Trading Rigid Rules for a Dynamic, Confidence-Boosting Spending System

If you're planning on using the static 4% Rule in retirement, you might be leaving significant money on the table. In fact, a rigid approach could cause you to underspend and miss out on your best retirement years.

I believe the traditional 4% rule is too conservative for many of the clients I work with. I'm going to introduce you to the Guardrail Spending Strategy, which has completely transformed how I work with clients, protecting them from running out of money while allowing them to spend more. Take a look at my YouTube video on this topic here.

The Problem with the 4% Rule (It's Not Realistic)

The 4% Rule, popularized by financial planner Bill Bengen in the 1990s, set out to determine the maximum sustainable withdrawal rate over a 30-year retirement horizon. While it established a foundation for planning, its methodology has two major flaws:

1. It’s the Minimum: The 4% rule is calculated based on retiring during the worst possible historical periods (like the Great Depression or the 1970s stagflation). In all other historical periods, you could have spent much higher than 4%. It's meant to be the absolute minimum you can spend without running out of money.

2. It Ignores Lifestyle: The rule assumes you take 4% and adjust it for inflation every single year. This doesn't reflect real life:

   • Go-Go Years: People tend to have high spending early on for trips, new houses, toys, and gifts.

   • Slow-Go Years: Spending dips as retirees age and slow down.

   • No-Go Years: Spending potentially spikes again due to healthcare and long-term care expenses.

The Reality: The retirement smile pattern (high spending, dip, high spending) is realistic, and taking 4% adjusted for inflation every year is simply not how most people live. Even the founder, Bill Bengen, admits he changes his own asset allocation ahead of market events, deviating from his own fixed-allocation study.

The Limits of Monte Carlo Analysis

The next innovation was the Monte Carlo analysis, which is better than the 4% rule because it is dynamic. However, it still falls short in providing clarity:

• The Abstract Problem: If I tell you, "You have an 86% chance of success in your plan," your natural question is, "What does that even mean?" The resulting "chance of success" is highly abstract and dependent on inputs that can be easily manipulated.

• The Volatility Flaw: In periods of extreme market volatility, the "chance of success" in your plan will drop precipitously on paper. This causes immense client anxiety. While a market decline should lead to higher expected future returns, the delay in updating the model assumptions makes the client feel like they just failed their retirement test.

The Solution: Guardrails (Dynamic Spending)

The guardrail strategy, championed by advisors like Matthew Jarvis, solves the issues of relativity and clarity.

• How Guardrails Work: You establish an Upper Guardrail (if your portfolio performs exceptionally well, you can safely increase spending) and a Lower Guardrail (if your portfolio drops too low).

• The Action: If your portfolio value hits the Lower Guardrail, you implement a predefined spending cut (usually 5% to 10%) until your portfolio recovers above that line.

• The Benefit: This approach is dynamic and easy to understand. You can literally see your portfolio approaching a guardrail, giving you a clear, quantitative signal that says, "We need to decrease spending to X," or "Things are okay." It removes emotion from the critical decision of when to spend less.

Crucial Caveat: Who Should NOT Use Guardrails?

While the guardrail approach is superior for many, it is not universal:

• The Rule: If you do not have enough discretionary spending in your retirement budget to actually cut (meaning almost all your spending is essential living expenses), the guardrail strategy will prove disastrous.

• Action: If your budget is all core expenses, you must stick with the more conservative, defensive strategy like the 4% Rule until you build a large enough buffer to handle mandatory cuts.

A Plan That Works

The guardrail approach is dynamic, easier to understand, and gives you a much better sense of control than rigid rules or abstract success percentages. It ensures your spending adjusts to market realities, preventing you from overspending in a downturn and allowing you to enjoy more wealth in a bull market.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you integrate a guardrail system into your portfolio and see if we're a good fit.