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Revisiting the 4% Withdrawal Rule for Penske Automotive Group Employees

Healthcare Provider Update: Healthcare Provider for Penske Automotive Group Penske Automotive Group employees typically receive healthcare coverage through a variety of providers depending on their specific plan selections, with major national insurers like Kaiser Permanente, UnitedHealthcare, and Anthem BlueCross BlueShield being among the options available. The exact provider often varies by location and the specific plan chosen during open enrollment. Healthcare Cost Projections for 2026 The healthcare landscape is set for significant upheaval in 2026, with potential premium hikes expected to exceed 75% for many Affordable Care Act (ACA) marketplace enrollees, largely due to the expiration of enhanced federal subsidies. Penske Automotive Group employees, particularly those nearing retirement, may face steep increases in their healthcare costs as insurers respond to rising medical expenses and price inflation. With the ACA marketplace seeing some state requests for premium increases reaching as high as 66%, careful financial planning will be essential for employees heading into another challenging year in healthcare affordability. Click here to learn more

Saving for your retirement from Penske Automotive Group 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 Penske Automotive Group 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 Penske Automotive Group.

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 Penske Automotive Group 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 Penske Automotive Group. 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 Penske Automotive Group. 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 Penske Automotive Group 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 Penske Automotive Group 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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Flps Must Comply With State Law and IRS Requirements

An FLP is subject to more restrictive rules than other forms of business entities. Care must be taken to create a valid FLP in the eyes of the state and the IRS. An FLP will be recognized only if it is formed for a valid business purpose. The FLP form will be disregarded if the IRS or the state finds that it was formed solely to avoid taxes.

Some specific purposes for creating an FLP include:

To adopt a family succession plan
To simplify annual gifting by the senior generation
To minimize income, gift, and estate taxes
To protect assets from potential creditors
To protect assets from waste by heirs
To consolidate assets into a single entity
To keep the business in the family
To decrease estate and probate costs

Additionally, an FLP may own a closely held business (other than a corporation that has made an election to be taxed as an 'S' corporation), real estate, marketable securities, or almost any other investment asset. Homes, cottages, or other personal use assets are normally not suitable for an FLP.

Tips For Forming And Maintaining A Valid FLP:

Have one or more substantial nontax purposes for creating the FLP, such as asset protection
Keep good records
Create the FLP while you're still in good health
Observe all legal formalities when creating the FLP and while operating the business
Hire an independent appraiser to value assets going into the FLP
Transfer legal title of assets going into the FLP
Put only business assets into the FLP — don't put any personal assets into the FLP
If you do put personal assets into the FLP, such as your home, pay fair market rent for their use
Don't commingle FLP assets and personal assets — keep them separate
Never use FLP assets for personal purposes
Keep enough assets outside the FLP to pay for personal expenses
Distribute income to partners pro rata

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Eligibility Criteria: Employees of Penske automatically become participants in the Penske Cash Balance Plan after completing a year in which they work 1,000 or more hours, as long as they are in an eligible group. To ensure they meet the eligibility requirements, employees should confirm they meet these conditions annually and consult the Summary Plan Description for details(Penske Cash Balance Pla…).

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Plan Differences: The Penske Cash Balance Plan is a defined benefit plan, offering benefits similar to a defined contribution plan but providing additional options like lump-sum distributions and annuities. Employees should carefully evaluate these options, as lump sums provide immediate access to funds, while annuities ensure steady long-term payments. Both choices impact long-term financial stability(Penske Cash Balance Pla…).

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Vesting: Vesting refers to an employee's right to receive benefits even if they leave Penske before retirement. Employees must meet specific requirements to become vested, and they can consult the Brief Plan Summary to fully understand their rights(Penske Cash Balance Pla…).

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Benefit Assurance: Benefits from the Penske Cash Balance Plan are paid from a trust fund established by the company and insured by the Pension Benefit Guaranty Corporation (PBGC). Employees can rely on the trust fund and the PBGC for benefit security, and should contact the Customer Contact Center if they have concerns about benefit estimates(Penske Cash Balance Pla…).

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Taxation: Benefits from the Penske Cash Balance Plan are generally taxed as ordinary income. Employees can manage taxes effectively by rolling over lump-sum distributions to an IRA to defer tax payments. Careful consideration of lump sums versus annuities can minimize taxes over time(Penske Cash Balance Pla…).

What are the various forms of payment options available under the Penske Cash Balance Plan, and how should employees of Penske evaluate their choices regarding life annuities versus lump sum payments? Additionally, how do these payment options affect short-term and long-term financial stability in retirement?

Payment Options: Employees can choose between lump-sum payments and various types of annuities. Evaluating these options is essential for balancing short-term and long-term financial goals, as lump sums offer immediate liquidity, while annuities provide lifetime payments(Penske Cash Balance Pla…).

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Divorce and QDRO: In the event of a divorce, employees must obtain a Qualified Domestic Relations Order (QDRO) to divide their pension benefits. This court order ensures that the division is legally recognized, and employees should refer to plan procedures for guidance(Penske Cash Balance Pla…).

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Annuity Options: Penske offers various annuities, including life annuities and joint survivor annuities. Employees should assess these based on their personal needs and consult the company for recommendations regarding beneficiaries to ensure future payments are secure(Penske Cash Balance Pla…).

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