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How much can you spend in your retirement from Flowers Foods without the risk of running out of money?
That is an important factor to consider for your Flowers Foods retirement income plan. By striking a balance between current spending and future asset value, you will be able to sustain that spending later.
You are presented with the choice of taking income now and running out of money when withdrawing too much, or withdrawing too little and leaving more than you anticipated to heirs.
Retirement variable withdrawals or 'guardrails' can help you achieve this balance in a systematic way that removes the guesswork.
How to Determine Withdrawal Amounts
One way to calculate the income or withdrawals you can take from an investment portfolio is by withdrawing a fixed percentage of the portfolio and adjusting the withdrawal for inflation each year using the 4% rule. If you elect to do so, this method will provide you with a consistent income throughout your Flowers Foods retirement, securing the amount of the withdrawals and your ability to maintain that income for your lifetime are both pretty safe with this method.
When considering the validity of the 4% rule, it's worthy to acknowledge how analyses of the 4% rule has stood up to the stock market crash of 1929, the Great Depression, World War II and the stagflation of the 1970s. Although the future remains unknown, history indicates that the 4% rule is a reliable approach to determining how much one can spend in retirement.
Despite that, there are some risks that need to be addressed
When taking consistent withdrawals from your portfolio you become exposed to the sequence of return risk. The sequence of return risk is the downside risk experienced when normal downside volatility hits your account early into your retirement from Flowers Foods, this can impact your account value down the line.
Despite running that risk when choosing this strategy, there are ways that you can protect yourself. In this article we will discuss a strategy of taking variable withdrawals from your portfolio, providing some protection from sequence risk, and protecting your portfolio from higher inflation.
Why Variable Withdrawals?
Factors affecting your portfolio such as Inflation, interest rates, investment returns, and taxes will change throughout your retirement. Adjusting withdrawals to account for these changes will balance your spending to keep it in accordance with what your portfolio can support.
Adjusting withdrawals based on account value provides opportunity for better investment performance. Taking more when markets are up is beneficial, while withdrawing more during a market downturn is inadvisable because you would be selling at a time of low market value.
How do I adjust my withdrawals?
This section will entail how to adjust withdrawals based on changes in your retirement account. The adjustments demonstrated are formally known as the Guardrail or Guyton-Klinger methodology.
There are four(4) guiding rules to this strategy:
- Withdrawal Rule
- Portfolio Management Rule
- The Capital Preservation Rule
- The Prosperity Rule
The last two rules work as one. Taken together, these two rules establish “guardrails” around your withdrawal that keep it from drifting too high or too low.
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The Withdrawal Rule
This rule is similar to the 4% rule – with a basic modification. Pick a set percentage of your portfolio to withdraw in the first year. For each year after, adjust your withdrawal by the prior year’s inflations.
The difference behind this methodology is to not make the inflation adjustment if portfolio returns are negative, and the new withdrawal would give you a withdrawal rate that is higher than the initial withdrawal rate.
An Example:
Assume you start with a $600,000 dollar portfolio and take a 4% withdrawal in the first year. That’s $16,000.
Then, let’s assume that inflation for the year is 4.3%. You would adjust your withdrawal for the next year upward by 4.3%. You would take a $16,640 withdrawal for the next year.
The rule would be triggered if your investment returns are negative, say -1%, AND the $16,640 is more than 4% of the portfolio.
For this example, a 1% loss plus a $16,000 withdrawal gives you a portfolio value of $380,000 for the second year.
$17,100 is 4.5% of $380,000. Since 4.5% is higher than 4%, you would forego the inflation increase and just withdraw the $16,000.
Portfolio Management Rule
The portfolio management rule addresses the way your portfolio is rebalanced as the investment values of the different asset classes fluctuate.
Retirement Income Guardrails
The capital preservation rule and the prosperity rule can be taken together. Think of these two rules as establishing guardrails around your retirement income withdrawal rate.
When choosing to use the guardrails, you are in effect placing a buffer around your savings. The amount of income taken from the portfolio is adjusted based on account value. If the account grows, income increases. If the account value drops, income is reduced.
