Monthly Archives: October 2018

3 Steps to Calculate Your Shell 80 Point Benefit Restoration Plan Pension Lump Sum

Realistically, it is a complicated and often confusing process to calculate Shell’s 80 Point BRP Pension, and it requires an actuary to do the math accurately.

 

However, Shell employees can calculate a rough estimate that enables them to understand the potential magnitude of how the change in rates may impact their lump sum benefits.

 

STEP ONE: Calculate the Value of the Shell 80 Point Pension

The first step is to calculate the value of the Shell 80 Point Pension according to the formula, which you can find in the Shell Benefit Book.

 

The Shell 80 Point Pension formula is 1.6% * average final compensation * years of service.

 

For this example, let’s assume the Shell employee’s average final compensation is $600,000, years of service is 30, and age at retirement is 60.

 

If we do the math, the pension is valued at 1.6% * $600,000 * 30 = $288,000 / year, or $24,000 / month.

 

The dilemma is that an employee in such a financial situation will not receive an 80 Point Pension of $24,000 per month because a substantial portion of their benefit will be saved in the BRP plan since they are a highly compensated employee.

 

 

STEP TWO: Log In to Fidelity NetBenefits & Perform a Pension Calculation

Once we calculate the total value of the pension, we log onto to Fidelity NetBenefits and do a pension calculation.

 

For this example, let’s say that NetBenefits is showing a Shell 80 Point Pension of $11,000 per month. We know the difference ($24,000 – $11,000 = $13,000) is roughly the ‘monthly annuity value’ of the BRP pension. As we discussed previously, the BRP is paid out as a lump sum, not an annuity.

 

The easiest way to estimate the Shell 80 Point BRP Pension lump sum value is to revisit NetBenefits. The dilemma is that NetBenefits is not set up to show Shell employees the difference in value a change in interest rates may have on their BRPs, which is essential for this analysis.

 

 

STEP THREE: Estimate the Value of the Shell 80 Point BRP Pension Lump Sum

The next step is to walk through how the math works to perform a rough calculation of the estimated value of the BRP Pension lump sum. Essentially, it comes down to the basic time value of money.

 

Since the lump sum is the present value of future estimated monthly BRP annuity payments, we need to calculate a summation of all future BRP theoretical annuity payments over the employee’s estimated life expectancy discounted by the applicable rate. 

 

PV = PMT1/(1+r)¹ + PMT₂/(1+r)2 … PMTn/(1+r)n.

 

Remember, as interest rates go up, the pension value will go down, and vice versa.

 

interest rate vs pension

 

Of course, to properly do this we need to know life expectancy and the appropriate discount rate to use. For this example, let’s use the Social Security’s Life Expectancy Calculator as our approximation of life expectancy. As we can see in the table, a 60-year-old male born in 1958 has a life expectancy of 23.2 years.

 

 

Life Expectancy Calculator

 

The discount rate used in the Shell 80 Point BRP Pension is the Minimum Present Value Segment Rates published by the IRS. Specifically, Shell uses the rates from September 30th of the 2017 year for any pension that began in the 2018 year.  

 

I am going to state that one more time because it is so important. Shell uses the rates from September 30th of the prior year for any pension that begins in the current year.

 

For example, let’s say you retire November 30, 2018, and begin your pension on December 1, 2018. In this situation, your pension will be calculated based on the segment rates as of September 30th, 2017—the prior year.

 

In comparison, if you retire December 31st, 2018 and begin your pension on January 1st, 2019, then the segment rates to use for discounting is based on September 30th, 2018.

 

Another important note is that the blended rate is three different rates instead of one rate. First Segment is the rate used to discount the first five years. The Second Segment rate is used to discount years six through fifteen. The Third Segment rate is used to discount any pension payments paid out after year fifteen.

 

To learn more about the impact of interest rate changes on your Shell BRP Pension Lump-Sum, walk through our real life examples by reading our previous blog, You Could Increase the Value of Your Shell 80 Point BRP Pension by More Than $200K by Retiring 31 Days Earlier.

