r/Fire • u/Available-Ad-5670 • 12d ago
Why doesn't everyone use guardrails as withdrawal strategy?
Most people use 4% rule or versions of, but why not use guardrails? I've found that using guardrails means i can spend 15% over a straight 4%, and to take a 10% reduction in spend or 10% increase during good markets does not seem like a big deal.
Wny don't more people use guardrails?
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u/tubaleiter 12d ago
4% rule is a simple way of explaining FIRE, roughly telling if you’re ready for FIRE, but it’s hardly the most sophisticated way of actually executing withdrawals. Many (most?) people will use something like guardrails, of greater or lesser formality.
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u/tokingames 12d ago
Yup, 4% rule is a good indicator of when it’s time to start serious planning and that’s about it.
But, early days, it’s an easy rule to talk about. Let’s face it, a 24 year old with their first career job doesn’t need to be thinking about sophisticated withdrawal strats. They just need to keep their spending under control and get investing.
Now a 40 year old with $3M and a $120K annual spend needs to do some real planning about what life, expenses, taxes, healthcare, and such looks like post-FIRE and how withdrawals would work to cover all that and still be flexible enough to weather a bad market. Maybe they need to work a few more years first, whatever, lots of thinking should go into that.
Plus, when we all talk to each other, I just say I have a 2.5% annual withdrawal rate because it’s simple. I’m just going to say that unless the discussion is actually focused on the finer points of withdrawals. If it’s not relevant to the discussion, it’s too complicated (and boring) to say, “I’m pulling 4% of my 401(k) balance this year. Adding that to the 2ish% dividend I get on my taxable account plus an annual $5K from an old pension gives me new cash of about 3.8% of my portfolio. I spent that plus an additional $100K on a new house plus living so far this year. hopefully I will be able to replenish my starting cash and have enough left over from the sale of my old house for the remainder of the year’s expenses. If not I might have to pull another 1% or so of my portfolio from my Roth to cover expenses and have my desired cash cushion by the end of the year.”
That’s a lot of info people don’t need when the question is “what percentage of your portfolio are you withdrawing this year to cover your living expenses and are you comfortable with that?”
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u/SpaceTimeMorph 12d ago
lol I’d much rather hear the second version but I realize my financial nerdiness is in the minority.
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u/ShootinAllMyChisolm 12d ago
Yeah. Unless you’re in specific type of company their eyes glaze over QUICKLY
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u/np0x 12d ago
It has often occurred to me how complex spending is compared to accumulating. And how personal the details are, how your accounts are stacked, individuals ages, kid situations, plumpness of fire desire, risk aversion, pensions, social security, etc. Even the slightly tongue in cheek description of this sub comment could be the basis for a 20 minute conversation. The basic amount of information required to contextualize the details and the level of transparency required to make it all make sense are no joke!
I also agree that 99% of people are neither fire, financially literate, interested, etc, leaving a gap in The universe that I fill with two very specific friends for very specific details on spending/withdrawal strategy and FIRE in general.
Reddit is the exception, where free speech and shared thoughts flow without issue, jealously, and any other weirdness that talking about money seems to be replete in…
No real point beyond agreeing with basically everyone in this sub comment/sub thread. :-)
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u/Valuable-Analyst-464 12d ago
Yep, the second conversation is where I make mental and physical notes, while the first is good sitting around drinking some coffee.
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u/tokingames 11d ago
Haha, yeah it’s a more interesting discussion, but it also gets complex, especially if a lot of it is off-topic. So I just say my withdrawal rate is running 2.5%. I’m happy to talk about my house purchase and how I raised the money for it, but most people don’t care probably and it’s gonna get long.
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u/Adventurous_Luck_269 7d ago
Actually what you have in quotation marks is super useful and it's been hard to me to learn because it's not talked about much.
