Step 2: Take advantage of your benefits while you have them

When an unexpected layoff hits, many employees start shifting their focus to looking for a new job or setting up their retirement, but that can be a significant setback. Before your termination date, make sure you've taken full advantage of the various benefits Chevron offers. The last thing you want to do is leave money on the table.

You Can Receive Unemployment Benefits Alongside Your Chevron Severance Package

What many employees receive from Chevron is considered a "conditional severance." In addition to payout, pension considerations, and more, the design of this severance package also yields a significant benefit that many professionals at Chevron often miss. To receive your severance, many companies require you to  sign off and waive them from any hardship liability. By doing so, you then become eligible to apply for unemployment benefits. 

Max out your Employee Savings Investment Plan (ESIP) — Pre-Tax, Roth, and After-Tax Contributions 

Before your last day, make sure you've adjusted your contribution amounts to max out the various savings options within the ESIP.  By frontloading these contributions, you're able to better utilize the tax-efficient savings before they're no longer available to you. 

• If you’re under 50, you can contribute up to $23,000 (2024) between pre-tax and Roth contributions.
• If you’re over 50, you’re allowed to contribute an additional catch-up amount of $7,500, for a total contribution option of $30,500 annually (2024). 
• In addition to the $27,600 in ESIP contributions, you can also contribute an additional $18,400  in non-Roth after-tax savings (2024). 
• Consider a potential backdoor Roth strategy if you’re a high-income earner and cannot contribute to a Roth directly.

If you're not getting $84,300 into retirement savings in 2024, you're missing out. Learn more here.

Request a calculation of benefits from HR

If you’re considering starting your Chevron pension right after your termination, request a calculation of benefits and the pension paperwork at least 60 days prior to termination. Review the document with a professional before you make any elections to ensure that you’re receiving the maximum amount of your benefits while minimizing your tax bill. Make sure you understand how varying interest rates can affect the lump sum option of your Chevron pension and how to get the most from it.

Step 3: Get your plan in place — benefit elections and insurance

Calculate the value of your CRP as a lump sum or as an annuity

Your Chevron Retirement Plan pension can be paid to you as either a lump sum rollover to an IRA or as a monthly annuity. Your pension will be calculated based on your last date of employment and benefit start date. Many employees at Chevron opt to receive their pension as a lump sum for two reasons:

1. To maintain more control over the assets, and 
2. For opportunities to pass their wealth on to the next generation.

Whether an annuitized or lump sum payout is a better fit for your financial situation, you should reach out to your HR department as early as possible to make the benefit election. The date you choose to begin your CRP can have a huge impact on its payout amount — be sure you understand the recent interest rates' impact on your CRP, especially if you're considering the lump sum payout option. 

Make elections on your Retirement Restoration Plan (RRP).

The Retirement Restoration Plan, or RRP, is a non-qualified pension plan offered to Chevron executives to ensure that they receive their full pension benefit despite IRS income limitations. The default payout method is a lump sum paid 12 months after separation from Chevron. When you receive this payment, you’ll also be responsible for paying federal income taxes, Medicare taxes and Social Security taxes. 

There are two alternative elections for the RRP payout — you can defer or annuitize it; however, these elections require more planning to maximize their tax benefits. To have these options available, you must make the election at least 12 months prior to the first payment. That means you need to make a decision on deferring or annuitizing these funds during your last quarter of work at Chevron. If you choose to defer or annuitize the RRP, the minimum deferral is five years meaning that you’d receive your first payment six years after separation. You can elect to receive from one to 10 installment payments, and any payments are made in January. Before making an election on how you'll take an RRP, it's important to understand the tax implications each option presents and confirm how it fits within your long-term financial planning goals. 

Determine what additional benefits you'll need after leaving Chevron

If you've been with Chevron for the majority of your career, you'll soon discover that you may need life insurance, disability, or other benefits after you leave. Some of these benefits are portable and it may make more sense to keep what you have and take it with you. 

Understand your options for healthcare beyond Chevron.

Ensuring your health and well-being should be a primary concern as you plan your next steps after being laid off from Chevron. Otherwise, you may spend more than you intended on medical coverage or may neglect your health altogether, both of which can end up costing you in the long run. 

If you're moving into retirement, Chevron uses a point system to determine its contributions to retirees’ medical coverage. The point system takes the following factors into account:

• Current age
• Age at retirement
• Eligible years of service

When you’re preparing to retire from Chevron, you have a variety of healthcare options available to you. Determining which options make sense for you depends on your age, years of service with the company and health coverage needs.

1. Are you eligible for Chevron retiree medical?
2. Are you 65, and thus eligible for Medicare?

Step 4: Prepare for the next steps

Don’t sit on the cash

Determine how much cash you should hold and how to invest the proceeds of the severance, Employee Savings Investment Plan Restoration Plan, RRP, or bonuses that paid out.

Think about taxes

Often times the year you retire is your highest tax year. Consider a few of the options below to lower your taxable income:

1. 1. 1. Contribute to charity by:
         • Frontloading multiple years’ worth of annual gifts up front through donor advised funds
         • Consider gifting appreciated stock so you never need to pay capital gains tax
      2. Determine your expected tax rate for the next few years and look ahead to when you are forced to take required minimum distributions. Understanding your tax brackets and managing them in retirement is a huge advantage to ensuring that you're not squandering your wealth by overpaying in taxes. In your first few years after retirement, use up lower tax brackets.
      3. Consider stepping up your basis on your stocks while paying 0% in capital gains
      4. Consider Roth conversions to move your pre-tax money to Roth money while in low ordinary income tax brackets
      5. If age 63 (or older) think about Medicare premium taxes.
      6. Ensure that you have a plan for your investments that takes taxes into account. We see many people unknowingly subjecting themselves to double taxation or incorrect tax rates by not taking advantage of planning opportunities available to them.

Set a plan up to diversify CVX in Your Portfolio

Many Chevron professionals have a significant overweight of US energy equities in their portfolio, particularly Chevron stock, CVX. If you have substantial amounts of CVX, there may be an opportunity to use NUA in a low-income year for tax-efficient income. 

Diversification of your investments allows you to reduce your exposure to specific types of risk, including risks inherent to your specific company. While all companies face exposure to different types of risk, if your portfolio includes a disproportionate amount of Chevron stock, your exposure to these risk factors is amplified. Taking a diversified approach can help you ensure you’re benefiting from the stock options your company provides, while at the same time mitigating risk.

NUA opportunities could present substantial tax savings

Depending on the amount of Chevron stock you have in your portfolio and when you purchased it, you may be able to utilize a net unrealized appreciation (NUA) opportunity to retain a significant portion of the stock's increased value when you decide to sell it. To determine whether this strategy is right for you, take a look at the stock's cost basis (the price you purchased the stock for) and compare it to the  stock's current market value. If the stock's value has increased significantly from the time you purchased it, you may be able to save substantially by making a NUA distribution. There are a number of complexities and rules surrounding NUA, so be sure to work with a professional to execute the strategy. 

The choices you’ll encounter upon the announcement of a severance are complex and nuanced. If you're not keeping track of the benefits available to you and utilizing them before your last day at Chevron, you're probably leaving money on the table. Our advisors can walk you through the process to better understand your specific offerings and help you make the most of what's available to you. If you need help navigating your severance package or have questions about your next steps, fill out the following form and we'll get in touch.