Thread regarding Chevron Corp. layoffs

I am worried about bonds myself, given what I consider artificially low rates these last several years and significant potential for future bond rates to go up (forcing current ones to have less value). That said, an annuity does not really backstop stock fluctuations because you can not rebalance on stock drops. Cash is really the only alternative, and that maximizes the under the mattress inflation risk. So no easy answers.

Wow, I must be the one with the lowest amount of "scratch" out here at less than $700K!! I feel very "butt-hurt" about that, using your lingo - ha ha !. However, with regards to another's post, I feel very comfortable leaving it all in equities, with no bonds, since I have an 8 month emergency fund as recommended by many advisers, and also the pension annuity and hopefully SS to back me up. I consider the annuity the conservative element of my asset allocation, since it is much more secure than equities or even bond funds for that matter. You guys are forgetting that no brokerage accounts have the guarantee that a CD or savings account does that we have historically utilized in older years to shield us from volatility or a market crash. Now that those CD's ans savings accounts are performing very poorly, the annuity is the closest thing to get a guaranteed return that also has a safety net attached, the PBGC. Sort of Like an FDIC insured savings account. Is that not correct?

Congrat's OP, your assets are comparable to mine. I thought I was doing OK, but now maybe more like "fair to middlin", Mine is $1.7MM pension, $2.9MM 401k, approx. $1MM after tax investments and roughly $0.87MM in real estate besides my debt-free primary residence. However there is no way in creation that I wouldn't take the 100% joint and survivor annuity. I have enough in risky portfolios to not take advantage of one of the best deals available in a secure lifetime annuity left today. My children are all well off career-wise, and I would not spoil them like dependent brats and dump an unearned windfall on them. Why ruin the self-respect and honor that I have inspired in them to be independent and self-sufficient? They will most likely end up better off than me in the long run, by design. Maybe some people like to raise useless spoiled trust-fund babies, but I choose to do just the opposite and the results show. When you are obliged to succeed, you do and I am very proud of my kids and their ability to LBYM and support themselves and I don't want to ruin that.

I just ran the retirement estimation tool on Chevron entering retiring tomorrow with annuity start date first of next year, and then again retiring tomarrow with annuity start date ten years from now, and it indicated a lower monthly payment delaying the start of payments by ten years: that can not be correct! Now I am also completely confused.

My friend, Fhgo, you are too modest. You do have enough "scratch" to your name, so my hat's out to you at age 59. Congrats and best of luck. Happy retirement.

I do not have the scratch some of you guys have, but then again I did not work for Chevron my whole career. I need to shake with a financial planner someday soon, but just recently forced into retirement at 59 with $1MM in a taxable brokage account, $1MM in a 401k, $0.5 MM in a Chevron pension (if I took the Lump sum), no debt (including house paid), and relatively modest needs I am thinking I can do just fine on the $70-80K that I am likely to generate from $2 MM in diversified stock/bond investments. My tentative plan is to use the pension moneys for a deferred annuity (deferred to age 70; or just significantly delay the start of the Chevron annuity) and also delay the start of Soc. Security as long as possible, such that even if I somehow blow through the $2 MM by 70 (I think unlikely) I will have a solid backup income until I finally die 40 years later at 110 ;-).

-Eiet, thanks for your comment and I can see your point. I said "invest my 401k funds conservatively to stay ahead of inflation", because just recently being retired, I'm not inclined to proceed too quickly on anything right now. But, you are probably correct in your assessment that I may soon feel or need to go beyond conservative and become more moderate-risk invested. I'll think about that beginning in January.

-Dyse. Like you I am inclined to go with the annuity for guaranteed basic income, even as I agree with Ehcp that that guarantee comes at a cost (i.e., statistically I can expect lower overall income). I see the Chevron annuity as a somewhat better deal on such income insurance relative to compatible products available from outside (basic annuity from Fidelity, etc.). That said, for me, I question your thinking behind the statement: "I don't have to rely on withdrawing from my 401k funds, so I invest it very conservatively to stay ahead of inflation." Having the annuity income (insurance) in hand, I would tend to be moderately aggressive investing the rest (401k) to cover long-term inflation risk on asset and annuity payment value. Seems to me that being "double conservative" your strategy actually is more risky long-term. Obviously your money, so ....

