Risk Based Guardrails Safe Withdraw Strategy

[fuzzyhippo]

I’m getting close to my Fire number and am thinking more about safe withdraw strategies. I came across a strategy from Michael Kitces he calls 'risk based guardrails' that I haven’t heard a lot of people talk about. It seems like a really good approach to me and I was wondering if anyone has been implementing this strategy in retirement and how they like it.

https://www.kitces.com/blog/risk-based-monte-carlo-probability-of-success-guardrails-retirement-distribution-hatchet/

https://www.kitces.com/blog/guyton-klinger-guardrails-retirement-income-rules-risk-based/

[Sandi_k]

Guyton-Klinger has been around for a while. I was interested in it as the concept makes sense, but the implementation - especially in retirement, as my cognitive abilities start to decline - seems to be hard.

And I cannot imagine trying to get DH to manage using these guidelines.

From age 60-65: our plan is to take a max of 4% for the first five years of retirement, from cash already set aside.

From age 65-75: once the house is paid off, we'll set withdrawals to 3% for the next ten years, to allow the balance to grow again.

- DH will be drawing Social Security (adding $25k per year) from age 65-70, and
- I will wait for Social Security until age 70 - which will add another $42k per year for ages 70-75.

After age 70, we're taking 4.2% annually, until RMD age. At 75, we'll take RMDs.

This is simple enough that we can explain it, write it down, and each of us can manage it.

[Ron Scott]

The guardrails model makes sense for a 30-year retirement horizon but it still places all the focus on trying to maintain a steady income with volatile portfolios. To my mind is only part of the equation and it’s the one you have the least control over.

I believe WHAT you spend your SWR on is more important. You can divide your expenses into NEEDS and WANTS. Include in NEEDS your desired housing, transportation, healthcare, taxes, food, and some minimal level of entertainment.

The greater the % of your calculated WR go toward NEEDS, the less flexibility you have to weather tough times. So you should shoot for a low %.

What’s the best NEEDS-to-WANTS ratio? It’s personal, but starting at 50-50 might be a good place for planning purposes, especially for FIRE, since you don’t really know how your attitude about spending might change as you get older and your interests evolve.

[grantmeaname]

in my judgment the very best writer we have on withdrawal strategies is Karsten over at Early Retirement Now. His take on Guyton-Klinger is that it may work to the extent that you are less likely to run out of money than with a static rate, but it's false advertising with proponents suggesting it's a matter of cutting down on your 'wants' spending for a while when any of these VPW rules may mean profound cuts to your spending for a long time - G-K in his simulation has a bottom safe withdrawl rate as low as ~1.6%. I'd bet not many of us can live on just 40% of our already frugal budgets. I think it's a much better idea to calibrate your initial SWR to market conditions on the day you retire and stick to it, possibly revisiting if you have a 'green waste' problem of too much accumulation after a decade retired.

[MustacheAndaHalf]

I haven't checked the math, so I'm glad Early Retirement Now did so.  If someone started with a 6% withdrawal rate (on guardrails) in terrible environment of 1966, by 1984 they have a withdrawal rate of 2%.  Imagine cutting spending by 1/3rd while inflation hits double digits!  Even the 4% withdrawal on guardrails drops to 2% in 1984.  With the guardrails approach, I doubt people will be willing to cut spending by 1/2 to 2/3rds to make it work.

[Sandi_k]

I haven't checked the math, so I'm glad Early Retirement Now did so.  If someone started with a 6% withdrawal rate (on guardrails) in terrible environment of 1966, by 1984 they have a withdrawal rate of 2%.  Imagine cutting spending by 1/3rd while inflation hits double digits!  Even the 4% withdrawal on guardrails drops to 2% in 1984.  With the guardrails approach, I doubt people will be willing to cut spending by 1/2 to 2/3rds to make it work.

If they are going from 6% to 2%, they cut spending by TWO THIRDS, not one third.

[Telecaster]

I’m getting close to my Fire number and am thinking more about safe withdraw strategies. I came across a strategy from Michael Kitces he calls 'risk based guardrails' that I haven’t heard a lot of people talk about. It seems like a really good approach to me and I was wondering if anyone has been implementing this strategy in retirement and how they like it.

https://www.kitces.com/blog/risk-based-monte-carlo-probability-of-success-guardrails-retirement-distribution-hatchet/

https://www.kitces.com/blog/guyton-klinger-guardrails-retirement-income-rules-risk-based/

I thought the Kitces articles you linked to laid it out pretty well.  If you use the Guyton-Klinger approach you may have dramatic swings in income in retirement.   Importantly, a dramatic swing downward which can remain down for a long period of time.    The band-aid advice is start your retirement with a lot of fluff spending, and then cut it out if you have to. The problem with this approach is this may mean a dramatic reduction in lifestyle, especially if you have unforeseen expenses.   

Instead of starting off with a lot of extra "want" spending and then cutting over time if necessary, I think a more practical and workable approach for most people is start off your retirement with enough money to support your chosen lifestyle using the 4% rule as a baseline for planning purposes and go from there.   See @Sandi_k 's example. 

[vand]

Guardrail strategies can certainly help, but they're not a silver bullet... you're still subject to the vagaries of the markets and sequence risk that is inherent in the problem you are trying to solve for. 

Furthermore, it is my experience that real life rarely affords you the opportunity to adjust your spending in a fashion that is most harmonious with your portfolio performance.

The strategy I still advocate strongly for: be prepared to go and earn more income if you feel the need! 

[FIREin2018]

I’m getting close to my Fire number and am thinking more about safe withdraw strategies. I came across a strategy from Michael Kitces he calls 'risk based guardrails' that I haven’t heard a lot of people talk about. It seems like a really good approach to me and I was wondering if anyone has been implementing this strategy in retirement and how they like it.

https://www.kitces.com/blog/risk-based-monte-carlo-probability-of-success-guardrails-retirement-distribution-hatchet/

https://www.kitces.com/blog/guyton-klinger-guardrails-retirement-income-rules-risk-based/

I Fired in 2018 using  what I thought was a good method.
It was actually an 'Ignorance is Bliss' method.
Aka I got REALLY lucky that it was a bull market after COVID.

https://forum.mrmoneymustache.com/post-fire/length-of-sorr-risk-period-for-early-retirees/msg3299125/#msg3299125