Regardless of your asset allocation, every retiree should have a strategy for when they will withdraw money from their accounts, which accounts they will draw from first, and how much they should withdraw every month, quarter, and year. There are many potential strategies to choose from, and a near-infinite number of ways to customize each strategy for you. Over the past few months, we’ve broken down a few of the more common. This month, let’s look at:
The Guardrails Strategy
This strategy is based on the concept of changing your withdrawal rate based on how the market is performing. If the markets are in a long-term decline, you would decrease your withdrawal rate. During a long-term bull market, your rate would increase.
Under this strategy, retirees set specific “guardrails” for their target withdrawal rate — a high guardrail and a low guardrail. If your actual withdrawal rate rises above your high guardrail, you reduce the amount you withdraw. If it falls below your low guardrail, you increase that amount.
This approach is helpful if the value of your portfolio fluctuates dramatically due to how the markets are performing. For example, let’s say your portfolio is worth $1 million, and your target withdrawal rate is 4%. Your rate will vary, but in this example, your guardrails would become 5% and 3%, respectively. So, in a normal year, you would withdraw $40,000. But the next year, the markets decline, and the value of your portfolio drops to $800,000. Taking out $40k would be more than 4% — it would be 5% of your portfolio. You’ve hit the upper guardrail, so you reduce the actual amount you withdraw for that year.
If the value of your portfolio increased to, say, $1.25 million, then withdrawing $40,000 would be a little over 3% of your portfolio. That means you’ve hit the lower guardrail, so you would increase the amount you actually withdraw.
That’s a lot of numbers I just threw at you! It’s important to keep in mind that your numbers will be very specific to you and your situation. The overall point is that the guardrails strategy is a dynamic way to withdraw money in retirement that adapts to market conditions rather than ignoring them. That definitely makes it a strategy worth considering!