Nice plan, Ehcp. Now only if I can get $4.6MM to start off with. Moron.

To answer the original poster, you should take the lump sum, combine all your investments into one set of accounts at Vanguard and invest largely in Admiral class index funds at your desired ratio of stocks and bonds. 70/30 works for me. You will have $4.6MM invested and can safely withdraw 4%, $184,000 per year starting now and increasing at inflation rates annually for 30 years with over 90% probability of not running out. 4% starting withdrawal assumes an absolute worst case scenario for stocks so chances are fairly high after 30 years you will still have significant savings. If you need a cushion in case of greater longevity, push the rate down as low as 3.5%. If you can be flexible, reduce spending in years the market tanks and increase a bit when it surges.

Your annual pension payment would be about $90k flat forever (or as long as CVX stays in business). Over 30 years, it has an NPV of $1.04MM, $500K less than the lump sum (assuming 7.4% discount rate). With the pension option you would have higher initial annual payments but nothing invested and also lose out to inflation. Even with only 3% inflation, in 20 years the pension lump sum alone will be paying out $105k/yr.

-Dyse, rolling in my lump sum into my 401k is certainly a strategy, but under my circumstances, I prefer to diversity my risk, not only my investments. The annuity and social security income provide me a sustainable and guaranteed income stream that meets my living expenses plus a little extra. I don't have to rely on withdrawing from my 401k funds, so I invest it very conservatively to stay ahead of inflation. Having just over $1 million and not needing it, is called peace of mind. I'm sure as inflation becomes an issue years from now, I can start dipping into the savings I have in my Vanguard account. You see, my plan works for me.

If you have the wits and courage to manage your 401K and whatever else you have saved, why is it difficult to also manage the lump sum? Just roll it in.

You can put the lump sum in Vanguard's admiral S&P 500 index VFIAX. 0.05% fee. Not 1%, not .25%, 0.05%.

Never hire advisors when you can index invest so easily. Indexing will normally give higher returns than the individual stocks your advisor is churning, even without including his fees and the brokerage fees.

Right you are -Drxu. You would need your investments of your lump sum to return an average of 4% over 30 years to match the annuity. But, you will need to add fund expense ratios, along with any management fees and commissions to that 4%. If you are good enough to handle the investments yourself and maintain the lowest expenses, add 1%. If you don't know much about investing and would rather have someone else do the managing, add another 1%. For most people, it's the latter, so tack on 2% to the 4%. There's your 6%. Frankly, I don't need the headache of investing all of my money. The pension annuity and social security produce a comfortable monthly base of cash flow for me. My house is paid off and I'm debt free. My 401k balance which is close to $1 million is being invested very conservatively by me, and my Vanguard expense ratio is less than 0.25%.

Well stated, -Dsrx. Deciding to take the pension as a secure and guaranteed annuity or as a lump sum amount is something each of us has to decide which is best. Everyone's situation is different. If the monthly annuity is large enough to pay for most or all of one's expenses, although modest, could be an attractive choice especially if the retiree also has substantial savings and 401k balances. If the retiree was working for Chevron for 5 or 7 years, the annuity amount may be too small to make a difference for one's financial benefit. In cases like that, the lump sum, even if less than $100,000, could do a lot more good. I think the whole point of the topic is one cannot make a blanket statement that one pension option is better than another. There are other factors to consider beyond the effective rate of return of the annuity vs lump sum. Likewise, it's not fair to criticize one person's choice over someone else's. I made my pension election already and it works best for me. Happy with it.

Dcbi,

To be able to spend 468,000 over 30 years at 27k per year, you would need your investments to return an average of about 4% per year. I emphasize average, but that includes horrible crashes and great years. Don't panic when the market crashes - they do that periodically. No point in losing sleep over it. Doesn't mean anything is wrong in the long term.