 

Or, take some time to review your retirement options by scheduling a free consultation with one of our Shell benefits specialists

 

 

Related Posts:

You Could Increase the Value of Your Shell 80 Point BRP Pension by More Than $200K by Retiring 31 Days Earlier

How Waiting 15 Days to Retire May Save You $50,000 in Taxes on Your BRP Payouts

Non-Qualified Retirement Plan Tax Risks the Corporate Professional Should Avoid

Sequence of Return Risk

Will You Optimize Your Employee Benefits Elections This Fall? Here’s What You Should Consider BEFORE Open Enrollment

 

 


nickNick Johnson, CFA®, CFP®

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Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 


 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

What Nick’s Reading | You Could Increase the Value of Your Shell 80 Point BRP Pension by More Than $200K by Retiring 31 Days Earlier

 

Most of our Shell clients do not realize that their pension can be impacted by interest rates. Specifically, their Shell 80 Point Benefit Restoration Plan (BRP) Pension.

 

For high income earners that have spent their entire careers at Shell, properly managing this impact may amount to saving hundreds of thousands of dollars—especially for those that are planning on retiring in the near term.

 

This article will walk you through how interest rates impact your Shell 80 Point Benefit Restoration Plan Pension payout and what you can do about it.

 

A Brief History of Interest Rates

Economists have been continually calling for interest rates to increase for nearly a decade and now, we are beginning to see this happen. 

 

As you may know, the Federal Funds Rate (FFR) for 2018 started at 1.42% on January 4, 2018 with three rate hikes so far, not including the additional rise in rates we will likely experience by the end of this year. The FFR reached 2.18% on October 16, 2018.

 

Likewise, on January 2, 2018, the 10-Year U.S. Treasury started the year off at 2.46% and increased to 3.16% by October 16, 2018. Compared to historic trends, we are at unprecedented low levels of rates.

 

Note, this does not mean rates will go up immediately. Economists have been wrong for a number of years, and just because we have seen a major movement in rates this year doesn’t mean they will keep going up next year. However, we do know that the rise in rates we have already experienced from September 2017 to September 2018 is going to impact the value of pension lump sums for our Shell clients retiring in the near future.

2018 Intere

 

Wait My Shell 80 Point Pension is an Annuity, Interest Rates Shouldn’t Affect Me!

 

Yes, your Shell 80 Point Pension is required to be paid out as an annuity. You cannot take it as a lump sum. Interest rates primarily affect lump sum pension payouts.

 

What you may be forgetting is the 80 Point Benefit Restoration Plan (BRP) Pension. If you are a highly compensated employee of Shell Oil and are on the 80 Point Shell Pension Plan, it is likely that Shell is making contributions to the Shell 80 Point BRP Pension on your behalf. When you retire, Shell pays a lump sum benefit to your BRP Pension approximately 90 days after your retirement date (6 months if you are considered a key employee). The Shell BRP Pension is immediately taxed at distribution. If you want to learn more about how to minimize taxes, read my article on Shell BRPs and taxes.

 

The Shell Benefit Restoration Plan Pension is a non-qualified pension plan, meaning it does not receive the same preferential tax benefits as your qualified pension.

 

For most retirees, this means the Shell BRP Pension is paid out within 90 days of retirement and immediately taxed. You cannot roll your BRP over into your 401(k) or IRA. You cannot elect to defer receiving proceeds from your BRP over time (unless you have an Old Money contribution, or made prior to benefit elections in 2007).

 

Changing Your Retirement Date May Save You More Than $200,000 in Taxes on Your Shell 80 Point BRP Pension Lump Sum Payout

 

November 30th Retirement Date

 

For this example, let’s assume the Shell employee meets the following criteria:

 

a) 60-year-old retiring November 30th

b) Pension starting on December 1st

c) Average Final Compensation is $600,000

d) Thirty years of service with Shell

e) The value of both the traditional 80 Point Pension and BRP Pension is worth $24,000/month

f) Netbenefits is showing a traditional 80 Point Pension of $11,000/month

g) Life Expectancy is 83.2 years

 

If we run the math on the above example, then the value of the lump sum BRP Pension is worth around $2,629,000.

 

Let’s briefly walk through how the math works to perform a rough calculation of the estimated value of the BRP Pension lump sum. Essentially, it comes down to basic time value of money. Since the lump sum is simply the present value of future estimated monthly BRP annuity payments, we need to calculate a summation of all future BRP theoretical annuity payments over the employee’s estimated life expectancy discounted by the applicable rate. 

 

PV = PMT1/(1+r)1 + PMT2/(1+r)2 … PMTN/(1+r)N.

 

Remember, as interest rates go up, the pension value will go down, and vice versa.

