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Using Guard Rails to define your Retirement

Using Guard Rails to define your Retirement

| June 21, 2021

Using Guard Rails to define your Retirement.

When we talk about financial plans, most people would prefer to do math on a cocktail napkin once a year than pay someone to create an official document. The reality of the situation, financial advisors have not always spoken clearly enough for the everyday Joe/Jill to understand.

As a result, companies like mine have been trying to tear down the old ways and bring to light a friendlier version to understanding how to map out your life. Whether you are saving to retire or thinking about retiring soon, you need a real plan. It is cheaper than one HOA payment and is a living, breathing document that you can use for the rest of your life.

As a millennial, it is in my human nature to try and stay current with FinTech (financial technology) and try to find something that is more efficient than its predecessor. I have found that, and it revolves around creating retirement plans.

The new way of retirement planning has changed the narrative. The old way was all about your Probability of Success in surviving retirement. It was very black and white. Pass/Fail. The new way is not pass/fail because everyone passes. There is no failing. The conversation revolves around Probability of Adjustment.

What are the chances I need take a pay cut?

How many times will this happen through retirement?

How much money is the pay cut?

The simple answer is not nearly as scary as you would think. Usually, the adjustment is temporary in nature and a slightly smaller number than you got the previous year. The following year, we reassess the situation. In the end, these types of small corrections along the way ultimately prevent you from falling off the cliff and failing.

The secret behind the curtain is that this new type of planning uses the ‘guardrails approach’, where the ‘guardrails’ serve as pre-determined thresholds for not only decreasing spending but also increasing future spending to stay within the guardrail parameters.

Say for example, let’s say you start spending your retirement nest egg at an initial withdrawal rate of 5%.

Guardrail#1 on top says: cut spending if withdrawals exceed 6% (meaning that spending is outpacing growth and needs to be corrected).

Guardrail#2 on bottom says: increase spending if withdrawals fall below 4% (meaning portfolio growth is outpacing spending and more income is possible.)

The guardrail values serve as the withdrawal-rate-driven guidelines for adjusting the income levels and, additionally, make sure that you can make it to the end of retirement without fully depleting your nest egg.

These are the ideas that your financial advisor should be talking to you about. Understanding your retirement future does not have to be intimidating. Give us a call and we would love to talk more about your probability of adjustments.