The worst 35 year run of the US stock market ever returned just over 6% average annual return. So even if you are such an unlucky guy that you take the lump sum at the start of a year which matches the worst sequence on record, you invest that lump sum in a nice low-cost Vanguard index fund, set it and forget it, you still come out way ahead of the annuity. The annuity at a 6% discount rate has a net present vale of $373,000, or $100k less than Chevron offers you with the the lump sum.

The only scenarios it makes financial sense to take the annuity are 1) the case where you plan to put the lump sum under your mattress because you are afraid of banks and investments (I'm serious here: if you are afraid of investing, take the annuity) and 2) the case where interest rates are running over 7% and Chevron is offering a small lump sum with little margin to beat the annuity payout by investing.

The 100% joint survivor annuity will provide you with the peace of mind that you and your spouse will be set financially and you can go about your retirement without worrying about the market and focus on other more important things like travel, recreation, visiting with friends, volunteering, etc. But of course if you die, then you will regret not taking that lump SUM!!! Dang!!! Wait wait wait. I take that back. Dead people don't regret a thing. They are dead. A living person WOULD regret not opting for that security for their remaining years, without having to piddle in the market and worry that it's going to crash any day. Remember, the return that most retirees plan on as far as risk is 4%. Most withdraw 2.5- to 3% SWR(safe withdrawal rate)and/or use that as their target portfolio in saving years also to be safe. I was young and invincible once too. I used to think that I could get all sorts of extravagant returns consistently. There's nothing wrong with being optimistic. Unless you're foolishly optimistic.

Yes, by all means, to the nubile self-proclaimed market timing guru and self-validating investment expert in their own mind, who is immune to market crashes, the lump sum is always light-years ahead of any annuity. It's like a broken record. Grow-up, experience life, come back and report. And no, we don't believe you when you tell us your made-up age and level of experience that you are thinking of making up right now as you read this, so save it, you've given yourself away already. Too late.

Dqea - Let's examine the Chevron annuity vs the Lump Sum based on the figures from the Retirement Estimator scenario I just ran and printed. 100% Joint and Survivor Annuity $2,254 per month vs Lump Sum $468,032.

Let's divide the annual annuity income $27,048 into the Lump Sum amount of $468,032.

If the Lump Sum is not invested and you withdrew $27,048 each year, it would last you 17.3 years.

The Lump Sum is not a good deal since it runs out in very little time, whereas the Annuity lasts a lifetime.

So the question is, at what consistent rate must the Lump Sum generate returns to last my presumed lifetime? That's where the mortality tables come into play. It's still a guess, as the tables cannot known if I'm sick at present or what my family history is, or if I'll die in a car crash 10 years from now. The mortality tables is an average of the statistical population. It's the best guess you can make assumptions with. In my case, the tables say my life will end when I'm 87. That's in another 30.1 years. That means my Lump Sum needs to last 30.1 years instead of 17.3. The Lump Sum needs to be invested well enough to withstand my annual withdrawals of $27,048 to last 17.3 plus another 12.8 years.

I leave that up to you and the smart engineers and analysts to figure out. At what rate must the Lump Sum generate to exhaust itself in 30.1 years. Please don't figure for inflation, as the annuity is not inflation-adjusted. Let's compare apples to apples. Just solve for the rate of return. That too would be the effective rate of the annuity.

I wonder if Chevron's problems are related to the poor quality of their engineers?

The pension vs lump sum is a dead simple time value of money question (just like we are supposed to be able to do every day for our business decisions). Compare the net present value of the two scenarios and choose the higher NPV. The NPV of the lump sum is the lump sum figure. The NPV of the annuity is the NPV of the income stream over your chosen time period and discount rate. Obviously, for short time periods the lump is more valuable. How about longer periods? Let's see.

