Summary
It consists of the capital preservation rule and the prosperity rule.
The strategy allows for dynamic spending adjustments based on portfolio performance.
The values for the Capital Preservation Rule and the Prosperity Rule can be changed.
Description
The guardrail strategy was created by financial planner Jonathan Guyton and refined with William Klinger. The guardrail strategy is a dynamic spending approach that incorporates rules-based increases or decreases to portfolio withdrawals, depending on the portfolio's performance. This strategy is designed around two main rules:
The Capital Preservation Rule: This rule is triggered if the current withdrawal rate increases by more than X% compared to the initial rate, prompting a reduction in the withdrawal amount by Y%.
The Prosperity Rule: This rule is triggered if the current withdrawal rate decreases by more than X% compared to the initial rate, resulting in a Y% increase in the withdrawal amount.
These rules can be adjusted to fit clients' financial circumstances and goals.
Example
For instance, let's say a retiree begins with a £1,000,000 portfolio and decides to withdraw £40,000 annually. This represents an initial withdrawal rate of 4%. Assume by the fourth year:
The portfolio has grown to £1,400,000
Due to annual inflation adjustments, the withdrawal that year is now £45,000.
The current withdrawal rate is now 3.2%, which is more than 20% lower than the initial 4%. The prosperity rule is triggered, so the withdrawal is increased by 10% to £49,500.
However, by the seventh year:
The portfolio has decreased to £900,000
The retiree is drawing £50,000 (because of cumulative inflation and previous increases).
The current withdrawal rate has increased to 5.5%, more than 20% above the initial 4%, triggering the capital preservation rule. The withdrawal is reduced by 10%, to £45,000.