An Advisor’s Guide to Guardrails in Retirement Income

It’s become a difficult time for fixed income, and retirees and those looking at their retirement portfolios are doing so with trepidation and concern. A great tool that advisors can use to help keep retirement plans on track in difficult, volatile, and stressful times for their clients is using guardrails to help limit spending adjustments both up or down.

Dr. Derek Tharp, assistant professor of finance at USM and financial planner at Conscious Capital Research at, gave a recent webinar on the importance of using risk-based retirement income guardrails in the Kitces monthly webinar.

A simple example Tharp uses of how to apply guardrails is to increase spending if a portfolio increases and to decrease spending when the portfolio decreases. If a client has a $1 million portfolio and plans to spend $50,00 annually, if the portfolio increases to $1.25 million, the client would also increase their spending to $62,500. Conversely, if the portfolio declines to $833,000, the client’s spending would decrease to $41,667.

“There can be a lot of peace of mind,” that comes with using guardrails, Tharp explains, “particularly when thinking about those downward adjustments. Anytime the client sees the market is going down, that’s going to create some anxiety but if you know in advance what level that market would need to hit before you make any adjustments and you know in advance what that adjustment is, it might be easier to face that turbulence in the market when it comes.”

For advisors, benefits of placing guardrails on their clients' portfolios include that they give very useful metrics for planning, can help answer the difficult questions from clients about what happens if their portfolio declines a certain percentage, and help to put a retirement income policy statement in place.

Guardrails based on withdrawal rate may not be the best option for clients because they work on the assumption that distribution rates are going to be consistent over time, and studies have found that this simply isn’t the case most of the time. Two big trends in retirement spending are that clients who defer their Social Security payments generally have high distribution rates from the beginning, and that over time, there is typically a downward slope in spending throughout retirement.

Risk-based guardrails, on the other hand, are individualistic and focus on each client’s spending habits and needs in their retirement. These types of guardrails adjust for risk changes as a client ages, fluctuate to accommodate and capture unique spending habits, and are also adjustable to fit the client’s risk preferences.

These types of guardrails can cover a variety of strategies and desired outcomes, whether the focus is on increasing a client’s financial legacy, reducing the chances of downward adjustments, or prioritizing their current income. For risk-based guardrails, it’s actually the initial withdrawal rates that matter much more than upper and lower guardrails.

It’s still an evolving approach with a lot of nuanced unknowns, such as the impact of spending floors and ceilings on retirement income overall, but it offers a lot of flexibility depending on a client’s outcome desires and individual spending habits.

For more news, information, and strategy, visit our Retirement Income Channel.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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