This month's topic comes from a long-term client who is interested in hearing about safe retirement withdrawal rates and guardrail spending strategies. A great topic in which there is no shortage of information out there. And off we go!
If you’ve ever tried to get healthy, you know the drill: one expert says you must eat keto, another swears by paleo, and a third insists veganism is the only way to survive. They spend their time poking holes in each other’s research, leaving the rest of us totally confused about what to eat for lunch.
Not surprisingly, the financial world has its own version of fad diets: Retirement Withdrawal Strategies. I was on a 90-minute webinar a few months ago in which EIGHT different strategies were covered. My mind was full after those 90 minutes, and I left it thinking, “How in the world do clients know how to take money out of their accounts if we finance people are debating eight different strategies?” And it’s highly likely that as I am writing this, eight more are being created.
If you read financial blogs, you will see numerous debates over the "4% Rule," "Dynamic Spending," or "Guardrails." Oftentimes there is a business side to these debates. Financial experts spend so much time trying to prop up one strategy while tearing down the others that it completely misses the point of why you saved this money in the first place: to live your life.
Just like the best nutrition plan isn't a rigid formula but a sustainable lifestyle, the best retirement spending strategy isn't a rigid math equation. It’s about pragmatism.
🧮 For My Fellow Math Whizzes: The Guardrail Concepts
Some of you love getting under the hood, so let's break down just two of these popular guardrail strategies:
Guyton-Klinger Guardrails (Fixed-Percentage Rules): Developed by planners Jonathan Guyton and William Klinger, this strategy focuses on your initial withdrawal rate. Here’s an example: You start with an initial withdrawal percentage, say, 5% (meaning, you withdraw 5% of your total portfolio). If a market drop causes your portfolio to decline and therefore the percentage of your withdrawal rate rises 20% above that baseline (to 6%), you hit the lower guardrail and are required to take a 10% pay cut. On the flip side, if a market rally drops your withdrawal rate 20% below your baseline (to 4%), you hit the upper guardrail and get a 10% pay raise.
Risk-Based Guardrails (Probability-Driven): Popularized by researchers like Derek Tharp, this strategy replaces fixed percentages with a constantly shifting probability of success. Here’s how it works in a nutshell: Software runs Monte Carlo simulations behind the scenes (For reference, RightCapital uses a Monte Carlo analysis). If a market dip drops your plan's estimated success rate below a set threshold (say, 80%), the result is a spending cut that will bring your plan’s success rate back to target. If a market surge pushes your probability above the target, it signals you can spend more. (Note: Derek Tharp is the Head of Innovation at Income Lab, a financial software company that creates and sells the platforms used to calculate these exact probability shifts. Poking holes at other withdrawal strategies = more advisors buying Income Lab 😉)
🛑 Why I Don't Use Guardrails or Withdrawal Percentages
While the math behind these theories is interesting, I tend to avoid focusing on guardrails or withdrawal percentages for my clients. To be clear, when we review your plan in RightCapital, we are using probability models (you’re all familiar with my target of 80% or higher for the probability of success). When your probability of success is above 80%, I’m usually saying, “You can spend more if you want to, and here’s how much more you can spend each year!” If it’s below 80%, we’re trying to find ways to get it closer. Why 80%?
It gives us a strong, safe buffer to pivot and make adjustments if the stock market hits a severe downturn.
It prevents us from being overly conservative so you don't unintentionally die with an enormously large portfolio that you never got to use to enjoy your life.
You don't buy a new car just because the stock market had a good year (or maybe you do!), and your real-life bills don't care what the S&P 500 is doing today. Also, guardrail formulas don’t account for these super important details:
Tax Location: Withdrawing $50,000 from a Roth IRA (100% tax-free) is completely different than taking $50,000 from a Traditional IRA (taxed as ordinary income) or a brokerage account (capital gains). Guardrails treat every dollar the same.
Guaranteed Income Shifts: What happens when Social Security starts at age 67 or 70? Or if you have a pension kicking in? Your required portfolio withdrawals drop significantly, rendering guardrail percentages in dire need of an update.
🎯 How We Actually Design Your Spending Plan
There are way too many numbers that we could focus on in your financial plan. From your perspective, as the client, I believe the probability of success is one of the most important. It’s the best number, in my opinion, that measures the sustainability of your plan. It lets us know how many trials do not run out of money. With our target of 80%, we know 80 out of 100 trials still have money left at the end of the plan. This is not the situation to aim for 100%, so for all you straight A students out there, we have to shift our thinking on this one. A “B-” is a-ok here.
Here is our ongoing process:
We identify your real life: Together, we look at your actual annual expenses.
We account for the future: We make sure your variable expenses increase with an assumed inflation amount each year.
We plan for the big stuff: We proactively build in those periodic big expenses, like replacing a car, funding a home improvement project, or taking a dream vacation.
We review and adapt: We update these exact numbers in our regular review meetings to make sure we stay on track. Just like everything else in your plan, adjustments are made continuously based on your unique circumstances.
✨ You've Earned This
At the end of the day, your wealth is a tool to support your life, not a puzzle to solve every morning. I don't believe you need complex formulas or algorithms telling you how to live.
With a strong 80% success target and a plan that adapts as your life evolves, you can rest easy knowing you have plenty of cushion for market ups and downs. My goal is to make sure you have peace of mind so you can focus on making memories, trying new things, and enjoying the fruits of your hard work.
Quick Note: This content is purely for educational guidance and high-level strategy. It isn’t meant to be personal tax or investment advice. I always suggest checking in with a professional to confirm any moves make sense for your unique situation.
Talk soon,
Krystal
P.S. What am I reading this month?
P.P.S. I'd like to invite you to this unique webinar in which my colleague, Rose Zealand, will be discussing end-of-life planning. Not only is Rose a financial planner, but she is also a death doula, and I first heard her speak over the summer on this very personal topic.