 

The Recent Changes in Segment Rates and Their Impact on Your Shell 80 Point BRP Pension Lump Sum Payout

 

You may have noticed that rates from September 2017 through August 2018 have risen significantly. The September 2017 rates will not be published until October 12, 2018, but we can estimate what they will be with a reasonable degree of accuracy.

 

Note, higher interest rates mean a lower value for your Shell 80 Point BRP Pension lump sum.

 

Segment Rates

December 31st Retirement Date

Let’s re-run the above example and change the Shell employee’s retirement date to be 31 days later than the previous example.

 

a) 60-year-old retiring December 31, 2018

b) Pension starting January 1, 2019

c) Average Final Compensation is $600,000

d) Thirty Years of Service with Shell

e) The value of both the traditional 80 Point Pension and BRP Pension is worth $24,000/month

f) Netbenefits is showing a traditional 80 Point Pension of $11,000/month

g) Life Expectancy is 83.2 years

 

If we re-run the example with a December 31, 2018 retirement date and a pension start date of January 1, 2019, then the value of the lump sum is worth approximately $2.4 million—that is a difference of around $229,000! Simply by retiring 31 days earlier, this Shell employee could save hundreds of thousands of dollars!

 

Who Can Benefit From This Shell 80 Point BRP Pension Strategy?

Those who should be considering this strategy are Shell employees who are planning to retire in the next 18 months, but are also able to retire at an earlier date. This strategy may not fit those taking voluntary severances as Shell may have requirements for their termination date, and the severance can be worth a substantial amount as well.

 

We are helping our Shell clients who are looking at retiring in the next 18 months to analyze their choices considering today’s rising rates so they can make the best election decision for their situation. Of course, taxes, other financial assets, personal goals, and financial needs all come into play. That’s why we perform a comprehensive assessment with our clients, instead of simply looking at one item.

 

If you are looking at retiring in two to five years, and are concerned about how rising rates may affect your lump sum pension, don’t over react. The value of your pension will increase by working longer and no one knows exactly how much rates are going to rise.

 

Please note, this a general education article illustrating some of the ways we help our clients make complex financial decisions. Before you make any decision, we recommend you work with a fiduciary financial advisor and seek confirmation about your pension benefits and choices from Shell HR. There are numerous employees at Shell who have varying pension rules due to acquisitions, obtaining U.S. citizenship, being on the APF pension plan instead of the 80 point, as well as additional factors. It is best to confirm how your retirement date affects your pension before making any decisions.

 

If you have questions about your Shell benefits and would like to get a second opinion, contact one of our advisors who specialize in helping Shell employees make the most of these retirement savings tools.

 

 


nickNick Johnson, CFA®, CFP®

CONNECT WITH ME ON LINKEDIN

 

Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 

 


 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 

Financial Fact | Estate Planning Essentials You May Not Know You’re Missing

When you are young and healthy, estate planning is often an overlooked part of the retirement planning process.  

However, it is an important piece of your retirement plan that you should be thinking about as you are building your asset base, getting married, starting to have children, or moving into retirement. 

 

You want to protect the people who are most important to you. Having a solid estate plan in place serves to provide for your loved ones when and if you are no longer around to do so. The following sections address the three most pressing questions people have about their estate plan: Where will my money go? How will it get there? What should I do if I want to leave money to charity?

 

Where Will My Money Go and How Will It Get There? : The Importance of Updating Beneficiaries and the Use of Testamentary Trusts for Your Estate Plan

 

For a majority of our clients, retirement accounts hold the bulk of their asset base. Such accounts may include their IRAs, Roth IRAs, 401(k)s, life insurance policies, annuities and more.

 

Beneficiary Designations

 

While many of an individual’s assets will be transferred at death by their will, a majority of their retirement accounts have beneficiary designations that guide how each asset will pass. If you do not have beneficiary designations in place, or these designations do not match what is outlined in your will, you or your family may encounter problems further down the road.

 

If your estate is fairly simple, you can use beneficiary designations to direct how your assets will be managed at your time of death. However, as you get older and accumulate more assets, it is essential to have a properly drafted will to guide when and how your assets will be distributed. This may require more in-depth estate planning and periodical reviews to ensure your legacy is protected and your money moves in the direction you intended.

 

It is important to note that certain assets will pass by beneficiary designations, regardless of provisions in your will.  For example, since life insurance policies are contracts between a policy owner and an insurance company, life insurance proceeds will be paid to the named beneficiary, even if your will says otherwise.  Neglecting necessary changes to beneficiary designations can often result in unnecessary costs to resolve disputes among family members, which can be avoided by early planning. Therefore, it’s critical to regularly consult with your attorney and financial professionals to confirm that your assets will be distributed in accordance with your wishes. 

