Thread regarding Chevron Corp. layoffs

Made simple, the problem with Lump Sump Investing (LSI) is that the math is not nearly as simple as some here purport. To average 6% over a span of time, and maintain withdrawals from "somewhere," (unless you plan on stopping eating and living in market retractions) you are going to have to really average 12+ % to live on those dollars. The fatal flaw in all that simple lump sum math is that in a market retraction, your $$$ have to come from somewhere, and that somewhere is principle, which is fatal in long term cash flow generation. You draw on principle for a year or two or three, and when the market returns, your principle is less, returns are less, and the spiral to death of your $$$ is on. The only way to counter would be to attempt to speculate on the market, sell hi buy low etc and the odds are that your fatally wounded portfolio is going to end up being truly fatal and faster. This is the dirty secret of how even with the great promises of the "experts" they virtually all predict that at the end, your are going to "run out of money," unless the entire market over performs. Bottom line, take an annuity, invest your 401K dollars in a good, balanced, growth, "dividend aristocrat" type portfolio, have your income grow through the rest of your life, and leave behind a few million for your heirs (or legatees). Another benefit, by doing this you don't give a penny of your dollars to some high dollar investor making promises he (or she) really can't make.

There's no one "best choice". Everyone's situation is different. Avid investor made the best case, IMO. Take the lump sum and gamble whether it will last your lifetime. Take the annuity and it will last until you die. You can always fall back on your 401k investments (safely invested) for shortfalls, emergencies or when you require a large purchase. The annuity along with Social Security will provide a secure income stream without worrying about investments. Why invest your lump sum and your 401k? You are putting all your eggs in the same basket and subjecting yourself to more risk and worry. The call is all yours.

Actually the lump sum would have to average 6% annual return over 30 years to equal annuity payout. That's not a very high hurdle. The worst 35 year period in stock market history (started in 1906) returned a bit over 6% annually. With a low-cost index fund, you have >90% chance of achieving 6%. Let's say you have a greater than 50% chance of gains in the 6-9% range, 30% chance of 9-11% and 10% chance of 12%. 12.9% was best 35 year run (beginning 1932). One would need to have flexibility to weather market down turns (via other income like soc security or curtail spending) if they happen early on. On the other hand, if one had other savings and income and could invest the lump it could work out quite well. $525,000 invested in an index fund 35 years ago would be worth about $26 million today.

Other points to consider aside from those made by others -

• An annuity is less liquid than a lump sum

• A lump sum can be lost to a court judgement (say you accidentally maim or kill someone with your car)

• While index funds can be no-brainers, annuities are even easier to manage as one ages and loses ones faculties

Thanks for your posts, avid investor. Very helpful and makes sense.