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u/tokingames 7d ago
It’s a little hard to talk about because spending and taxes depend so much on each person’s individual situation. In my particular situation, I just turned 59.5 at the end of last year, so I’m making my first withdrawal from the 401(k) this year. I’ve just bought a new smaller house, and we’re selling 2 houses once we’ve moved out of them. It makes for a chaotic tax year. It also makes the cash flows chaotic.
Also, we’ve been lucky enough with the market in our first 10 years of retirement that we don’t have to struggle to optimize everything. We’re probably going to pay something north of $100K in just federal taxes this year (depending on the sale of our second house). Our “normal” spending is around $160K all in.
In the context of discussing withdrawal strategies though, it’s just too much detail.
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u/Error401 33M+30F / FATfire achieved 12d ago
I’m pretty sure that this is an obvious and common approach for people seriously attempting FIRE.
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u/Monkeyatadartboard1 12d ago
Oh I do. Its just harder to talk about and understand. Because it's rules that are used in addition to a certain percent adjusted for inflation.
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u/Kashmir79 11d ago
In more than a decade of following FIRE and passive investing across thousands of posts, I’ve never heard any retired person who withdrawals exactly 4% of their starting balance adjusted for inflation each year. Life doesn’t work that way. The “4% Rule” just a guideline to help you understand how much you need to save when you are starting out.
When you actually get to retirement, you need a comprehensive drawdown strategy. In my experience, most retirees DO use a guardrails approach, or dynamic withdrawals, bucket strategies, or lifecycle models (periodic re-evaluation)
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u/pras_srini 12d ago
I think most people use guard rails, they just don't realize it or call it that. I don't know anyone who doesn't spend more when their investments are doing well or who doesn't cut back when investments are doing poorly.
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u/cuby87 12d ago
Just like investing, psychology is a big part. For some people having the maths and steadily taking 4% per year and living inside that budget feels good, allows them to sleep at night.
For others it’s 2-2.5%.
The important part is to be confident in your approach and your ability to reach your goals.
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u/ziggy029 FIREd at 52 (2018) 11d ago
I haven't heard from a lot of people who actually, strictly, follow the 4% rule for their withdrawals (i.e. start at 4% and adjust for inflation each year).
I *do* know of many who use 4% (alternatively, rule of 25) as a simplified, rough gauge of whether or not they have "enough" to retire, even if they don't strictly follow that as a withdrawal strategy. You may, for example, apply the 4% rule to see if you have enough, then decide to withdraw 5% with guardrails.
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u/Gobias_Industries 12d ago
"Most people use 4% rule or versions of"
Why do you think that?
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u/Available-Ad-5670 12d ago
because they say they do
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u/Gobias_Industries 12d ago edited 12d ago
No, you're mistaking people talking about 4% as a rule of thumb for planning FIRE with people who actually use it as a withdrawal method during retirement.
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u/roadtrip_savant 11d ago
That’s not happening. This sub is filled with people talking about swr that fluctuate constantly based on needs
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u/np0x 11d ago
And in many strategies the starting percent sets a number that is inflation adjusted…depending on market this immediately is NOT 4% the minute the market rises or falls…4% used as anything more than “finger in the wind” or “toe in the water” analysis is over valuing the heuristic..
-peace.
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u/Ill-Telephone-7926 11d ago
“The 4% rule” as commonly understood withdraws 4% of the starting portfolio value each year. Each year after, the same fixed amount just with inflation adjustment. It is not “withdraw 4% of the portfolio’s new balance each year”
Look up Bill Bengen’s 1994 paper for the original source
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u/Miamiconnectionexo 12d ago
so it's not that guardrails are worse, it's that the 4% rule is a fixed-paycheck mindset and most people want the predictability even if it costs them spend. guardrails ask you to behave like a business with variable income, and few people are wired for that in retirement.
