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June 17th, 2020

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.

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. Over the last year, interest rates have dropped dramatically which has greatly increased many lump sum payments. They are currently sitting near record lows for individuals that commence their benefits in July 2020 or August 2020.
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 July 2020, Chevron would use the blended rate available through April 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.


For a July 2020 pension commencement date, the average of the February 2020, March 2020, and April 2020 rates comprise the blended rate. 

For an August 2020 pension commencement date, the average of the March 2020, April 2020, and May 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.

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Because the annuity is discounted based on mortality as well as interest, the present value of each monthly payment reduces as the probability of living to receive each payment reduces to. 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.  

Interest Rates and Lump Sum Benefit


The blended rates for August 2020 are currently 1.63% / 2.91% / 3.48%. For July 2020, they are 1.84% / 2.89% / 3.44%. For June 2020, they are 1.95% / 2.91% / 3.54%. You will notice these rates are very close. 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 June to July will only account for a small increase in lump sums. However, if you look at where rates were last May, they have come down quite a bit. For May 2019, the blended rates were 3.19 / 4.23 / 4.57. That is a drop of over 1.3% in the 2nd segment which tends to have the strongest affect. A drop of 1.3% may have caused your pension to rise by close to 13%. For someone with a $500,000 lump sum, that could mean a move of $65,000. For a $1,000,000 lump sum, it would be roughly $130,000. 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 if 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.


This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

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Tags: Financial Planning, Lump Sum, Pension, Retirement Planning