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What is a Safe Guardrail Withdrawal Strategy for Retirement? Thumbnail

What is a Safe Guardrail Withdrawal Strategy for Retirement?

Tim breaks down everything you need to know about deploying a dynamic guardrail withdrawal strategy for a safe income stream during retirement. He uses proven research by Guyton and Klinger to dig into the details of how you can securely manage your retirement funds. He talks about the significance of having a 'war chest,' and how our method ensures a steady income regardless of market fluctuations.

Safe income withdrawal strategies for retirement is a big topic. One service we provide that is very popular with our clients is our dynamic guardrail withdrawal strategy, for those in retirement or who soon will be. 

I’m going to describe how our guardrail strategy works and how we determine how much money you can safely withdraw from your nest egg in retirement.

If you’ve been researching different withdrawal strategies, you’ve probably heard of: the 3% rule, the 4% rule, the bucket strategy, the smile strategy, and so on. There are different methods and different ideas from studies done looking at the past 100-120 years.

Why 100-120 years? Well, before that, we really didn’t retire. We just worked until we died. Only the last few generations have had the opportunity to retire, at least as we know it today.

Dynamic Guardrail Withdrawal Strategy

The strategy that I like most and makes the most sense to me is the dynamic withdrawal (or distribution) model, with guardrails. It’s based on studies performed by Jonathan Guyton and William Klinger.

Many comprehensive financial advisors are going to take all your assets, income, Social Security, and expenses and then tell you based on these factors, you can do this in retirement, but not this in retirement... and so on. 

We can also model that with our retirement planning software. But rather than getting down into the weeds and telling you that according to this Monte Carlo simulation, you have an 87% chance of spending “x” amount per year in 20 years, we like to flip it around and take your nest egg and give you an estimate of what we could send you monthly and/or annually, and have it last for 30+ years over your retirement. 

Everything is going to change over time, and we don’t know where things will be 5, 10, or 20 years from now. We’ve also found that people want to know what they can spend, in dollars and cents, rather than being told some percentage of success. Why? Well, you can’t spend a percentage, but you can spend dollars.

First, everyone has to realize we can't guarantee any method for sure. There are simply too many variables and too much going on. Even though we can base this strategy on these great studies, the future is still unknown.

The Guardrails

We take the dynamic withdrawal model and we combine it with a guardrail process. There are two things we don't know: we don't know how long your retirement will last (hopefully quite a while), and we don't know what the stock market is going to do. 

Just like when you're driving your car down the road, there are guardrails if there's a sharp curve or a cliff. Well, we're going to put guardrails around your nest egg or investments. Hopefully, it stays in the middle of the road, but if it swerves and hits a rail, your investments get dinged up a bit, but that is much better than going over the cliff, right?  

If you're willing to follow a few rules, you can safely withdraw between 5% and 6% annually (the specific amount depends on your individual goals and your risk tolerance). We know the investments are going to go up and down, but as long as it stays above the lower rail, you’re all good and we'll keep sending you your monthly amount.

If it drops below the lower guardrail (usually 20%) and stays down there for 5-6 months, then you have to be willing to tighten your belt a bit. And we're going to have to temporarily reduce your monthly distributions or withdrawals by around 10% while we wait for the market to come back up.

On the flip side, if you break through the upper guardrail, you get an increase in income. So, yes everyone likes to go through the upper guardrail!

Also, I often tell clients how much we can safely send them from their nest eggs, and they say “oh, well Tim, that is great to know, but we don’t need that much, we only need "x" amount of money”, so we often don’t even send the max amount to them that we could. This allows us to drop the lower guardrail considerably.

But they all like to know what amount we could safely send them, if they need it.

The War Chest

One of the rules with this process is we have to have a war chest of cash, fixed income, bonds, treasuries, fixed indexed annuities, or single premium annuities to get us through the downtimes.

Because we don't want to sell if or when the market goes down; we want to have a buffer of time for it to come back. We're trying to avoid selling when everybody else is panic selling. As most of my clients have heard me say, “Panic is not a strategy.”

This strategy also helps mitigate the sequence of withdrawal risk, which is the risk of taking too much money from your nest egg if it goes down quite a bit early in your retirement.

With a dynamic guardrail withdrawal model, technically you will never run out of money, because if or when the market (or your investment balance) goes down enough to trip that lower guardrail, your monthly withdrawals will just keep getting ratcheted down as well.

For example, one of the worst times to retire in the past 100 years or so, was in 1973. Because there was inflation and investments were cut in half. If our guardrail method was used during 1973 and after, you would have hit the lower rail two to three different times causing two to three pay cuts depending on timing. And eventually, it would have gone back up and gone through the upper guardrail.

For this to work, you have to understand statistically and historically every one in three years, your investments will go down. The market does go down and if you are maxing out your withdrawals, you will probably hit the lower guardrail a handful of times over a 30+ year retirement period. But statistically, you will hit the upper guardrail more than that.

The average down market lasts about 1.5 years. The longest since 1900 was just shy of 8 years. So, in order to weather the storm, I like to say you need at least 2 years of spending in your war chest (consisting of fixed income and cash). But we typically recommend a larger war chest mainly because the future is still unknown and because of human behavior and simply getting peace of mind.

Most of our clients are comfortable with a war chest that can last 4-6 years. Also, one last note, everyone’s investments vary depending on: age, risk tolerance, Social Security strategy, pensions, size of investment accounts, goals, etc....

Bottom Line 

In my opinion, our guardrail withdrawal strategy is the best method I’ve found that makes the most sense for retirement withdrawals, and it is very popular with our clients because it is a predetermined method, and we aren’t simply shooting from the hip or taking lower distributions than we need to if/when things get tough.

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

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