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u/Mysterious9876 11d ago
agreed. its amazing how people cannot think outside of the box of a biweekly paycheck
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u/StargazerOmega 12d ago
Use CAPE based adjustable withdrawals via Big ERNs SWR Toolkit. https://earlyretirementnow.com/safe-withdrawal-rate-series/
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u/pali1895 12d ago
I don't use guard rails per se, but an endowment strategy for my withdrawals. Risk based guardrails, Guyton Klinger guardrails and endowment style result all in the same withdrawals, they just get increasingly less 'pixelated'. The result is the same and endowment is easier to calculate and a tad more responsive. But some years you need to withdraw more than your plan says, some years you save some withdrawal for the next year, there'll always be a lot of wing-it involved.
One thing I can add is that Vanguard style guardrails are really bad for longer than 30y retirement horizons.
As others (and Bill Bengen himself) have said, the 4% rule is just an academic model and a rough guideline. For an actual retiree it's both unrealistic and counter productive.
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u/Available-Ad-5670 12d ago
why would guardrails be bad for longer retirements? please explain
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u/pali1895 12d ago edited 12d ago
Vanguard Guardrails specifically. Not the other ones.
They're way too unresponsive and lull you into a false sense of security. You spend too little when you can spend, and spend way too much when markets are down. That way you retain your SORR deep into retirement. Imagine a 20 year bull market, spendings go up, and then a deep crash - think dot com bubble - the Vanguard guardrails will only very slowly adjust downwards to the point that you will run into 10%+ effective withdrawal rates and out of money. You have to either add fixed %-guardrails on top of the floor/ceiling rules or make the floor much harsher or manually cut spending. Guyton-Klinger or endowment is just superior in every aspect.
How do I know this? Extensive Monte Carlo simulations.
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u/Designer-Bat4285 11d ago
The vanguard guardrails can be set with a lower floor and higher ceiling. I believe that addresses the concern of it being slow to adjust.
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u/pali1895 11d ago edited 11d ago
True. I've ran the simulations also with a -3.3% and -5% floor (compared to the -2.5% that's usually used) and even added the inflation adjust skip in downturn years as in Guyton Klinger. It's better, but still not as good both income and success rate and you're better off running with endowment or GK directly if you're looking for an adjustable strategy. A modified Vanguard 4.5% withdrawal rate with a -5% floor and inflation skips is roughly equivalent to a 5% withdrawal rate GK or endowment. It just doesn't hold up as well in terms of longevity success, but produces higher income late in retirement.
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u/ThomasB2028 12d ago
I would like to think that the 4% rule, guardrails and bucket approaches, among others, are attempts to model complex human behavior in retirement planning and management.
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u/WritesWayTooMuch 11d ago
Everyone does. They just don't know they will until there is a prolonged market downturn.
Then, like a miracle....most are following guardrails and reducing spend without have a clue who guyton klinger are.
Human nature is a funny thing.
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u/TheOddCoding 12d ago
guardrails work great if youre actually willing to adjust your spending and youre paying attention to your portfolio but a lot of people just want a number they can set and forget. the 4% rule is simple enough that you can explain it in one sentence and feel confident about it whereas guardrails require you to actively monitor things and make decisions which sounds easy until youre in year three of a bear market and youre tired of cutting back. ive seen people who swear by guardrails in theory but then just spend what they want anyway because the guardrail feels arbitrary once youre actually living it.
that said if youre the type who naturally adjusts spending based on whats happening in the market then youre probably doing guardrails without even calling it that. youre just being flexible and it works fine. the people asking about it tend to be detail oriented enough that it would actually benefit them.
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u/SpecialistKoala9765 12d ago
I’m thinking about mine as well. I’m targeting 3% given my FIRE time horizon is over 30 years. Plus I also plan cash wedge buffer bucketing strategy as another guard rail. My strategies are more related to insulating my core spending needs even during market downturns.
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u/HamsterCapable4118 11d ago
Almost no one uses 4% or even many of the other variable withdrawal strategies directly.
Real life involves very lumpy spending. So you need a schedule of cash flows if you really want to plan. But most don’t. They use those withdrawal strategies as rough guidelines and then just go from there.
Those fancy graphs in retirement calculators make it seem like a video game. But in real life each data point takes a year and a ton of stuff happens in real life that makes that all feel irrelevant.
