www.cnbc.com Open in urlscan Pro
104.111.214.166  Public Scan

Form analysis
0 forms found in the DOM

Text Content

Skip Navigation
Select Logo

 * Money
 * Wellness
 * Tech & Tools
 * Explore


Search

The guardrails approach is a flexible retirement withdrawal strategy: Here's how
it works

 * Share
 * 
 * 
 * 

Sections
 * Money
 * CREDIT CARDS
 * LOANS
 * BANKING
 * CREDIT MONITORING
 * INVESTING
 * RESOURCES
 * PERSONAL FINANCE
 * SMALL BUSINESS
 * TAXES

 * Wellness
 * EXERCISE
 * HEALTH
 * SELF-CARE
 * SLEEP

 * Tech & Tools
 * APPLIANCES
 * ELECTRONICS
 * GAMING
 * SMART HOME

 * Explore
 * APPAREL
 * HOME & KITCHEN
 * OUTDOORS

More from NBC
 * Sign up for the Select newsletter
 * Shop TODAY
 * NBC News
 * CNBC
 * TODAY
 * ABOUT
 * HELP
 * CAREERS
 * PRIVACY POLICY
 * DO NOT SELL MY PERSONAL INFORMATION
 * CA NOTICE
 * TERMS OF SERVICE
 * NBC NEWS SITEMAP
 * ADVERTISE
 * AD CHOICES

Follow Select

 * 
 * 
 * 

© 2022 CNBC.COM



OUR TOP PICKS OF TIMELY OFFERS FROM OUR PARTNERS

More details

Learn More
Terms Apply
LightStream Personal Loans
Offers great rates on loans up to $100K for consolidating debt and more

Learn MoreTerms Apply
Blue Cash Preferred® Card
New $300 statement credit welcome offer after meeting spending requirements

Learn MoreTerms Apply
U.S. Bank Visa® Platinum Card
One of the longest intro APR offers plus, no annual fee

Learn MoreTerms Apply
Blue Cash Everyday® Card
Earn cash back on groceries, gas, and at department stores plus, no annual fee

Learn More
Terms Apply
Upstart Personal Loans
Great for those with fair credit - borrow up to $50K with no early payoff fees

Select’s editorial team independently created this content. We may receive a
commission from affiliate partner links. Click here to read more about Select.
Click here to read our full advertiser disclosure.

Select


THE GUARDRAILS APPROACH IS A FLEXIBLE RETIREMENT WITHDRAWAL STRATEGY: HERE’S HOW
IT WORKS


SELECT EXPLORES A NEW RETIREMENT WITHDRAWAL STRATEGY KNOWN AS THE GUARDRAILS
APPROACH.

Updated Sun, Feb 6 2022
Trina Paul@thetrinapaul
ShareShare Article via FacebookShare Article via TwitterShare Article via
LinkedInShare Article via Email
Getty Images
Select’s editorial team works independently to review financial products and
write articles we think our readers will find useful. We may receive a
commission when you click on links for products from our affiliate partners.

Many experts recommend that people withdraw 4% from their retirement portfolio
each year in order to make their retirement savings last. This much touted
advice, however, may not hold true for today’s retirees. While personal finance
experts have relied on the 4% rule for years, a recent Morningstar report
predicted that future retirees might have a higher chance of making their
retirement savings last if they use a lower withdrawal rate.

Financial planner William Bengen first developed the 4% rule in 1994 by using
historical returns of the stock market and a 30-year retirement horizon. The 4%
rule dictates that people should withdraw 4% of their retirement portfolios in
the first year, only adjusting for inflation each subsequent year. By using a
portfolio of 50% stocks and 50% bonds, Bengen found that people with a 4%
withdrawal rate had a 90% chance of success (which meant not running out of
money during retirement).



Yet today’s retiree’s are facing an entirely different financial market.

While current retirees have experienced higher than expected stock market and
bond returns over the past 30 years, researchers at Morningstar predict that
future retirees might find themselves facing lower returns on bonds and stocks
after the market’s recent stellar performance.

This could mean a future decline in the value of people’s retirement portfolios.
The report recommends that retirees consider a lower withdrawal rate of 3.3% to
ensure they don’t run out of money in retirement.

Though researchers suggest a lower withdrawal rate with adjustments for
inflation, retirees might also consider trying a more dynamic withdrawal
approach. The guardrail approach is one such method. Below, Select explains what
the guardrails approach is and how it works.

Subscribe to the Select Newsletter!

Our best selections in your inbox. Shopping recommendations that help upgrade
your life, delivered weekly. Sign-up here.


WHAT IS THE GUARDRAILS APPROACH TO RETIREMENT?

The guardrails approach, which was developed by financial planner Jonathan
Guyton and professor William Klinger, requires that retirees change their
withdrawal rate based on the performance of the market. This approach is
designed to account for changes in the value of your portfolio. Your withdrawal
rate will fall when the market is doing poorly or increase when it is doing
well.

