"...you may ultimately draw out more money this way than you would with a more traditional withdrawal strategy."
Hi again and welcome to another edition of retirement insights. You know, I love working with people getting ready to retire. It’s a blast to hear what clients are passionate about and to see what it is that they’re going to do with all this extra time that they’re soon gonna. My job is to help turn those passions and those goals into a reality that is sustainable and realistic.
Sometimes we’ll run into an issue where the “wants” are bigger than the means. We’ll run some projections and it will come back that “hey, you know we’ve got a pretty big chance of running out of money if you do this” or “we’re going to have to take more market risk than what you said you were comfortable taking if we’re looking to spend that much money every year”. And that’s disappointing.
But it doesn’t have to be the end of the conversation.
There are many “dynamic” income strategies that can allow you to start out with more income and still have a better chance of making your money last. And today, I’ll describe just one of those strategies that people are using.
I first heard this strategy a few years ago while I was pursuing my Retirement Income Certified Professional designation. It’s called “income guardrails” and it was a strategy designed by Jonathan Guyton, who helps with the RICP curriculum at the American College, along with his colleague William Klinger.
And a simplified version of the strategy works like this:
First, set your withdrawal amount. And this is typically higher than it would be without using this method. And don’t worry, I’ll go through an example in a moment here.
We now apply several rules for future withdrawals.
First – no increase for inflation in years where your portfolio loses money.
Second – If the amount of your withdrawal at any time is 120% of your initial withdrawal rate, you cut your withdrawal by 10%
Third – if the amount of your withdrawal at any time is 80% of the initial withdrawal rate, you can increase your withdrawal by 10%.
OK, let’s look at an example to sort out what’s happening here. We’ll compare a “guardrail” strategy to a more traditional 4% withdrawal.
So, let’s simplify and say that on a $1M portfolio, we’ll pull $50,000 on the guardrail side and
$40,000 on the traditional side. Hey, right off the bat we’re allowing ourselves an extra $10,000 per year! Woohoo!
We get through the year and it’s time for next year’s withdrawal. Let’s pretend our portfolio went up 5%. Totally hypothetical. We’ll look at what happens when it loses money too. So here’s what we’re left with on the guardrail side. It’s $997,500 and on the traditional side we have $1,008,000. We’re oversimplify the math a bit for the example.
Now, with our traditional withdrawal strategy we simply increase our withdrawal for inflation. Let’s say inflation was at 2%. So we have $40,800 for the next year. With the guardrail approach however, we need to look at the portfolio balance and recalculate what percentage of the portfolio that
that withdrawal makes up. So we take $51,000 (remember the increase for inflation) and divide by $997,500. We get about 5.11%. The key is… if we ever get to where the withdrawal percentage is either 120% of the 5% we started out with (which would be 6%) or 80% (which would be 4%) we make an adjustment.
So fast forward another 2 years. Our “guardrail withdrawal” is about $53,000 and our traditional withdrawal is $42,400. Through some weak performance in the market our guardrail portfolio is down to $817,336.80. And lo and behold we’ve hit a guardrail.
This means that for this year we would need to reduce our withdrawal from $53,000 down to $47,700. Still it’s more than the $42,400 on the traditional side, but it’s a reduction that would be felt for sure.
Now, the good news with this strategy is it can allow for larger withdrawals, especially in the early years of retirement. And this may very well be reason enough for someone to consider it in spite of the bad news. And the bad news is that you would need to have a good deal of flexibility in your spending from the portfolio. You could experience several guardrail checks over the years, bringing your withdrawals down significantly from where they started. On the flipside, you may ultimately draw out
more money this way than you would with a more traditional withdrawal strategy.
Remember, this is one of many different dynamic strategies that you can use. So much depends on what your goals are and your ability and your willingness to adapt to changing market conditions and changes to your withdrawal levels.
Is this a strategy worth considering? It could be. You really need to have your own strategy put together specific to what your needs are.
Do you have questions for me? Let me know! Give me a call me at (518) 612-1060, or send me an email at firstname.lastname@example.org. Do you follow me on Facebook? I think you should! You’ll see videos like this, blog and article shares
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Once again, thanks for joining me. See you next time