Assumptions -

Lump Sum - 1,000,000

Annuity payment per year - 5.5% of lump sum (55,000 per year) (if you retire later this can approach 6%)

Discount Rate - 7.4% (average long term stock market investment returns with a stock/bond mix)

As I said, we know the NPV of the lump sum is $1MM today. How about the annuity income stream?

NPV over time:

10 years - $400,000

20 years - $600,000

30 years - $700,000

40 years - $740,000

50 years - $760,000

For heavens sakes, why would you ever choose the annuity?? It will never equal the net present value of the lump sum.

Someone will pipe up and say "they are actuarily equivalent, so it doesn't matter". This is true, but only using the Chevron discount rate tables which are MUCH lower than you would expect to get from any intelligent investment. The current rate schedule is 1.47%-3.57%-4.57%. The genius of always choosing the lump is that the Chevron discount rates are ridiculously low compared to what you are likely to get in the real world.

Some dumb financial planner will tell you - "oooh, that annuity is giving you almost 6% return a year. That is a great deal you should grab that!" Well, it is better than annuities you can purchase on the open market, but it still s---s because annuity payouts s--- due to the low interest rate environment we are in.

The mattress may be your safest haven for now.

A "mattress" portfolio is however subject to fleas & pees. LOL.

A portfolio with virtually no fees at all is called a mattress.

I am not condidering paying any higher fees than I have to. In fact, I am condidering a portfolio with virtually no fees at all.

The comments below about low fees are very important. Losing 2% per year to fees will take a lot of your money. If you are condidering paying high fees, go back and re-read the earlier posts about fees.

My retirement is for me and my wife, not my two grown children. I raised them right, sent them to college. They are independent and responsible for themselves now. They know that. That is their gift back to their parents. So, my retirement wealth is mine to enjoy. I hope I can leave an inheritance to my kids, but they know it's not a promise. I'm going to enjoy myself now. It's my reward for leading a good life.

-9fny, and how much you want to leave to your spoil brat heirs instead of improving your quality of life today. When I'm 80, I really won't give a rats a-- about real estate and rental properties and don't want to know or hear about them. Unless you plan on giving someone a windfall to blow(useless), or leaving it to a charity (honorable), You will have to eventually pay taxes on that income. It's not a matter of if, just when. I just as well trickle it in as an annuity than in bigger chunks, that's just me. I have no brats to spoil, and if I did, I would not spoil them. In my retirement years, I do not want to be a money manager, constantly shucking and jiving trying to move investments around, avoiding or minimizing taxes, constantly trying to die with a higher figure in the bank as if there's a prize for that. When I croak, I want my last $0.01 check to go for the burial expenses. And I want that one to bounce!

8SWC is on the money. For the average person reading this, Federal Tax burden is going to take in the neighborhood of 1/3 of your return. If you're estimating that the annuity will return you 6%, your realistic rate of re-turn is more like 4%. Add in state and other taxes (for those states and localities that levy them, and you are looking at a less than 4% return on your principle. With a lump sum, your income stream will give you flexibility to take or re-invest as needed, plus more leverage to take that principle and to and beyond age 70,5 roll those dollars into investments such as real estate and hands off rental properties that will not only bring returns superior to either the annuity or the market, but also brings tax relief and depreciation that will amplify your dollar return. Much more discussion could be had on this topic but the bottom line is how much of your money you want to keep and what you are willing to do to keep it.

@8axc - I think you misunderstand the issue. Everyone who retires has to decide between taking a lump sum or one of the annuities. We all consider ourselves very luck to have these options. Those who have CRRP, stock options, etc. aren't freaking out, they just have another thing to consider from a tax point of view. Everyone wants to make the best decision for their circumstances. Tax planning is an essential part of any retirement and estate planning.

@8axc, I'm going to live at least 1 day longer than you. That extra day will seem like an eternity to you as you lay there one day taking your last breath.

Wow. I'm concerned about retirement savings but let's not be ridiculous. None of us are going to live forever. We're not even talking about ER here. Unless you are simply saving for your heirs, if your only problem is a few more percent in taxes, then that's a good problem to have. Lump sums, Pensions, Stock options, SS, Bonuses, massive 401k's compared to almost everyone else in the country. Seriously people. You're not going to live forever. Relax.