With the guardrails approach, people set a high guardrail and a low guardrail
based on their target withdrawal rate. Therefore, when your withdrawal rate is
above or below guardrails, you reduce or increase your withdrawal amount so you
end up within the target withdrawal range.

“And if you think about driving your car down a road, you hit a guardrail, it
does two things. It puts a ding in your car, and it changes your momentum so
that instead of the momentum pushing you toward the edge of the road, it now
starts to shift you back toward the middle where it’s safe,” said Guyton in a
Morningstar interview.

Your guardrails are set at 20% above and below your withdrawal rate. For a
target withdrawal rate of 5%, the lower guardrail is 4% and the upper guardrail
is 6%. The target withdrawal range would be between 4 and 6%.

If your withdrawal rate falls outside your guardrails (after adjusting for
inflation) you would take a 10% increase or reduction in your withdrawal amount.
After taking the 10% adjustment, your withdrawal rate should be between the
upper and lower guardrails. For example, if your retirement withdrawal rate is
above 6% next year, you take the inflation-adjusted withdrawal amount and reduce
it by 10% so your withdrawal rate is below 6%. 

Consider what would happen in a market downturn:

 * Year 1: If your portfolio is worth $1 million and your withdrawal rate is 5%,
   you withdraw $50,000.

 * Year 2: The value of your portfolio decreases to $800,000 and your normal
   withdrawal of $50,000, with an adjustment for inflation, would be more than
   6% of your portfolio. This means you’ve hit a guardrail. You would then take
   the inflation-adjusted withdrawal amount (assuming 4% inflation) of $52,000
   and reduce it by 10% so you would withdraw $46,800 which would be less than
   6% of your portfolio.

It’s important to note that the guardrails approach does not require that
retirees cut their spending by 10% in a market downturn. Retirees often have
different sources of income, such as a 401(k) or a traditional IRA. With a
pre-tax retirement account like a traditional IRA and a 401(k), you do not pay
taxes on your upfront contributions, but you pay taxes on the money when you
withdraw it in retirement.

If you had to decrease your withdrawal amount by 10%, part of that reduction
could come from the reduced amount of income tax you owe on your retirement
withdrawals. 

When coming up with your retirement strategy it could be prudent to consult a
financial planner to help find the optimal withdrawal rate and come up with what
your guardrails would be.


SAVING FOR RETIREMENT

You’ll need to start building a retirement nest egg when you’re young in order
to have savings to draw upon in retirement. First off, you should focus on
maximizing your 401(k) match. Some employers offer employees matching 401(k)
contributions, typically between 2 and 4% of each paycheck. Your 401(k)
contributions are made pre-tax and are automatically deducted from your
paycheck.

After you’ve earned your 401(k) match, you might also consider opening an
individual retirement account (IRA). With an individual retirement account,
you’ll have more choice in how you invest your money. An individual retirement
account will typically give you the option of investing in individual stocks,
bonds, mutual funds and CDs. 

The two most popular retirement accounts are the Roth IRA and the traditional
IRA. The major difference between a Roth IRA and a traditional IRA is how the
accounts are taxed.

Contributions to a Roth IRA are taxed upfront, so the contributions can grow and
be withdrawn tax-free. Contributions to a traditional IRA are not taxed until
withdrawal. Roth IRAs have an income limit. In 2022 individuals making more than
$144,000 and married couples filing jointly making more than $214,000 are not
eligible to contribute to a Roth.

There are no income limits for traditional IRAs. Contributions to a traditional
IRA are tax deductible (which means your contribution reduces your taxable
income, and therefore the amount you owe in taxes) depending on your income and
whether you have a retirement plan through work.

When Select analyzed over 20 different Roth IRA accounts, it found that Charles
Schwab, Fidelity Investments, Ally Invest, Betterment and Wealthfront offered
some of the best Roth IRAs. Select looked at which accounts had no (or a low)
minimum deposit, commission-free trading of stocks and ETFs and the variety of
investment options offered to find the best Roth IRAs.


BOTTOM LINE

While the 4% rule has been the preferred withdrawal retirement strategy for many
years, it might be time to consider an approach that addresses the impact that
market volatility can have on people’s retirement strategies. The guardrails
approach is meant to do that.

By setting your guardrails 20% above and below your target withdrawal rate, you
can increase or reduce your retirement withdrawal any time you find yourself
spending outside of the range set by your guardrails. Though this withdrawal
strategy requires more thought and effort than the 4% rule, it could make your
retirement savings last longer.

Catch up on Select’s in-depth coverage of personal finance, tech and
tools, wellness and more, and follow us on Facebook, Instagram and Twitter to
stay up to date.


READ MORE

The 5 best robo-advisors when you want to be hands off with your investments

What is the 4% rule and how can it help you save for retirement?

Retiring in your 30s: Is it possible and is it even a good idea?

