Chevron interest rates have started to increase and larger trends indicate rates could be on an upward trajectory over the next few months. 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. When interest rates move up or down, your pension lump sum amount will move in an inverse relationship. Over the last year, interest rates have dropped dramatically which has greatly increased many lump sum payments. This trend culminated in record lows for individuals who commenced their benefits in December of 2020. However, since December, rates have stayed relatively stagnant and segmented rates are now trending upward, which could reduce future lump-sums. The underlying trends and treasury rates point to the fact we will continue to see rates on the rise.
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. 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 of this figure.
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Chevron Pension Lump Sum Calculation:
If you are planning to retire and start your pension in May 2021, Chevron would use the blended rate available through February 2021 (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 May 2021:|
|1st Segment||2nd Segment||3rd Segment|
|May 2021 Blended Rates||0.51||2.40||3.21|
April 2021 Blended Rates:
May 2020 Blended Rates:
For a May 2021 pension commencement date, the average of February 2021, January 2021, and December 2020 rates comprise the blended rate.
For an April 2021 pension commencement date, the average of January 2021, December 2020, and November 2020 rates comprise the blended rate.
For a March 2021 pension commencement date, the average of the December 2020, November 2020, and September 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.
|"If rates increase by 1% you could see a 8 - 12% reduction in your lump-sum.||
The annuity is discounted based on mortality as well as interest rates, meaning 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?
Pension pricing is based on interest calculations, which means 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 May 2021 are: 0.51% / 2.40% / 3.21%. April rates are: 0.51% / 2.32% / 3.09%. March rates are: 0.53% / 2.32% / 3.13%. February rates are: 0.53% / 2.33% / 3.17%.
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 February 2021 to May 2021 may account for a 1% decrease 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 effect. A drop of 1.5% from September 2019 to May 2021 may have caused your pension to rise by 13% - 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 $130,000 to $150,000. If we go further back to April 2019, the second segment was 4.34%. We have come down almost 2% from there, which means you may have seen a move as high as 20% over the last year and a half. As we can now see with the April 2021 blended rates, this downward trend appears to be reversing and you could very well see your pension lump sum start to decrease in value. If rates increase by 1% you could see a 8 - 12% reduction in your lump-sum. 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. However, with the possibilities of rates rising it may be beneficial to lock in your pension now. Please be aware 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.
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