Whether you started your Chevron career with Gulf, Texaco, Getty, Unocal, Caltex or Chevron, your transition from the company can be complex. We’ve identified 5 of the most common mistakes made by employees when leaving the company that can dramatically affect the sustainability of a retirement plan:
Not Understanding NUA
Net Unrealized Appreciation (NUA) can be a fairly lucrative tax strategy for many Chevron employees. Unfortunately, because it is rather complicated, many employees neglect to consider it, and many financial advisors chose not to learn it. In essence, NUA allows Chevron employees to pay the lower long-term capital gains tax rates on their Chevron ESOP and common stock (rather than the higher ordinary income rates that are normally assessed on retirement account withdrawals). There are some caveats to be aware of, though, and NUA doesn’t make sense for everyone. The timing of the distribution is also critical, and one error can prevent you from being able to take advantage of this strategy entirely.
Not Evaluating the Social Security Offset
One of the components of the Chevron Retirement Plan formula is a Social Security Offset. This reduces your pension payout, both lump sum and annuity, by a portion of your projected social security benefit (up to 45%). Often times, Chevron will project your social security benefit incorrectly, which sometimes reduces an employee’s pension benefit amount unnecessarily. The good news is that you can correct this by sending in your social security statement when applying for pension benefits to INCREASE your pension amount. But what if Chevron underestimated your social security benefit and is overestimating your pension benefit as a result? You probably don’t want to alert them of this, as it could REDUCE your pension amount. Our Chevron-focused retirement advisors can help you evaluate whether or not to submit your social security statement to HR when commencing your pension benefit.
(Page 10 of CRP SPD for employees hired before 1/1/2008)
Poorly Timing the Pension Commencement
As it turns out, most employees don’t have to commence their pension right when they retire. An exception to this is for employees age 65 and above at retirement, as this is considered the normal retirement age for the Chevron Retirement Plan. Those not yet age 65 may have an argument to defer the commencement of their pension benefit. The primary reasons we see for this is age penalties and lump sum interest rates. Employees under age 60 typically have age penalties associated with taking their pension right away, which can be avoided by a deferred pension commencement. In addition, those planning to take a lump sum from their pension can benefit from a declining interest rate environment if they defer the election of their pension. There is an opportunity cost to this decision, though, which is missed annuity payments (for those that plan to take the annuity) or forgone investment growth/interest (for those that plan to take the lump sum). To maximize your benefits, it’s critical to understand this relationship as well as the lump sum pension interest rates and the 3-month lookback period that Chevron uses to calculate pension lump sums.
Not Understanding Tax Implications and Vesting Rules for LTIPs and RRP
Highly compensated employees at Chevron often qualify for Long Term Incentive Programs (LTIPs) and typically will have a non-qualified component of their pension called the Retirement Restoration Plan (RRP). The LTIPS consist of Restricted Stock Units, Performance Share Units, and Stock Options. Each has different vesting rules, both while working and when separating from the company, and each have different tax implications upon vesting and sales of shares. Furthermore, Chevron’s stock options are made even more complex by the existence of leverage and the additional timing decisions that come with them. The RRP can also have significant tax implications dependent on the distribution schedule chosen by employees upon qualification. While qualifying for these benefits can be very lucrative for a Chevron employee’s retirement plan, they can create tax headaches that we would otherwise want to avoid. Working with a Chevron-focused retirement advisor can help to reduce the total tax burden associated with these benefit plans and make the decisions related to them easier to understand.
Not Consulting with a Retirement Specialist
Not all financial advisors are created equal. Similar to how medical issues often require the use of a specialist, there are a variety of reasons to consider working with a retirement specialist when building your retirement income plan. Some of the areas that are often overlooked by generic financial advisors include tax and distribution strategy (NUA, 72t, Roth Conversions, tax-loss harvesting), legacy planning, and your Chevron benefit options. Our Chevron-focused advisors have many clients, both retired and active, from Chevron and have been helping Chevron employees transition out of the company for over 20 years. We’ve seen just about every mistake there is and are committed to helping the Chevron community avoid potentially devastating errors through their transition from the company.
Below are real life examples of situations that Chevron employees have experienced. We will demonstrate how to navigate these situations to help improve your chances of a successful retirement.
Watching interest rates:
Back in 2020, an employee was leaving Chevron in early 2020 and had already ordered their pension packet to take the lump sum at roughly $1.23M.
We first explained how the pension works and confirmed the LS was the correct choice after running a financial plan. We then canceled the pension forms and elected to watch the rates month by month, ultimately waiting 4 months to commence and increase until the 2nd segment rate dropped about 65BPS, giving them about $63K more in lump sum benefits.
Understanding NUA and ESOP:
On multiple occasions, we have educated clients on NUA that had no idea about it, even when they said they had an existing advisor. In one case we started a new relationship by saving someone and their advisor from making a mistake of quickly rolling their 401K over to an IRA. After retiring in the late summer, we prevented them from simply rolling over to an IRA because we discovered they had close to 2000 shares of ESOP and explained NUA. The cost basis was roughly $35K with a value of roughly $300K. That would generate close to $265K of NUA to potentially save 9% taxes in their case or just under $24K. We elected to wait until the following year to exercise it due to an even lower tax bracket on the cost basis.
Understanding SS Offset:
Make sure the pension calculation has your social security listed correctly especially if you have worked in the public sector. If you have worked only for Chevron your whole career you likely have no issues. However, if you worked in the public sector and then transitioned to Chevron, they likely have your social security overestimated which will reduce your pension calculation affecting both the annuity and the lump sum. Examples of this in the past have allowed us to uncover a difference of $50-$200/mo and over $17K in lump sum benefits.
**Based on a real client situation. Names and circumstances have been changed. This information is not intended as a recommendation. Investment decisions should always be made based on an investor's specific circumstances.
Reach out with Any Questions to info@theretirementgroup.com