Saving for your retirement from Howmet Aerospace isn't always easy, but using your retirement savings wisely can be just as challenging. How much of your savings can you withdraw each year? This is an important question we often receive from many of our Howmet Aerospace clients, and understandably so — withdraw too much and you run the risk of running out of money, but withdraw too little and you may miss out on a comfortable retirement from Howmet Aerospace.
For more than 25 years, the most common guideline has been a rule known as the '4% rule.' This rule suggests that a withdrawal equal to 4% of the initial portfolio value, with annual increases for inflation, is sustainable over a 30-year retirement. This guideline can be helpful for Howmet Aerospace employees in projecting a savings goal and providing a realistic picture of the annual income that their savings might provide. For example, a $1 million portfolio could provide $40,000 of income in the first year with inflation-adjusted withdrawals in succeeding years.
The 4% rule has stimulated a great deal of discussion over the years, with some experts saying 4% is too low and others saying it's too high. Due to the speculation, we find it important for us to analyze both the original and recent research regarding the 4% rule with our clients from Howmet Aerospace. The most recent analysis happens to come from the man who invented it, financial professional William Bengen, who believes the rule has been misunderstood and offers new insights based on new research. Let's see if he's right.
Original research
Bengen first published his findings in 1994, based on analyzing data for retirements from the years 1926 to 1976 — that's 50 years of data. He considered a hypothetical, conservative portfolio comprising 50% large-cap stocks and 50% intermediate-term Treasury bonds held in a tax-advantaged account and rebalanced annually. A 4% inflation-adjusted withdrawal was the highest sustainable rate in the worst-case scenario — retirement in October 1968. This was the beginning of a bear market and a long period of high inflation. All other retirement years had higher sustainable rates, some as high as 10% or more.[1]
Of course, no one can predict the future, which is why Bengen suggested the worst-case scenario as a sustainable rate. He later adjusted it slightly upward to 4.5%, based on a more diverse portfolio comprising 30% large-cap stocks, 20% small-cap stocks, and 50% intermediate-term Treasuries.[2]
New research
Now that we have an understanding of Bengen's original research, we'd like to take a look at a more recent analysis with our clients from Howmet Aerospace. In October 2020, Bengen published new research that attempts to project a sustainable withdrawal rate based on two key factors at the time of retirement: stock market valuation and inflation (annual change in the Consumer Price Index). In theory, when the market is expensive, it has less potential to grow, and sustaining increased withdrawals over time may be more difficult. On the other hand, lower inflation means lower inflation-adjusted withdrawals, allowing a higher initial rate. For example, a $40,000 first-year withdrawal becomes an $84,000 withdrawal after 20 years with a 4% annual inflation increase but just $58,000 with a 2% increase.
To measure market valuation, Bengen used the Shiller CAPE, the cyclically adjusted price-earnings ratio for the S&P 500 index developed by Nobel laureate Robert Shiller. The price-earnings (P/E) ratio of a stock is the share price divided by its earnings per share for the previous 12 months. For example, if a stock is priced at $100 and the earnings per share is $4, the P/E ratio would be 25. The Shiller CAPE divides the total share price of stocks in the S&P 500 index by average inflation-adjusted earnings over 10 years.
5% rule?
Bengen once again used historical data, this time, for over 60 years of retirement. Analyzing retirement dates from 1926 to 1990, Bengen found a clear correlation between market valuation and inflation at the time of retirement and the maximum sustainable withdrawal rate. Historically, rates ranged from as low as 4.5% to as high as 13%, but the scenarios that supported high rates were unusual, with very low market valuations and/or deflation rather than inflation.[3]
For the majority of the last 25 years, the United States has experienced high market valuations, and inflation has been low since the Great Recession.[4-5] In a high-valuation, low-inflation scenario at the time of retirement, Bengen found that a 5% initial withdrawal rate was sustainable over 30 years.[6] While not a big difference from the 4% rule, this suggests retirees could make larger initial withdrawals, particularly in a low-inflation environment. But in a high inflation environment withdrawals should decrease.
One caveat is that current market valuation is extremely high: The S&P 500 index had a CAPE of 34.19 at the end of 2020, a level only reached (and exceeded) during the late-1990s dot-com boom and higher than any of the scenarios in Bengen's research.[7] His range for a 5% withdrawal rate is a CAPE of 23 or higher, with inflation between 0% and 2.5%.[8] (Inflation was 1.2% in November 2020.)[9] Bengen's research suggests that if market valuation drops near the historical mean of 16.77, a withdrawal rate of 6% might be sustainable as long as inflation is 5% or lower. On the other hand, if valuation remains high and inflation surpasses 2.5%, the maximum sustainable rate might be 4.5%.[10]
It's important for Howmet Aerospace employees to keep in mind that these projections are based on historical scenarios and a hypothetical portfolio, and there is no guarantee that your portfolio will perform in a similar manner. Also remember that these calculations are based on annual inflation-adjusted withdrawals, and you might choose not to increase withdrawals in some years or use other criteria to make adjustments, such as market performance.
Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies, including your withdrawal strategy.
We'd like to remind our clients from Howmet Aerospace that all investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. Rebalancing involves selling some investments in order to buy others; selling investments in a taxable account could result in a tax liability.
The S&P 500 index is an unmanaged group of securities considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.