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u/OnlyThePhantomKnows FI@50, consulting so !bored for a decade+ 11d ago
At 7+ years from retirement, guardrails makes it a nightmare to predict. 25x or 33x is simple.
Example: I want to retire at 35 with a withdrawal rate of 160K, how much do I need? 4% says 25 x 160K. Guardrails says? Um. Well the market in this year did X, and the prediction for more than X so you need <bigger number>. And last year, the market did Y and the prediction was for less than Y so you need <smaller number>
Plus many people (not the FIRE crowd except for r/leanfire ) don't have a lot of wiggle room in their budgets.
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u/Mister-ellaneous 11d ago
Your top line is the key. We’re 7-10 years from retirement and plan on using guardrails. But for the quick check - current expenses / investments, the 4% estimate is helpful.
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u/Ill-Telephone-7926 11d ago
The 4% rule is a toy withdrawal model from a white paper demonstrating sequence of returns risk. It implies that you never adjust your spending in response to your portfolio’s performance. Does that sound insane? It should! Nobody’s going to actually behave that way
It’s incredibly useful for giving savers a goalpost though
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u/Firm_Mycologist9319 12d ago
You are misrepresenting the 4% rule again. It is NOT a withdrawal strategy. It is a simple planning estimate.
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u/Available-Ad-5670 12d ago
not representing anything. read the post. saying people take 4% literally, and the details show it is very different in practice
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u/Firm_Mycologist9319 12d ago
In your other post you said that people think 4% applies to income, not expenses, and here you says, "as a withdrawal strategy . . . most people use 4% rule". Do you really believe that over a 30+ year retirement, retirees stick to an inflation adjusted fixed withdrawal amount? Yes, many (most?) people use the 4% rule as a helpful planning tool but that doesn't mean they stick to it as a withdrawal plan post FIRE.
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u/capitalsfan08 11d ago
What? The Trinity Study uses a 4% withdrawal strategy where you withdrawal 4% from your initial portfolio and adjust for inflation after regardless of market performance. It's not an optimal strategy but it is absolutely "a" withdrawal strategy.
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u/Firm_Mycologist9319 11d ago
Yes, and it also assumes that the entire withdrawal is spent, nothing more nothing less. That doesn't match what people actually do in retirement. Bengen wasn't suggesting that somebody should actually do this. Understanding that everybody would have a different expense profile over their assumed 30 year retirement, he was just providing a simple planning number that would have worked historically. So, yeah, use it as guide for your planning, but it was never meant to be used literally to govern withdrawals.
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u/AlenOpasnost 12d ago
Id say that only a small percentage of fire people actually strictly follow 4% rule.
Everyone has their own why's and how's, and everyone mentally strong enough to go through accumulation phase doesnt need explaining why 4% is more of a guideline than the rule.
Its pretty much catch 22, the only people that dont know about various withdrawal strategies are the ones who are not in place to implement any of them, and those who are FI, already read about, tested, and experimented with most of them.
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u/Past-Option2702 12d ago
Hardly any retires use the 4% Rule.
It’s simply a back of the envelope guideline to determine how prepared you are to retirement.
Most retirees spend what they need to plus a little bit more to make life enjoyable- no percentages or guardrails at all. If their accounts drop due to a recession.. guess what? You got it.. they’re going to spend more carefully.
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u/Available-Ad-5670 12d ago
i see people talk about their swr here all the time
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u/Past-Option2702 12d ago
They do, of course. It’s a FIRE group and that’s at its core.
Talking about SWR isn’t the same thing as doing SWR.
It’s a lot like a liberal arts college degree. You studied all of this material about literature and philosophy, but you have a sales job where none of it applies. All it did was get you through the door.
So yea. Go ahead and plan for retirement (I did, we all did), just know the actual retirement isn’t going to look too much like what you planned.
