Financial Intel Monthly

Some great news was just announced for any Chevron employees considering the lump sum option on their pension payment. Interest rates are currently sitting at record lows for individuals that commence their benefits in December of 2020. Over the last year, interest rates have dropped dramatically which has greatly increased many lump sum payments. Should you desire to take your pension as a lump sum, Chevron will use interest rates and your age to calculate your lump sum payment. When interest rates move up or down, your pension lump sum amount will move in an inverse relationship. 

Your pension is calculated based on your last date of employment and benefit start date. The benefit
calculation is a defined benefit based on your years of service and final average pay. These along with a Social Security Offset are used to determine your single life annuity. All other forms of pension payments are based off this figure.

Watch Our Chevron Interest Rates Update

Chevron Pension Lump Sum Calculation:

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 2020, Chevron would use the blended rate available through September 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 Segment Rates for December 2020:

For a December 2020 pension commencement date, the average of the July 2020, August 2020, and September 2020 rates comprise the blended rate.

For a November 2020 pension commencement date, the average of the June 2020, July 2020, and August 2020 rates comprise the blended rate.

For an October 2020 pension commencement date, the average of the May 2020, June 2020, and July 2020 rates comprise the blended rate.

For lump-sum conversions, the annuity is discounted to a present value using the first segment rate for the first five years of expected payments, the second segment rate for the next 15 years of expected payments and the third segment rate for all years of expected payments over 20.

Because the annuity is discounted based on mortality as well as interest rates, the present value of each monthly payment reduces as the probability of living to receive each payment reduces. The older you are when you commence your pension benefit, the fewer the number of years that will be valued using the third segment rate (20+ years) and, conversely, the younger you are, the greater the number of years that will be valued using the third segment rate.

This methodology essentially means that there will be a unique monthly interest rate (lump-sum
conversion factor) for each year and month of birth.

How Do Rate Changes 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 due to changing rates each month.

The blended rates for December 2020 are: 0.54% / 2.26% / 3.06%. November rates are: .62% / 2.35% / 3.12%. October rates are: .8% / 2.53% / 3.27%. 

Everything else held equal, a lower interest rate will produce a higher lump sum. The exact changes depend on your specific age, but on average a 1% change in rates can equate to an 8% to 12% change in lump sums. So, on average, a 1% change could increase or decrease your pension lump sum by roughly 10%.

The changes from just September 2020 to December 2020 may account for a 3% - 5% increase in lump sums. However, if you look at where rates were in September 2019, they have come down quite a bit. For September 2019, the blended rates were 2.64 / 3.72 / 4.27. That is a drop of over 1% in the 2nd segment which tends to have the strongest affect. A drop of 1.46%  from September 2019 to December 2020 may have caused your pension to rise by 12% - 15%. For someone with a $500,000 lump sum, that could mean a move of as much as $75,000. For a $1,000,000 lump sum, it would be roughly $120,000 to $150,000. If we go farther back to April 2019, the second segment was 4.34%. We have come down more than 2% from there which means you may have seen a move as high as 20% over the last year and a half. Going forward, if rates start to move back up, you could see your pension lump sum start to drop. The rates are updated monthly, so you have month to month options to commence your pension once you have retired. You do not have to commence your pension as soon as you retire. You have the option to defer it. That may be beneficial if rates are dropping and/or you are under 60 years old. If you take your pension prior to age 60 there are age penalties and you will not receive 100% of your pension benefit.

Given the current interest rate environment, it is highly suggested you discuss your options with
The Retirement Group and allow us to monitor the rates and keep you up to date on the monthly
changes. We can provide a complimentary cash flow analysis to show you how various retirement
dates may play out.

It is important to remember the pension annuity may be a better fit no matter how attractive the
pension lump sum may be. Every situation is unique, and a cash flow analysis will allow you to
compare all pension options.

To read "What Chevron employees Should Know About NUA" Click Here.

Securities through FSC Securities Corporation, member FINRA/SIPC and investment advisory services offered through The Retirement Group, LLC, a registered investment advisor not affiliated with FSC Securities Corporation. Office of Supervisor Jurisdiction: 5414 Oberlin Dr #220, San Diego CA 92121. 800900-5867