Pardon the length of this post, but reading it through to the end will hopefully teach you something of value. Speaking in Actuarial terms, the Chevron pension payout, whether taken as a Single Life Annuity (default calculation) or a Lump Sum (conversion to present value), is not supposed to have any significant statistical benefit, one over the other. After using the employee's Highest Average Earnings and Benefit Years of Service, the annuity amount is based on your age when you commence the annuity payments, minus an early retirement factor (5% annually, prorated to the actual month) if retiring before age 60. The final part of the calculation uses your statistical mortality (the number of years and months you have left to live, aka "Mortality Table" published by the IRS. Conversion to a different type of annuity, whether 100% Joint and Survivor, 10-Year Certain, or just a present value Lump Sum, all start with the Single Life Annuity amount, which is then recalculated using published 3-month averaged corporate bond rates (for the Lump Sum) and mortality rates (if you have a spouse included as an annuitant). You can figure your annuity interest rate. Run a Retirement Estimator scenario on the Benefits Connection webpage. Take the annuity amount of your choice and multiply it by 12 (one year payout). Divide the annual annuity amount into the lump sum amount. This is the annuity's annual rate. I assure you the annual rate is quite good for a guaranteed monthly annuity for the rest of your life (and your spouse, if included). Selecting the lump sum from Chevron, then later converting some or all of it to an annuity would require you to go to the secondary market. The annuity amount they will calculate will be appallingly lower than what Chevron will pay you, so choose wisely the first time. There are a few variables a retiring employee must consider when deciding to go with an annuity or the lump sum; your general health, life expectancy, financial debts and obligations, future corporate bond rates, your need for large sums of free-cash, etc. The future is uncertain and knowing most of the variables will guide to to making the right decision. Just remember that statistically, if you outlive your life expectancy, the annuity in most cases will prevail as the best choice. To make the lump sum last as long as your statistical life expectancy, you will need to beat the annuity interest rate by sufficient points to cover fund management fees and commissions. If you calculate your Chevron annuity rate as a fixed 6%, you will have to get 7.5 to 8.5% every year without fail from your lump sum investments to last the rest of your life. Some people may fear the prospect of higher inflation in the future as an excuse to rule out taking the annuity. Inflation really has very little impact between a fixed annuity and the longevity of (equal annuity amount) distributions from lump sum investing. Go back 25-30 years in history and research whether investments in the stock and mutual fund market were earning a much higher return in years when inflation was very high than they are today in times of very low inflation. You won't find any meaningful correlation. Inflation will affect the purchasing power of annuity payments and monthly lump sum distributions almost equally. So the inflation argument is a false one. Like was said in a previous post, there is no one-size-fits-all approach to the decision. You need to consider your variables and also cross your fingers. But, Chevron is not ripping off anyone. On face value, Chevron's Single Life Annuity and the calculated Lump Sum amounts are essentially the same in value. Good luck to current and eventual retirees. It has been good working for Chevron for my 27 years. I will leave you with two webpages to calculate your life expectancy. One is from the Social Security Administration and the other from Myabaris.com (developed by Professors at the University of Pennsylvania). https://www.ssa.gov/planners/lifeexpectancy.html AND https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/

Clark Griswald, your analysis is sound and assumptions as well. Still, U chose the annuity at $2967 over the lump sum of $525,400. I still have $1.8MM in my 401k.

@EBvQOkT-2kqr, you need to reacquaint yourself with Chevron's pension formula. It is no where close to what you outlined.

Your lump sum invested in a low cost index fund would allow you to withdraw 4% inflation adjusted for 30 years, 90% guaranteed. That's only $1750/mo the first year. But if inflation is just 3%, it catches your annuity payout in 15 years. By year 30 you would be withdrawing $4600/mo, $1600/mo more than your annuity. If inflation ticks up to just 5%, the lump sum crushes the annuity. Within the last 35 years we have seen inflation as high as 10%. If you live more than 30 years and inflation remains very low, the annuity could be more valuable in 10-20% of cases.

If your health is poor, you may be better off with the annuity as you will get more the first 10 or so years (and then die). Then again, if your health is that poor, spend the lump sum over the first 10 years and you will come out ahead.

With interest rates and inflation at an all time low, now is the time for lump sums. Lump sums are maximized with the low interest rates. Chances of increasing inflation are very high, which is bad for annuity holders.

Well, to me the math doesn't add up. You worked for 27 years. So its 27 times average salary in the last 5 years times let's say 20% since you belong to the pre-2008 plan. That is 27 times 200000 (assuming you made at least that much) x 0.2. So You should get a lumpsum of 272000000.2=1,080,000.

But you are mentionining a number half as much for a lump sum.

$2,967 is the monthly pension annuity (100% joint and survivor). Granted, a single life annuity was somewhat higher but I wanted to make sure my spouse would get an unreduced amount if I died first. I opted for the 100% J&S annuity that rather than taking a $525,400 lump sum. I think the annuity amount is not that low. If you didn't risk the lump sum and kept it invested in a money market fund, it would last only 14.75 years. If my wife or I live 30 more years to reach 89, the lump sum would be depleted in half that time if I withdrew the same amount as the monthly annuity. To make the lump sum last 30 years, I would have to invest it in riskier funds earning let's say 7.5 to 8.5% every year. That percentage would need to cover about 1% in fees to a wealth management company and another 0.5 to 1.00% for fund expense ratios.

Congrats on 401k, but your monthly pension seems rather low.