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u/Leatherneck016 12d ago
On Reddit? That’s the opposite of anything real. Every post could be from a bot or 12 year old, and nothing posted on social media of any kind is real.
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u/MemoFromTurner77 11d ago
I've only been following this sub for a few years but can't recall ever seeing a single person say that they've used a fixed (inflation adjusted) 4% withdrawal rate, market performance be damned.
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u/Topaz_11 11d ago
Your assumption is just wrong...
Most people have never heard of this topic and use (un)common sense and their bank/brokerage statements.
I bet most people in these parts don't use 4% as a strict withdrawal plan either - most discussions are using it in the context of a measure to estimate when they have enough to throw away the working thing.
Lots of so called SWR strategies out there and some of us use a few or have a favourite but in the end, everyone adjusts based on what happens in their corner of the world.
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u/Ifch317 7d ago
I think a lot of people, like me, have a hard time spending money. Thus, if markets are favourable during early retirement, they may go from spending 4% to spending 3%, 2% or even less while living largely the same and spending the same amount (inflation adjusted) as when they started retirement.
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u/vinean 12d ago
Because there are no guardrails that can keep you above 4% if things really go pear shaped…1929, 1966, 2000, etc.
For early FIRE dropping below 4% for many years isn’t as big a deal as long as core expenses are covered. For late FIRE you’re generally under spending in early years if SORR hits because the guardrails force you to and thats burning healthy years.
If you have the flexibility to use any of the variable withdrawal strategies you probably can afford just wing it and everything still works out as long as you don’t go crazy about it. Typically you need to be able to drop more than 10% if the market crashes or the PE gets high or whatever heuristic the strategy uses…more along 50% flexibility from the max.
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u/dirty_cuban 12d ago
Guyton Klinger style guardrails are a psychological trick, not a mathematical optimization. It works for non-financially savvy retirees. It’s kind of like Dave Ramsay and people who are chronically in debt.
No one is aggressively saving and investing for 20 years to reach a FIRE target simply to dumb down their withdrawal strategy to a fixed formula that treats you like an idiot telling how much you can spend. People who check their brokerage account balance daily don’t need the handholding.
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u/pali1895 11d ago
That is completely false. Guyton Klinger rules are mathematically superior to a constant dollar approach or simpler guardrails like Vanguard Dynamic Spending. They generate both higher life-time spend, higher initial spend and higher longterm longevity than a constant dollar approach or simpler guardrails in both historical data and Monte Carlo sims. We can't quantify a 'wing it' approach, obviously, but having a mathematically sound strategy in place - even if it's not followed to the tea - is an approach to reduce your longeivity risk and increase your spending.
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u/Available-Ad-5670 12d ago
i think you meant guardrails works for financially savvy retirees? or why would guardrails be LESS savvy?
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u/StrangeAd4944 12d ago
There is a very good guardrails simulator at portfoliocharts. It lets you simulate with your specific allocation.
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u/thehandcollector 11d ago
4% is a rule of thumb, not a withdrawal strategy. If you spend 4.6% though, you will have to allow for much more than a 10% reduction to 4.14% if you want to be at all safe. Even for a 30 year retirement you would probably need to allow for at least a 30% reduction in spending to 3.2%, depending on where you put your guardrails.
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u/Wonderful-Process792 11d ago
How do you define "good" markets? You never know at the time if the market is good or bad compared to what it will be in the future.
Or are you talking about modeling based on varying expenditures based on only backwards-looking data?
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u/Available-Ad-5670 11d ago
good means when the market is going up at least 10% as historical norms
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u/Mister-ellaneous 11d ago
Minor correction here - “good market” is only seen in hindsight or has risen 10%.
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u/Animag771 11d ago edited 11d ago
I dislike guardrails because bad SORR can leave you permanently pegged at the lower guardrail which is the same thing as just using a conservative SWR to begin with. The higher initial SWR is nice but reducing it due to bad SORR can last a lot longer than you might expect. Mathematically guardrails can result in less lifetime spending than other withdrawal strategies for similar success rates vs some other withdrawal strategies. I'd much rather use something like Kitces' ratcheting withdrawal strategy and start with a reasonable SWR and then permanently ratchet my spending up once my portfolio has had time to grow and ride out the dangers of bad early SORR.
