Guardrails Retirement Income Strategy
The transition from saving for retirement to spending in retirement can feel like walking a tightrope. Spend too much early on, and you risk running out of money. Spend too little, and you may miss out on the very life you worked hard to enjoy. That’s where the guardrails retirement income strategy comes in—a flexible, rules-based approach designed to balance risk and lifestyle across your retirement years.
What Is the Guardrails Strategy
The guardrails strategy is a dynamic retirement withdrawal method that adjusts your income based on the performance of your investment portfolio. It was originally developed by financial planner Jonathan Guyton and researcher William Klinger, and is sometimes referred to as the Guyton-Klinger decision rules or dynamic withdrawal guardrails.
At its core, the strategy sets a target income amount, along with upper and lower guardrails. As your portfolio grows or shrinks, your income is adjusted only if your withdrawal rate moves outside these guardrails—helping to avoid unnecessary income changes from year to year, while still responding to significant market shifts.
Pros
- Can boost your starting retirement income without impacting your chances of running out of money.
- Income inflation adjustments boost income to keep up with expenses.
- In longer periods of strong performance, your income can increase faster than inflation.
Cons
- Inflation adjustments are not guaranteed year to year.
- In poor performing markets, your income could be cut.
- Only focuses on income from your portfolio and not total income.
Guardrail Components
Initial Withdrawal Rate:
This sets your starting income from the portfolio and typically begins higher than the traditional 4% rule. The rate can be adjusted upward or downward based on your comfort with reducing income in tough markets or drawing down your portfolio more aggressively.
Upper Guardrail:
This marks the threshold where your withdrawal rate becomes too high relative to your portfolio balance. If your income pushes past this point, a reduction is triggered to keep spending sustainable. In later retirement years, this guardrail is often relaxed or no longer applied.
Lower Guardrail:
This is the point at which you’re withdrawing too little from your portfolio. If your spending rate falls below this level, an increase in income is triggered—bringing your withdrawals back closer to your original target and allowing you to enjoy more of your resources.
Both guardrail levels are set relative to the initial withdrawal rate. For example, if the initial withdrawal rate is 5%, the upper guardrail would be set at 20% above that or 6% and the lower guardrail would be set at 20% below that or 4%.
Inflation Rule:
Guardrail strategies also contain an inflation rule which increases spending with inflation. However, some rules only apply the inflation is the portfolio is positive.
Example of the Guardrails Strategy
Let’s say you retire with a $1,000,000 portfolio and an initial withdrawal target of $50,000 per year (5% withdrawal rate).
- Upper guardrail is set at 6% withdrawal rate
- Lower guardrail is set at 4% withdrawal rate
If markets perform well and your portfolio grows to $1.2M, your $50,000 withdrawal becomes a 4.2% rate—approaching the lower guardrail. If it drops below 4%, the strategy allows a raise in income.
Conversely, if the portfolio drops to $850,000, your $50,000 withdrawal becomes a 5.88% rate—near the upper guardrail. If it crosses 6%, the strategy recommends a spending cut to bring the withdrawal rate back in line.
This approach gives you flexibility without overreacting to short-term market noise.
To better visualize where raises or cuts might occur, the guardrails are often converted into dollar amounts as in the following chart.
If your portfolio rises above $1,250,000, your income increases.
If it falls below $833,000, your income decreases.
The Guardrails Experience Over Retirement
As the guardrails strategy can move up and down with various triggers, it’s important to understand what is possible in regards to how your spending could change. The following shows real spending assumes a $1,000,000 starting portfolio with a 5% spending rate and guardrails set at 6% and 4%. The portfolio is invested in a 70% stock portfolio and 30% bond portfolio with a long term average return of 7.3%.
Notice the variability in potential income paths. On average (the green line), spending does decline slightly in real terms before rising again to end at about $44,000 in real terms.
On the extreme low end, income in real terms is by more than 50% dropping to $16,000 in real terms.
It’s this reduction in future spending that allows the guardrails to begin with a higher spending amount initially.
Author calculations.
Summary
The guardrails strategy offers a compelling middle ground between rigid and reactive spending approaches. It allows retirees to enjoy their money when times are good, while still protecting against overspending when markets falter. By introducing structure, adaptability, and a bit of behavioral coaching, guardrails help turn a daunting retirement income puzzle into a livable, flexible plan.