The ‘Guardrails’ Approach: 2 Ways it Gives Retirees More Spending Money

Retirement should be a time of rest, relaxation and, most importantly, enjoyment. While a retiree may not be earning an income from work anymore, there’s an approach that adjusts retirement spending with market swings. This “guardrails” approach lets a retiree start higher and enjoy more of their nest egg while still protecting it.

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First, it’s important to understand what’s known as the 4% rule, and how it compares to the “guardrails” strategy.

Understanding the 4% Rule First

According to The Street, the 4% rule suggests that (based on historical market data), a person who withdraws 4% of their portfolio’s value during their first year of retirement, who then withdraws the same dollar amount adjusted for inflation in each subsequent year, would never run out of money by the end of a 30-year time period.

While this rule represents a static approach — meaning that no spending adjustments are made during retirement other than for inflation –there is another way: the “guardrails” approach.

How the “Guardrails” Approach Works Differently

A more dynamic approach with respect to the 4% rule, the “guardrails” method entails an initial withdrawal rate that is variable depending on portfolio performance. In other words, you’ll be able to spend more when portfolio performance is strong and you’d reduce spending when portfolio performance is weaker. The idea behind this approach is that your spending correlates with how well your assets are performing. This way, you shouldn’t run out of funds.

2 Ways The Guardrails Approach Gives Retirees Extra Cash To Spend

Here are two ways that the guardrails approach can give retirees more spending money:

You Can Spend More When The Market Is Strong

Rather than maintaining a static approach where you can’t spend more than a fixed percentage of your retirement fund, this approach allows you to spend more on the things you love in times of market prosperity. When the market is doing well, you can enjoy more of your savings.

You’ll Have More Chances To Splurge Without Breaking The Bank

Learn: 9 Things Frugal Retirees Never Waste Money On

Utilizing this approach allows you to indulge in more discretionary purchases, during certain times of the year, like a vacation or a fancy dinner out. You won’t have to feel guilty about depleting your account too much since your spending aligns with market performance.

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This article originally appeared on The ‘Guardrails’ Approach: 2 Ways it Gives Retirees More Spending Money

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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