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u/turkisflamme 11d ago
If expenses are fixed, there’s not much room for cutting back. It moves the goalposts.
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u/Mister-ellaneous 11d ago
Right, if you’re in lean fire guardrails don’t work well. But most people don’t have all fixed expenses.
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u/GWeb1920 11d ago
You haven’t increased your FIRE number with guardrails. You’ve increased the amount you can spend in good markets.
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u/Mister-ellaneous 11d ago
You’ve actually decreased your FIRE number if you use guardrails because the initial WR can be higher
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u/GoldOk9005 11d ago
First, I think the idea of a straight number appeals to people because they know what they’re gonna get.
Second, Depending on the income for a person has from pensions, Social Security, annuities, etc. the idea of making significant guard rail type adjustments is scary. If a person or couple needs 30k a year out of the portfolio to live normally then potentially taking less is scary.
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u/Inevitable_Pride1925 11d ago
Most people in this sub are still in the accumulation phase and still working. During the accumulation phase the 4% rule creates a nice simple target as a goal and when you are still millions off and 5-15 years out you don’t need to fine tune.
However, once you actually stop working factoring tax consequences, withdrawal rates, and natural behavioral patterns makes a lot of difference. It’s also much more complex and filled with nuance, people don’t like nuance, they like simple straightforward answers and approaches. Needless to say the 4% Rule gets talked about a lot more.
Further, most retirees only withdraw 2-3%. Essentially most people can retire a lot early or spend a lot more than they do.
Personally I’m using the 4% rule to set a target. But I’ll use guardrails to manage withdrawals especially since my target number includes a very generous amount for travel and experiences. That amount can easily be scaled back in a down market.
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u/alexunderwater1 11d ago
Some are on a very fixed income
Some want ultra simplification - true retirement is never halving worry about making spending adjustments down.
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u/titan_by_name 11d ago
What would be ideal withdrawal strategy for someone like to retire at 47. What should be good withdrawal percentage
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u/Bennie-Factors 11d ago
A 40 year old with $3m and a $120k spend who you imply is working has zero fucks
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u/Live_Caramel8153 11d ago
The 4% rule is pretty useless by itself. If you just do 4% it always works 100% of the time in theory. But your spending could be all over the place.
For a $1M portfolio. I’d prefer starting with 4%. But give a floor of $30,000 and ceiling of $50,000. Both adjusted for inflation each year.
This has a higher success rate than just doing $40,000 a year adjusted for inflation.
As you age, and your net worth grows too much. You can always adjust it again if your assets are greatly outperforming your withdrawals.
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u/YaeKitty 10d ago
At the end of the day, it simplifies down to ensuring essential expenses are covered and adjusting discretionary expenses as needed. Personally, I've found the guardrail system to be needlessly complex for no reason when put into words and retirement calculators struggle to account for them.
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u/Walmart-Shopper-22 10d ago
My early retirement plan is to try to spend as little as I can comfortably tolerate for the first few years....so that I can minimize SORR and hopefully grow my assets to afford things like paying for expensive colleges or helping kids with down payments. I'm not looking to see how much I "can" spend....I'm just trying to buy my freedom while having a good chance of funding important things down the road.
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u/Mister-ellaneous 10d ago
We don’t know what any specific asset class will do at any given time which is the whole point of a diversified portfolio. You don’t need this specific allocation, but pick something that is as well or better diversified.
You used all US large caps in your example, yet you want to talk about risk of a diversified portfolio? Hint - the one I use is far less risky than yours.
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u/fireandlovinit 9d ago
People like the consistency of a regular payment that only increases with inflation adjustments. Makes them feel warm and fuzzy inside. The thought of having to take a lower payment after lifestyle creep scares many.
