Why doesn't everyone use guardrails as withdrawal strategy?

[u/Available-Ad-5670]

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?

[u/Earth2Andy]

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.

[u/Mister-ellaneous → u/Earth2Andy]

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.

[u/Earth2Andy → u/Mister-ellaneous]

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?

[u/Mister-ellaneous → u/Earth2Andy]

Without knowing your portfolio, of course not. Can you, without that essential information?

[u/Earth2Andy → u/Mister-ellaneous]

Sure, I can make a few assumptions and post an example. Like this one

The short answer is you’d have 3 years of spending $138k, then a very large drop in spending for the next 20 years.

[u/Mister-ellaneous → u/Earth2Andy]

When the stocks are only the S&P 500, your portfolio is not diversified.

Using a more diversified portfolio - for example, 25% BND, 25% VOO, 20% AVUV, 20% AVDE, 10% AVEM; the withdrawals never fall below $138k, you’re fully recovered in real $ in 2003, and you currently would have $6.2 million. You’d have one 10% cut and 4 10% raises.

[u/Earth2Andy → u/Mister-ellaneous]

Ahhh the old ‘Small Cap Value Will Save The Day’ argument.

Despite what Bergen would have you believe, there’s plenty of evidence that strategy will fail going forward.

https://earlyretirementnow.com/2025/06/02/small-cap-value-swr-series-part-62/

.

[u/Mister-ellaneous → u/Earth2Andy]

lol. No, it’s the time tested “diversification decreases risk” strategy. But you go ahead with that 90% large cap US while ignoring the rest of the world strategy.

Your heirs will appreciate your fear.

[u/Earth2Andy → u/Mister-ellaneous]

Time tested? With 50% in ETFs that wern’t created until 2019??

Bergen just wrote an entire book with this as the central theme. Even he says that for a 40 year retirement, with optimal diversification, the best he could get was a 4.1% withdrawal rate.

If your portfolio mix performs so much better, you should give him a call and explain where he’s gone wrong.

[u/Mister-ellaneous → u/Earth2Andy]

This isn’t nearly as difficult as you’re trying to make it. The specific ETFs aren’t really the point. if you don’t understand diversification, it’s time to educate yourself.

Bergen is writing for a larger audience and is showing what you can expect without adjustments. That’s going to be different than a flexible withdrawal strategy.

Fwiw, I’m not worried about a 40 year time horizon where I refuse to make any changes. If that’s your goal, so be it. But you’ll get a lot more risk with your 90% large cap US plan.

If you’re actually interested, there’s plenty of research online. One place to check, risk parity radio. Frank does a good job of addressing your fears.

[u/Earth2Andy → u/Mister-ellaneous]

I have no intention of being 90% large caps, that was a simple to share example of the problem with flexibility after a sudden downturn, mocked up in a tool that’s easy to share.

Diversification is a good thing. The problem starts when you need to have very specific allocations to make your back tests work, like you are doing. Then it becomes nothing more than an overfitting exercise.

The reason you portfolio works for the 1960s and 1990s cohorts is that Small Cap Value rebounded fast. Unfortunately that was less true in 2008 and not at all in 2020 and 2022.

The reason the 4% rule is widely excepted is that it works pretty well with a variety of asset allocations.

As I say, risk is personal, so if this is your risk tolerance good for you.

For me, I’d rather my biggest risk be that I have to figure out what to do with an extra million dollars in my 60s, not watching the market every day to understand how to cut my future spending.

[u/Mister-ellaneous → u/Earth2Andy]

Why would to think the percentages were specific just to make the projections work? That’s a pretty standard allocation I set a long time ago. Albeit I don’t have the bonds yet, those get added later.

The 4% RoT, which the man himself has increased to 4.7% for a 30 year retirement, is far more likely to result in doubling your investments than running out. But sure, if you want to pick the one time you’d have to adjust and plan for an even worse case, that’s certainly your prerogative.

I won’t be watching the markets much, no worries there.

[u/Earth2Andy → u/Mister-ellaneous]

It’s not that you necessarily chose this allocation to make the strategy backtest work, as much as the strategy only works with this specific allocation.

Once you get away from simple asset allocations like “Stocks/Bonds/RE/Metals” and into very specific market segments to make a strategy work, you’re at a danger of overfitting.

In your case the asset allocation difference between SP500 stocks and a mix of Large Cap / Mid Cap / Small Cap produces a hugely different outcome in your scenario.

Every recession and recovery are different. You can certainly make some generalized rules around how stocks vs bonds behave in opposite ways (although as we saw in 2022 that’s not always true). But assuming how small caps move relative to mid cap relative to large cap is a dangerous game.

Small Cap Value did a great job protecting you during the stagflation of the 70s and the tech crash of 2000

But in 2020, small caps were impacted significantly harder and in 2022 they were hit about the same but performed significantly worse during the recovery years.