Many Chevron employees who are waiting to commence their pension lump-sums, will now see a significant decrease in their value. With short, medium, and long-term rates rising significantly over the last month, the higher average rates will result in lower lump-sums for those retiring in July of 2022. This is because when Chevron employees elect the month they would like to begin their pension, Chevron looks back at the third, fourth, and fifth months' rates to calculate the pension disbursement. When these interest rates move up or down, your lump sum amount will move in an inverse direction, so if interest rates increase, your lump sum amount will decrease and vice versa.
Through the pandemic, interest rates dropped dramatically which greatly increased many lump sum payments. This trend culminated in record lows for individuals who commenced their benefits in December of 2020. However, since then this trend has shifted, as interest rates have been increasing quickly, there has been a large reduction in pension lump-sum values.
Large increases in interest rates are important if you decide to take the lump-sum option since the calculation for your lump-sum is based on interest rates and your age. Your pension will be calculated based on your last date of employment and benefits 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 on this figure.
Chevron Pension Lump Sum Calculation:
Chevron Interest Rates for May 2022
If you are planning to retire and start your pension in July 2022, Chevron would use the blended rate available through April 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.
|Chevron Interest Rates for the First Quarter of 2022:|
|1st Segment||2nd Segment||3rd Segment|
|May 2022 Blended Rates||1.48||3.03||3.39|
April 2022 Blended Rates:
March 2022 Blended Rates:
For a July 2022 pension commencement date, the average of the April 2022, March 2022, and February 2022 rates comprise the blended rate.
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For a June 2022 pension commencement date, the average of March 2022, February 2022, and January 2022 rates comprise the blended rate.
For a May 2022 pension commencement date, the average of February 2022, January 2022, and December 2021 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 also discounted based on mortality, 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 an adjustment in your retirement date may lead to avoiding a serious financial hit, due to avoiding months with high-interest rates.
The blended rates for July are: 2.44%/3.76%/3.94%. June rates are: 1.91% / 3.36% / 3.67%. May rates are: 1.48% / 3.03% / 3.39%.
Everything else held equal, a higher interest rate will produce a lower 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 March 2022 to July 2022 may account for a 10% decrease in lump sums, as the second segment rates have seen a significant increase. For March 2022, the blended rates were 1.02 / 2.73 / 3.11. The July 2022 blended rate is 1% higher in the 2nd segment which tends to have the strongest effect. An increase such as this over just the last five months may have caused your pension to decrease by about 10%. For someone with a $500,000 lump sum, that could mean a move of as much as $50,000. For a $1,000,000 lump sum, it would be roughly $100,000. Interest rates trended upward for most of 2022, so if rates increase again by 1% you could see another 8 - 12% reduction in your lump-sum. These rates are updated monthly, so every month you have options to commence your pension. It's important to note that you don't have to commence your pension immediately after you retire. If you wish to delay your commencement, you have the ability to defer it until a later date. Also, please be aware that if you decide to take your pension before the age of 60, there will be age penalties that prevent you from collecting 100% of your pension.
Given the current interest rate environment, we highly suggest Chevron employees residing in the US discuss their 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 that every situation is unique and that by getting a cash flow analysis you'll be able to compare different types of pensions and find the best fit for your situation.
The Retirement Group is not affiliated with nor endorsed by Chevron. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Neither The Retirement Group or FSC Securities provide tax or legal advice. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
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