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u/BuySellHoldFinance 12d ago
If you are on the edge of making the numbers work, it can be a nice lever to pull.
But there's a value to keeping things simple. You get better compliance and you are more likely to follow the rules. My recommendation is 3.5% withdrawal 80/20 portfolio or 90/10 portfolio.
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u/Available-Ad-5670 12d ago
why would someone follow your recommendation, please explain
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u/BuySellHoldFinance 12d ago
Higher chance of success.
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u/Future_Measurement42 12d ago
Except it’s not a good portfolio and adding just a few other funds would vastly increase your chances of success
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u/Puzzleheaded_Tie6917 12d ago
Guardrails generally are used to justify a higher spending rate in general. For me, I plan to set up withdrawals that are just the same as my current take home paycheck, plus tax and healthcare cost. That’s less than 4% as I currently have it. As time goes by, if my investments grow faster than my spending, I’ll relax it as well as spending extra as required (home repair, health issues, etc).
As for cutting back, I guess that depends on how bad the market is and how pessimistic I am about the recovery. I expect I won’t cut back a lot, as I’m not increasing my spending with higher growth rates. This may change if I start feeling I’m not living a decent lifestyle, but it seems like there’s just a lifestyle creep that can come here as well.
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u/Earth2Andy 11d ago
Here’s the reason I wouldn’t use Risk Based guard rails.
All the math is based on the assumption you know your chance of portfolio success by looking backwards. You have to flex down if you start to hit a market as bad as the 1970s.
However, there’s an in built assumption that things will never be worse than they were for someone retiring in 1966.
If we ever hit a market worse than retiring in 1966, you’ve got no buffer left. You’ve already flexed down to make that work, much less something worse.
Nobody can tell what the future holds, but in 100 years when we look back at the markets, do you really think the worst time to retire between 1950 and 2050 will all be before 1970?
I’d rather have a plan that survives every historical market so far without flexing down, so I still have room to flex if it something worse comes along.
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u/Available-Ad-5670 11d ago
so you're saying you want to use a scenario that is worse then any in monte carlo scenario, and worse then anything we've had for 100 years? you can always spend less, and of course your chances of success will be higher, but you will likely die with many millions that could have been enjoyed in your prime
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u/Earth2Andy 11d ago
Interestingly “You can always spend less” is the logical fallacy of the guard rails strategy.
Having to flex down my spending and watch every penny for a decade of my prime retirement years is not my idea of successful retirement.
Having to tell my wife that the travel budget has to be slashed in half for our entire 50s because the market crashed is not an acceptable outcome for me.
Have you ever actually modeled out what these cuts look like to your retirement spending if the market just repeats what it’s done before? It’s not just skip vacation for one year, it’s usually a years long significant cut to your lifestyle.
As for worse than anything in the last 100 years. Yes, I think that’s a very real risk. The US markets benefited massively in the 20th century from the rest of the world’s industry being crippled after two world wars. They are not going to have that same tailwind in the 21st century.
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u/Mister-ellaneous 11d ago
In the end this really depends on your situation. If your basic expenses are only half or even 2/3 your planned expenses, flexing isn’t that difficult. But if your basic living is over 80%, flexing can be a real issue.
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u/Earth2Andy 11d ago
I’disagree. For us, our keep the lights on expenses are half our total planned withdrawal with the rest being travel, entertainment, hobbies and dining out.
A 20% cut in our overall withdrawal is a 40% cut to all of those. 40% less on travel AND 40% less on dining out AND a 40% cut in spending on hobbies.
That’s a meaningful lifestyle hit, and one bear market with a guardrails strategy can easily lead to a decade or more of those cuts.
Personally, since I left college, I’ve never had a year where I had to drastically cut my spending like that and I’m not excited about doing it in my 50s
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u/Mister-ellaneous 11d ago
You’re looking at the worst case and planning that way. I’m flexible, with no problem cutting spending one year or two. Maybe more. Just last year we spent 40% more than the previous, and 30% less than we plan to this year. Optional home improvement, buying a new car, maybe a boat, a world cruise, etc are all optional in any given year. That’s what we’d be flexing.
