We talk about retirement income guardrails a lot on this show, but today we’ll go into greater depth while exploring an article from Kitces.com. This article was written by a mentor of mine and takes an advisor’s perspective on how to discuss spending increases and decreases with clients.
These are fantastic conversations to review if you have been implementing or thinking about using the guardrails strategy in your retirement plan. Grab a pen and paper and take some notes to reflect as you listen so that you can keep them handy and run them through your own filter.
Stick around until the end to hear from a listener who is unhappy with their advisor, yet concerned about the tax implications of switching to a new one.Grab a pen and paper and take some notes to reflect as you listen so that you can keep them handy and run them through your own filter. Click To Tweet
Outline of This Episode
- [2:22] What are guardrails?
- [10:20] How to have the spending reduction conversation
- [15:30] What to do if you are unhappy with your financial advisor
What are guardrails?
Guardrails are also known as dynamic distribution rates, but since that is a mouthful that is challenging to remember, we like to use the term guardrails to get a better visual understanding of the strategy.
There are four rules that we need to remember to help implement the guardrails strategy.
- Portfolio management rule – Using this rule we take distributions from overweight assets first, then cash, then – only if needed – underweight assets. This rule helps us define where to take monthly spending from. Essentially in good markets, we live off our gains, and in poor markets, we live off our cash.
- Inflation rule – This rule allows us to increase our distribution amount to match the prior year’s inflation number up to 6% following years of positive returns. This gives us one more dial to turn to make our guardrail plan more aggressive or more conservative.
- Portfolio preservation rule – This is the rule that people remember the most. To preserve the portfolio, we decrease the distribution amount in poor markets. We need to do this if our distribution rate has increased by 20% or more from the initial rate.
- Prosperity rule – This is the flip side of the portfolio preservation rule that people often forget about. The prosperity rule helps us understand that when our portfolio value increases by 20% or more we should we can increase our spending.
We like to use the term guardrails to get a better visual understanding of the strategy. Click To Tweet
Retirement questions the guardrail strategy can answer
There is never an easy answer to the question: How much can I safely take from my savings and be sure that I never run out of money? While no one has a crystal ball, the guardrails strategy can help ensure that you make the proper behavioral changes when times are tough to secure your future.
Listen in to hear the hypothetical conversation that Matthew Jarvis has with imaginary clients in the article. He answers these questions: What happens in poor market conditions when my portfolio breaks the lower guardrail limit? What happens if I need to take out a large lump sum from my portfolio? These conversations can help you better visualize how to implement this strategy.
Learn how to implement your own guardrails strategy
If you are interested in exploring the guardrails strategy in more depth, check out Retirement Income University. In addition to seeing the spreadsheet that I use with my clients, you’ll learn how you can outspend the safe withdrawal rate strategy by up to 50% if you are willing to reduce your spending in rough markets. Listen in to learn why the guardrails are such an effective withdrawal strategy in retirement.If you are interested in exploring the guardrails strategy in more depth, check out Retirement Income University. Click To Tweet
Resources & People Mentioned
- Implementing Retirement Income Guardrails to Facilitate Spending Raises and Cuts
- Dynamic Distribution Rate white paper
- Jarvis Financial
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