As you near retirement there are many things to consider as you prepare to leave the workforce and move into the next stage of your life. An important part of this transition is selecting how you will receive your Chevron Retirement Plan (CRP) pension. You have two basic options: elect some form of monthly annuity or a lump sum payment. There are advantages and disadvantages to both which should be carefully considered. A basic summary of the options can be found below.
‍

A simple example – Your lump sum is the present value of the series of monthly benefit payments provided by the terms of the plan over your expected lifetime. Think of a mortgage. In a mortgage, you know how much you need to purchase the home and how long you want to pay it back. The lender sets the rate and then lets you know how much you need to pay each month to pay back the loan in the time frame you requested. If you need $200,000 to purchase a home and the current interest rate is 3.5% you would need to make monthly payments of $898 to pay off the loan in 30 years.

Your lump sum works in a similar manner. The difference is you know the monthly payment and are trying to figure out the purchase amount. Using the above example if your monthly pension is $898 and you had a life expectancy of 30 years your lump sum would be $200,000 at a 3.5% interest rate.

‍

Now let us assume interest rates increase to 4.0%. Your lump sum would be about $188,000. This means a 0.50% increase in interest rates decreases your lump sum by about 5% or about $12,000. In short, increasing interest rates mean a decreasing lump sum value and vice versa.

‍

A little more detail. n the above example, one interest rate was used for the entire term of the loan. In your pension calculation there are three interest rates used called segment rates. The first segment rate applies to the first 5 years of your life expectancy, the second segment rate applies to the next 15 years and the third segment rate applies to years 20+.

Segment Rates – The segment rates are published monthly by the IRS and can be found here. Chevron uses a blended rate for each segment when calculating your lump sum value. This rate is determined based on your benefit commencement month which is the first day of the month you select to commence your pension. The rate is the three month average three months prior to benefit commencement.
‍
The following chart illustrates the months utilized for a starting date of January 1.

‍

Summary – While interest rates play a significant role in the value of your lump sum pension benefit it’s important to coordinate your pension benefit with your overall financial plan. The fiduciary wealth advisors at The Mather Group can offer advice regarding your pension as part of a complete financial retirement plan. Visit our website to learn more about our complete retirement planning services.