1-2) Forbes Advisor, October 12, 2020
3-4, 6, 8, 10) Financial Advisor, October 2020
5, 9) U.S. Bureau of Labor Statistics, 2020
7) multpl.com, December 31, 2020
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Some specific purposes for creating an FLP include:
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How can Howmet Corporation employees ensure that they are maximizing their pension benefits under the Howmet Salaried Employees Pension Plan? Are there specific contributions or actions that could enhance their benefits over the years of their employment with Howmet Corporation?
Maximizing Pension Benefits: To maximize their pension benefits, Howmet Corporation employees should focus on accumulating years of service and ensuring they meet the eligibility criteria for the highest percentage of compensation credits under the pension plan. Employees should review their benefit statements regularly, especially considering how age and years of service affect their pension accrual. Consulting financial advisors or using Howmet's retirement planning tools can also aid in making strategic decisions about retirement timing and additional personal savings to complement their pension(Howmet Corporation_July…).
In what situations might employees at Howmet Corporation find themselves ineligible for pension plan benefits? What steps should they take, if they suspect they fall into such categories, to clarify their eligibility status?
Ineligibility for Pension Benefits: Employees at Howmet Corporation might be ineligible for pension benefits if they are not classified as salaried employees hired before January 1, 2002, or if they leave the company before accruing sufficient vesting service (three years or more). If employees believe they fall into a category of ineligibility, they should contact the plan administrator or consult HR to clarify their status, especially regarding vesting service(Howmet Corporation_July…).
Given the complexities of the Howmet Corporation Pension Plan, what resources are available for employees to understand their pension calculation, and how can they access such resources through Howmet Corporation?
Understanding Pension Calculation: Employees can access resources like the Your Benefits Resources (YBR) platform or call 1-888-ALCOA123 for assistance in calculating their pension benefits. These tools offer detailed projections and estimates based on individual account balances, years of service, and compensation, allowing employees to plan for retirement effectively(Howmet Corporation_July…).
With the elder workforce approaching retirement, how does the Howmet Corporation Pension Plan accommodate early retirees, and what factors should employees consider when deciding the optimal time to retire?
Early Retirement Considerations: The Howmet Corporation Pension Plan allows early retirement starting at age 55, with a reduced benefit. Employees should weigh the impact of reduced payments against their financial needs and Social Security options. Additionally, delaying retirement can increase benefits significantly. Employees should use the available calculators and consult financial advisors to determine the optimal retirement age(Howmet Corporation_July…).
What are the specific implications of the Internal Revenue Service (IRS) limitations for Howmet Corporation employees’ pension benefits, and how might these changes affect future retirement planning?
IRS Limitations and Future Planning: IRS limitations affect pension benefits by capping the maximum benefit amount that can be received, which for defined benefit plans is subject to annual adjustments. Employees nearing high compensation levels should consider how these caps might limit their pension payouts and integrate personal savings strategies, such as 401(k)s or IRAs, into their overall retirement plan(Howmet Corporation_July…).
How does the Howmet Corporation Pension Plan protect employees' rights under ERISA, and what recourse exists for employees who believe their rights have been violated during the pension application process?
ERISA Protections: The Howmet Corporation Pension Plan is governed by the Employee Retirement Income Security Act (ERISA), ensuring that employees' rights are protected. If employees believe their rights have been violated during the pension application process, they can file a claim with the Benefits Management Committee and, if necessary, pursue an appeal or legal recourse under ERISA(Howmet Corporation_July…).
For Howmet Corporation employees planning their estates, how essential is it to name beneficiaries in the pension plan, and what process should they follow to ensure that their beneficiaries are correctly registered?
Naming Beneficiaries: It is essential for Howmet Corporation employees to name beneficiaries for their pension plan, especially to ensure that survivor benefits are properly allocated. Employees can update beneficiary information through the YBR platform or by submitting the appropriate forms to HR. Spousal consent is required if designating a non-spouse beneficiary(Howmet Corporation_July…).
Howmet Corporation employees often have questions regarding survivor benefits. What provisions does the Howmet Pension Plan have in place for surviving spouses, and how do these benefits differ based on the employee's marital status at retirement?
Survivor Benefits: The Howmet Pension Plan offers survivor benefits, which provide ongoing payments to a spouse or designated beneficiary. For married employees, the default option is a joint and survivor annuity, which ensures a percentage of benefits continues for the surviving spouse. Single employees can designate other beneficiaries, but should review their options carefully to ensure proper coverage(Howmet Corporation_July…).
What are the essential milestones employees of Howmet Corporation should be aware of regarding vesting service under the pension plan, and how does this vesting impact their eventual payout?
Vesting Milestones: Employees become vested in the Howmet Pension Plan after completing three years of service or reaching age 65. Once vested, employees have a right to receive pension benefits even if they leave the company before retirement age. Knowing these milestones helps ensure employees fully benefit from their time at Howmet(Howmet Corporation_July…).
If Howmet Corporation employees have further questions regarding their benefits as detailed in the document, what steps should they take to contact the plan administrator, and what information will they need to provide for personalized assistance?
Contacting the Plan Administrator: Employees with further questions about their pension benefits should contact the plan administrator through the YBR website or by calling 1-888-ALCOA123. Employees will need their Social Security number, date of birth, and user ID to access personalized assistance(Howmet Corporation_July…).