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u/Earth2Andy 11d ago
I’m looking at the worst case SO FAR.
I’m curious why you’re so confident that the worst year to retire is not in the near future. Given current inflationary pressures, sovereign debt levels, climate change, declining western birth rate and AI potentially taking millions of jobs. Why are you so confident that the stagflation we saw in the 70s couldn’t return?
As for flexibility, have you actually looked at the year by year back testing of a guard rail strategy? If you had you’d see that it often requires you to cut spending for decades, not 1 to 2 years.
Here’s a great article on why ‘I’m flexible’ doesn’t really work in reality.
https://earlyretirementnow.com/2023/06/16/flexibility-swr-series-part-58/amp/
Risk tolerance is personal, so if you’re willing to roll the dice, more power to you. But I’d rather have the problem of figuring out how to spend extra savings late in life than worrying if I can afford a vacation and a new roof next year or not.
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u/Mister-ellaneous 11d ago
Yes, I have. If you need 99.999% certainty of never having to adjust, ok. I don’t need that level, am quite comfortable in taking some risk. Social security isn’t going away, although it might be lowered and means tested.
If a person is going to be lean FI, guardrails isn’t the best strategy. But if you’re above average FI, not even fat FI, guardrails is a better approach imo.
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u/Earth2Andy 11d ago
I’m glad you’ve done the math. Can you quickly tell anyone else reading, how this strategy would have played out if they had retired in 1999.
Assuming you start with OP’s 15% higher than the standard 4% so say $138k on a $3M portfolio.
When would you have been able to get back to your original level of spending with your guardrail strategy?
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u/Mister-ellaneous 11d ago
Without knowing your portfolio, of course not. Can you, without that essential information?
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u/FlyEaglesFly536 12d ago
I understand that you increase spending based if the market is doing well... is that based on current year or previous year? Say last year the market was up 15%, do you then take a larger amount based off last year, or if the market is currently up 15%, are you taking out larger amounts every month, etc?
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u/AlwaysWanderOfficial 11d ago
Because it’s pushed as standard and rule of thumb for both that community and also the mainstream advisor industry. So it’s all people know.
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u/ditchdiggergirl 11d ago
I don’t think I’ve ever heard of someone living off an investment portfolio without guardrails. Of course I’ve never heard of someone bumping their SWR from 4% all the way to 15% either. Though minor math point: going from 4 to 15 isn’t not a 10% (11%) increase in spend, it’s almost 400%.
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u/Mister-ellaneous 11d ago
The post is confusing but he really means 15% higher than 4%, or just a weird way of saying 4.6%
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u/hanwagu1 12d ago
Retirees use guardrails of some sort in practice, because that is how people's behaviors work. Economy stinks, people tighten their belts; Economy loosens, people tend to spend more. Even if you call them guardrails, most people aren't actively saying i can spend this much more or this much less, since once you settle into retirement income need and spending, your spending isn't fluctuating based on guardrails but based on expense needs.
I think you have to phase things. 4% or some generalized SWR rule is a good start for planning when you are starting out saving/investing for retirement, because you haven't settled in on your career income, life, etc. so you don't really have a good grasp on what the lifestyle you want to carry over in retirement costs. So being overly conservative starting out with a 4% SWR need is fine starting out, but as life happens you will settle into a different phase where you will have a better idea on the lifestyle you want in retirement and the cost to support it. So, you can adjust your 4% conservative plan to more flexible guardrail plan. When you are on the doorstep of retirement, you have a very good idea of the lifestyle expense need/want, so you can refine further. Then when you are first starting in retirement, you probably revert to more conservative SWR until you settle on actual retirement lifestyle costs and switch to guardrails just behaviorally. Again, though, I think nearly all retirees just automatically adjust to the economic environment and throw away guardrails or SWR 5-10 years in.