 

Testamentary Trusts

 

A testamentary trust can help ensure your money moves to your beneficiaries when and how you want it to. If your will does not include testamentary trusts, your assets will pass to your beneficiaries directly. Those assets will be included in their estates and will be subject to creditors in the instance of a divorce or lawsuit.  Without the use of testamentary trusts, there is also no assurance that the assets will stay in the hands of your family.

 

Additionally, if your children are young adults when you pass, they may have immediate access to a large sum of money. Depending on your child’s money management skills, this may be a concern worth addressing. Testamentary trusts can allow for another person to manage your child’s assets until they the child reaches an age at which they may be better equipped to make wise financial decisions.

 

Consider that you have a child, age 18, and you have accumulated $1 million in your 401(k) and $1 million in life insurance benefits. What if you and your spouse passed away today? What would happen to your estate?  Your child is no longer a minor so they would inherit $2 million and have outright control over those funds.  While many 18-year-olds are quite responsible, it may be an overwhelming responsibility to manage that amount of money.  Setting up a trust for them in your will could allow for an older, more responsible adult to step in to control and protect the assets for the benefit of your child, until he or she is old enough to make those decisions for themselves. 

 

Such situations illustrate the importance of reviewing and updating your will, beneficiary designations, and additional supporting documents after any major life event (divorce, remarriage, birth of children, etc.), or any time you update your legal documents. 

 

What Should I Include In My Estate Plan If I Want To Leave Money To Charity?

 

In addition to helping family members, many people want to support charity with the assets they leave behind. In such cases, it is generally better to donate a qualified retirement plan to charity instead of a Roth IRA or after-tax account. Why? Because charitable organizations do not have to pay income taxes and you can save your tax-free accounts for your beneficiaries who do have to pay income taxes. You can also receive an estate tax deduction by donating to charity (if applicable). 

 

If you are charitably inclined and want to include charities in your will, be cautious of how you set up your estate plan. 

 

For example, consider that you name both a charity and your spouse/child as beneficiaries to an IRA account. If the retirement account is not split between beneficiaries in a timely manner, your loved ones may be forced to take their share of the retirement account out all at once instead of over their respective lifetimes. As a result, they will miss out on the tax-deferred status of an Inherited IRA and pay more taxes on the money you leave behind.

 

A well-drafted and coordinated estate plan is a crucial piece of a comprehensive financial plan.  You should review your wills and beneficiary designations a minimum of every 5 years, or anytime you have a major life event, to ensure that the estate you have worked so hard to build is protected for your loved ones. Take a second look at your estate plan with the help of a Willis Johnson & Associates advisor by scheduling a free consultation today.

 


alaxisAlexis Long, MBA, CFP®

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Alexis Long is a wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. Understanding what is truly important to a client is key to good financial planning, along with providing solid technical advice.

 

Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.

 


 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. We are not attorney’s or tax advisors therefore please be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed that may have legal of tax implications. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.

Market Update | Quarterly Market Review for Q3 (as of market close September 28, 2018)

The third quarter proved to be very strong for domestic stocks.

 

July saw the major benchmark indexes listed here enjoy robust gains, led by the large caps of the Dow and S&P 500.

 

Global stocks also rebounded in July, with the Global Dow surging 3.76% by the end of July. Favorable economic indicators and encouraging corporate earnings reports were enough to quell investor concerns over the continuing saga that is the back-and-forth trade tariffs between the United States and China. August saw stocks continue to push ahead. Several of the benchmark indexes listed here reached record highs during the month. Both the Dow and S&P 500 posted monthly gains of 2.16% and 3.03%, respectively. However, tech stocks and small caps made notable monthly gains. 

 

Q3 2018 Market Update

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Nasdaq increased by almost 6.0%, while the Russell 2000 eclipsed 4.0%. Corporate earnings continued to soar on the heels of corporate tax cuts, consumer spending, and global growth Corporate earnings continued to soar on the heels of corporate tax cuts, consumer spending, and global growth. Toward the end of September, a new round of reciprocal tariffs between the United States and China kicked in as it appears neither economic giant is ready to flinch. The United States imposed an additional $200 billion in tariffs on Chinese goods, prompting China to assess $60 billion worth of tariffs on U.S. products… Click here to read the full article.

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