@EBvQOkT-1WI4, you ask me what investment strategy I used to build $1.8MM in 27 years? I contributed 10% of my salary from my first day on the job and increased it to 15% in the last 7 years. I rebalanced my portfolio constantly, almost once a quarter. I have always had a knack for investing and a good sense for timing the markets. Luck also played a minor part.

EBvQOkT-uvE

That previous comment about pension amount was directed to you.

I also think you did extremely well with your 401k. I wonder what investment strategy you used.

EBvQOkT-9Z6

I don't know what Psg you are at, but for 27 years, your pmonthly pension seems a bit low to me. Please check your calculations. It should be twice that much.

Much less for 5 more years.

I'll take the lump sum. No trust in Chevron pension fund lasting for 30 years.

does anyone know how long you have to be married for spouse to get your annuity if I die.i think ill marry a 17 year old Filipina girl.im 63..im goin out with a smile....

Don't worry about your spelling. Your comment is understood and appreciated. I wrote about the annuity vs lump sum in this thread and I agree it's not a one size fits all decision. For me, the annuity was my choice. I debated back and forth what to do, but given my age, good health, no debts and a boat load in 401k savings, the annuity gives me piece of mind and a guaranteed revenue stream. Social Security coming up soon will only add to that cash flow.

Although sophisticated financially my spelling on a mobile is for crap.

It's really worth getting some professional advice on this. I would say that I'm somewhat more financially soohisticated than the average rwtiree but I coughed up the dough for a tax accountant and independent investment advisor. I spent about a grand on the tax advisor and just one piece of advice on the timing of starting my benefits saved me about $8K in taxes. There's a lot to consider-your age, whether you are married or have other heirs, the state of your other investments, and more.

It is apples to apples. Annuities are not inflation adjusted. Neither is the lump sum case cited in this thread. Whether inflation takes off or not also has nothing to do with either choice. Inflation affects prices, which on a fixed annuity may seem to doom the recipient. But inflation does not automatically raise stocks and mutual fund investments. The earnings on your lump sum will still need to grow by 7.5 to 8% annually just for your monthly distributions equal to that the annuity is paying, to keep up before it goes to zero by the year and month the mortality table says you have to live. It's clearly a choice between two pension payouts and no one has a definite advantage. The lump sum choice provides the possibility to pay out a greater monthly amount but it's all a risk you don't have absolute control over. It can easily go south and last you only half the years you expected.

if your wife knocks you off she will be set,,,

If inflation takes off, you are doomed with an annuity.

That's not apples to apples because in the case you describe, you'd have the lump sum left after you die. That wouldn't be the case of you take the annuity.

A 6% IRR for an annuity is very good. That's a much rate that one can get as a retail customer. To take the lump sum you would get from Chevron and to draw the same monthly amount for the duration of two lives based on the mortality tables, the retiree would have to invest it and earn each year a return of about 7.5 to 8.5%. I'm basing this on the 6% the annuity is guaranteeing plus 1% fees to a wealth manager plus another 0.5 to 1.5% for investment fund expense ratios. And one needs to earn that each year without fail for the lump sum to last as long as the actuary tables. In periods of recession and down markets, your principle amount is reduced quickly. My quick analysis assumes no additional earnings to keep up with inflation since the annuity is fixed as doesn't do this either. Just comparing apples to apples.

Everyone's situation is different. The $1.8MM will stay invested and anything left will go to inheritance for the kids. The pension annuity and Social Security cash streams will easily pay the bills and more while we live.

If you have kids and want to leave an inheritance or create a legacy trust, take lump sum. Once both of you are gone, so's the annuity payments. That could happen tomorrow.

I retired from Chevron in the 2nd quarter 2015 after 27 years at age 59. I preferred to take my pension as a 100% Joint & Survivor annuity. I will receive a monthly annuity of $2,967 which will continue until both I and my wife die. My Financial Advisor calculated the annuity to have a 6% internal rate of return, which she admitted was very good. I selected the annuity over the lump sum for financial security. I'll be able to couple the annuity with Social Security when I take it at 62 years of age. All my debts and mortgage are paid and I have over $1,800,000 in my Vanguard 401k invested at minimum risk. So, for me and my wife, we chose the Chevron annuity.