@8swc - You are correct. I've been loathe to bring up this aspect because it is very specific to the individual. However, if you have severance, stock options, and/or CRRP money it can be useful to be able to control your other income, something you can't do with the annuity. For some people these amounts are substantial. Combine this with SS payments and RMD calculations and having flexibility to control your income can be quite useful from a tax standpoint, especially if you live in a state with income taxes.

I agree with @7vct -- we have been in a period of sustained low interest (and inflation) rates that is without historical precedent. I personally don't think that can last, eventually inflation will rear it's head and those who took an annuity at these low rates could get pretty uncomfortable.

I too remember the 70's and 80's where inflation was a monster -- in fact, looking back, there was a 10-yr period from 1973-1982 where inflation AVERAGED over 8% per year. Not saying we'll get back to those days any time soon, but I don't expect that the ~2% inflation we've averaged over the past 10 years (2006-2015) will last either. Given most folks are thinking about a 20-30 year time horizon when they retire, it's a huge bet to assume inflation won't eventually hurt those taking an annuity.

@8swc, taxes should always be part of your decision when preparing to retire. I live in Texas, so no state income taxes here. But, your point is well taken. I decided on the annuity. I did so primarily for a guaranteed income stream. It pays well enough to live on since I don't have a mortgage or other debts. I don't foresee having to touch my 401k savings for many years. Social Security will be kicking in as soon as 3 years from now. If my lifestyle doesn't demand an increase in cash flow, I'll wait until I'm 65 or 67 before collecting my benefits. In a way, I am controlling my tax exposure. The annuity is satisfying my needs well enough and shortly SS can add to my income. The 401k will standby and be used as needed, although by age 70, I'll be forced to take the Minimum Required Distributions.

Good discussion but virtually no one takes into account tax impact on annuities if your state taxes annuity dollars as income in addition to the Feds, who do. That is a HUGE game changer vs taxation rates of dividends and short and long term capital gains. Plus keeping in mind that you can control cash flow in for those periods when you don't need it (inheritances or good fortune) whereas with an annuity it just keeps on coming and keeps on getting taxed. Don't take my word, run the numbers.

Greetings, here are some retirement rules of thumb that are out there to guide employees considering retirement. Perhaps you have used these or you may have access to others. Just sharing here. I'm interested in hearing any feedback on these rules of thumb or any others you have used.

No Source of Retirement Information - Retirement Income Savings Criteria

1. Ann Hewitt - by age 65, the average full career worker needs to have banked 11 times annual pay

2. T Rowe Price - a multiple of 12 times final pay will do the trick

3. Fidelity - a multiple of 8 times final pay will do the trick

4. BTH Research - Assume 5% average annual returns, for every $1,000 of monthly income you want over 30 years of retirement you need $269,000 in the bank

5. Dallas Salisbury - you need 33 times what you expect to spend in your first year of retirement after subtracting Social Security Benefits

6. Rule of Thumb at 60 yrs (empowernetwpork.com) - A common rule of thumb is that if you want to retire at 60, you will need about 15 times the amount you have calculated for your annual after-tax retirement expenses.

7. Rule of Thumb at 65 yrs (empowernetwpork.com) - A common rule of thumb is that if you want to retire at 60, you will need about 13 times the amount you have calculated for your annual after-tax retirement expenses.

8. The Roy Lucia Show - Postpone your retirement to maximize Social Security

9. http://myob.com.au/blog/how-much-do-i-need-to-retire-at-60/ - A common rule of thumb is that if you want to retire at 60, you will need about 15 times the amount you have calculated for your annual after-tax retirement expenses

10. Financial Samurai - Retirement Goal X Risk Free Rate (10-year yield and 5-7 yr CD rate (2.5%)) = Average Annual Gross Income

11. Early retirement.org - Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

12. Unknown - 'age minus 27' by your pretax annual household income and divide by five.

13. Social Security - If you retire at 67, you’ll get 108% of the monthly benefit because you delayed getting benefits for 12 months. At 70, you’ll get 132% of the monthly benefit because you delayed getting benefits for 48 months. When you reach age 70, your monthly benefit stops increasing even if you continue to delay taking benefits.