How it works
To understand how the rule works think first in terms of your initial withdrawal rate from your portfolio. Let’s say that you begin your first year of retirement by withdrawing 4% of your portfolio. Considering a $400,000 portfolio, that would be $16,000. Next, you follow the standard rule of increasing your withdrawals each year for inflation.
The guardrails work like this:
- When your current withdrawal rate exceeds your original withdrawal rate by more than 20%, you reduce the withdrawal by 10%.
- When your current withdrawal rate lags your original withdrawal rate by more than 20%, you increase your withdrawal by 10%.
The Prosperity Rule
Let's assume that for several years markets have been really good and your investments have performed well. Your account value has grown to $800,000 even though you have taken withdrawals for several years. Your withdrawal amount is now $20,800 due to inflation adjustments.
Ok. Here come the numbers…
$20,800 is only 2.6% of $800,000. The rule says to increase your withdrawal when your current withdrawal rate is 20% less than your original withdrawal rate. 20% of 4% is 0,8%. 4%-0,8%= 3.2%. Since 2.6% is less than 3.2%, you would increase your withdrawal by 10%.
10% of $20,800 is $2,080. You would take a withdrawal of $22,880.
In this case, the unexpectedly high investment gain means you can afford to take a larger amount of income from your portfolio.
The Capital Preservation Rule
This is the mirror image of the prosperity rule. If your account value drops too low, you reduce your withdrawals to reduce the risk of running out of money too soon.
Looking at the same scenario from above, you have a $20,800 annual withdrawal. Instead of having really good investment performance, however, you experience an extended bear market and now only have $350,000 in your portfolio.
$21,700 is 6.2% of $350,000.
The capital preservation rule says that since your current withdrawal rate, 6.2% is more than 20% higher than your original 4% withdrawal rate, you need to reduce your spending by 10%.
10% of $20,800 is $2,080. Since your account value has dropped so much compared to your withdrawal amount, you would reduce your withdrawal that amount. Your new withdrawal is $18,720.
Conclusion
Using a 'Guardrail' or variable withdrawal strategy keeps your retirement spending more in line with the value of your investments. It provides a means to spend more when sustained by your portfolio, and keeps you from draining your portfolio too quickly when returns are poor.
What is the 401(k) plan offered by Flowers Foods?
The 401(k) plan at Flowers Foods is a retirement savings plan that allows employees to save a portion of their salary on a pre-tax basis, helping them prepare for retirement.
Does Flowers Foods offer a company match for the 401(k) contributions?
Yes, Flowers Foods offers a company match for employee contributions to the 401(k) plan, which helps boost employees' retirement savings.
What is the eligibility requirement to participate in the Flowers Foods 401(k) plan?
Employees of Flowers Foods are eligible to participate in the 401(k) plan after completing a specified period of service, typically 30 days.
How can employees of Flowers Foods enroll in the 401(k) plan?
Employees can enroll in the Flowers Foods 401(k) plan through the company’s HR portal or by contacting the HR department for assistance.
What types of investment options are available in the Flowers Foods 401(k) plan?
The Flowers Foods 401(k) plan offers a variety of investment options, including mutual funds, stocks, and bonds, allowing employees to diversify their retirement savings.
Can employees change their contribution percentage to the Flowers Foods 401(k) plan?
Yes, employees can change their contribution percentage to the Flowers Foods 401(k) plan at any time, subject to the plan’s guidelines.
When can employees of Flowers Foods take a loan from their 401(k) plan?
Employees can take a loan from their Flowers Foods 401(k) plan under certain conditions, such as financial hardship or specific personal needs, as outlined in the plan documents.
What happens to the Flowers Foods 401(k) plan if an employee leaves the company?
If an employee leaves Flowers Foods, they can either roll over their 401(k) balance to a new employer's plan, an IRA, or withdraw the funds, subject to taxes and penalties.
Is there a vesting schedule for the company match in the Flowers Foods 401(k) plan?
Yes, Flowers Foods has a vesting schedule for the company match, meaning employees must work for a certain number of years before they fully own the matched contributions.
How often can employees of Flowers Foods review their 401(k) account statements?
Employees can review their Flowers Foods 401(k) account statements quarterly, and they can also access their accounts online at any time.
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