Summary
The Boundaries Rule allows setting upper and lower bounds for withdrawal rates.
It is quite similar to the guardrail strategy but provides a greater degree of flexibility.
Description
The Boundaries Rule is a dynamic spending strategy that enables financial planners to set specific upper and lower limits for withdrawal rates. This rule is similar to the guardrail strategy but allows for wider limits on withdrawal rates. With this strategy, financial advisors can adjust the figures to set their own bounds for the withdrawal rate and the frequency of applying the rule.
Example
Let's take a retiree who starts with a £1,000,000 portfolio, withdrawing £40,000 initially, which establishes an initial withdrawal rate of 4%. Under the Boundaries Rule, if the portfolio's performance improves significantly and its value increases to £1,200,000 in the second year, the current withdrawal rate would be £40,000 / £1,200,000 = 3.33%.
If the financial planner has set an upper boundary at a withdrawal rate of 6% and a lower boundary at 2%, there would be no adjustments this year because the current withdrawal rate does not cross these boundaries.
However, let's imagine that in the fourth year, the portfolio value drops to £650,000 due to a market downturn. Now, the current withdrawal rate is £40,000 / £650,000 = 6.15%, which is more than the set upper boundary of 6%. This triggers the capital preservation rule, reducing the withdrawal amount by 10% to £36,000 to protect the portfolio's value.