14. Forbes (Rule of 25 or Rule of 33) - Project your retirement needs income and multiply by 25 (or 33 if you want to be conservative). These values correspond to 4% and 3% withdrawal rates respectively. That’s how much you will need in a diversified portfolio.

Right on @7upn and @7vct. I was going to bring up Social Security as the "hedge" against the annuity's inflation fear. I retired from CVX in 2015 and I'm grateful for the 26 years I had with a good paying company and working alongside fantastic people. I took the annuity and am fortunate to be one that doesn't need to depend on Social Security, but was the reason I tilted toward choosing the annuity over the lump sum. SS will be the hedge I'll use against inflation. The decision of selecting the annuity or the lump sum is a personal one. It should be done with forethought and professional advise, never with fear of the future. Each person's decision is their own to make. Once made, they will have to adapt to bumps in the road. Believe me, bumps will exist whether they choose the annuity or lump sum.

Yes, Nowadays I notice that many ER's try to shoot for a lower withdrawal rate like 2-3% to make up for leaner times. The 4%, however is still the standard to plan and budget for. That's assuming, of course that your savings and budget allows. If it doesn't you just have to go higher, and hope SS will stay solvent and cover the difference. When SS kicks in, many drop to 1-2% WR then find they have saved too much. Of course that's a good problem to have. ER's are somewhat a small segment of the population, but they do commonly come from megacorps like CVX with good pensions and severances.

@7abq - First of all the 4% rule is just a rule of thumb. But more importantly, you bring up the Achilles Heel of the annuity, inflation. Just as one poster pointed out not to expect the current bull market to continue forever, one shouldn't rely on the current low inflation environment to last forever. The 4% rule assumes that you will increase the withdrawals with inflation. In order to produce the same result with the 6% annuity payout you would have to initially bank some of the payout in order to have more money available later to compensate for inflation. I haven't actually seen anyone do this calculation, but it wouldn't surprise me if you initially had to bank 1/3 of it in order to have the same buying power 30 years from now, using historical inflation rates. For example, 24 years of 3% inflation will cut the value of your annuity in half, and 3% is moderate by historical standards. If your old enough to be retiring, you may remember all the senior citizens who had the buying power of their pensions decimated during the 70s and early 80s. In any case, comparing a 6% level payout to a 4% payout that increases with inflation is an apples vs oranges comparison. Taking the annuity means your banking on continued unusually low inflation whereas with the lump sum you're banking on getting historically normal investment returns. Pick your poison.

@ImAaevd-7abq, I know what you are getting at and agree 100%, but you are not putting in into terms that an avid young investor who thinks that they can easily get 6 to 12% or so in the market with little effort and no expenses can understand. That only comes from years of wisdom and investing. When I was younger I thought the same as these guys do when the market was plugging and chugging along reliably.

It's the whole risk/reward thing. There's a reason that they call it higher risk. I don't really think you really learn about it and it gets through your thick skull and you can appreciate it until you lose a decent sized chunk. And you don't learn that by having good luck in the market all the time and telling yourself and others that you are a skilled investor who always gets good returns and anyone can do it invariably and reliably. In fact, that's very poor advice to give and take. There's quite a few winners on Wall Street, in Las Vegas, and in the lottery. Don't plan on being one of them.

You all need to do some reading. The two important factors for investing the lump sum are returns and inflation. Tests of all historical 30 year periods have shown that the highest withdrawal rate which does not leave you running out of money is 4% starting withdrawal with annual inflation adjustments. The annuity pays 6%, which is 50% more money in your pocket every month, but no inflation allowance. If inflation remains reasonable, the annuity stays ahead of the lump sum for most of your life expectancy and critically, gives you more money when you are likely to need it for active lifestyle.