Here’s how much money you should invest each month to become a millionaire if
you’re 30


Editorial Note: Opinions, analyses, reviews or recommendations expressed in this
article are those of the Select editorial staff’s alone, and have not been
reviewed, approved or otherwise endorsed by any third party.

Related

 1. Tracking your expenses is the first step if you want to retire by 65 or
    sooner — here’s why
    
 2. 3 personal loan lenders to consider if you have insufficient credit history
    
 3. The price of Amazon Prime is increasing — here’s how you can lock in a lower
    rate
    
 4. 25 key terms everyone with a credit card should know
    
 5. What is the difference between secured and unsecured credit cards?
    

Latest
 * This tax service can get you your tax refund in crypto — here’s how to get
   startedBrett Holzhauer
 * The price of Amazon Prime is increasing — here’s how you can lock in a lower
   rateBrett Holzhauer
 * This credit score is optimal for most Americans, says this CFPBrett Holzhauer


Select Logo
 * More from Select
 * About
 * Contact
 * Help
 * Careers
 * Privacy policy
 * Do Not Sell My Personal Information
 * CA Notice
 * Terms of Service
 * CNBC SITEMAP
 * Advertiser Disclosure
 * Ad Choices
 * Advertise

CNBC.com

© 2022 SELECT | All rights reserved. The use of this website means that you
accept the confidentiality regulations and the conditions of service.






COOKIE SETTINGS

We and our partners collect information from your device, such as device
identifiers, IP address, and your browser type to personalize and deliver
content, marketing and advertising—across devices and platforms; for analytics
and measurement, so we can improve our services and develop new ones; to match
and combine offline data with your online activity; and for social features. We
share this information with selected partners with your consent. By clicking
“Allow All”, you consent to our use of these Cookies. Click on the Cookie
categories or the “Detailed purpose descriptions” below to learn more about
these Cookies. We will also use other Cookies that are essential for our site
and Services, including for security and fraud prevention. To learn more about
some of our partners, see the List of IAB Vendors below. Visit our Cookie Notice
and Privacy Policy to learn more.
Allow All


MANAGE CONSENT PREFERENCES

STRICTLY NECESSARY COOKIES

Always Active

These Cookies are required for Service functionality, including security and
fraud prevention, and to enable any purchasing capabilities. You can set your
browser to block these Cookies, but some parts of the site may not function
properly.

Non-IAB Cookies‎

ENSURE SECURITY, PREVENT FRAUD, AND DEBUG

Always Active

Your data can be used to monitor for and prevent fraudulent activity, and ensure
systems and processes work properly and securely.

List of IAB Vendors‎ | Detailed Purpose Descriptions Opens in a new Tab

TECHNICALLY DELIVER ADS OR CONTENT

Always Active

Your device can receive and send information that allows you to see and interact
with ads and content.

List of IAB Vendors‎ | Detailed Purpose Descriptions Opens in a new Tab

STORE AND/OR ACCESS INFORMATION ON A DEVICE

Store and/or access information on a device

Cookies, device identifiers, or other information can be stored or accessed on
your device for the purposes presented to you.

List of IAB Vendors‎ | Detailed Purpose Descriptions Opens in a new Tab
Non-IAB Cookies‎

PERSONALISED ADS, AND AD MEASUREMENT

Personalised ads, and ad measurement

 * SELECT PERSONALISED ADS
   
   Switch Label
   
   Personalised ads can be shown to you based on a profile about you.

 * MEASURE AD PERFORMANCE
   
   Switch Label
   
   The performance and effectiveness of ads that you see or interact with can be
   measured.

 * CREATE A PERSONALISED ADS PROFILE
   
   Switch Label
   
   A profile can be built about you and your interests to show you personalised
   ads that are relevant to you.

 * SELECT BASIC ADS
   
   Switch Label
   
   Ads can be shown to you based on the content you’re viewing, the app you’re
   using, your approximate location, or your device type.

 * TARGETED ADVERTISING COOKIES
   
   Switch Label
   
   These Cookies are used to collect data about your browsing habits, use of the
   Services, your preferences, and your interaction with advertisements across
   platforms and devices for the purpose of delivering targeted advertising
   content, both on our Services and on third party sites. Third-party sites and
   services also use Targeting Cookies to deliver content, including
   advertisements relevant to your interests on the Services. If you reject
   these Cookies, you will see less relevant advertising.

List of IAB Vendors‎ | Detailed Purpose Descriptions Opens in a new Tab
Non-IAB Cookies‎

PERSONALISED CONTENT, CONTENT MEASUREMENT, AUDIENCE INSIGHTS, AND PRODUCT
DEVELOPMENT

Personalised content, content measurement, audience insights, and product
development

 * DEVELOP AND IMPROVE PRODUCTS
   
   Switch Label
   
   Your data can be used to improve existing systems and software, and to
   develop new products

 * SELECT PERSONALISED CONTENT
   
   Switch Label
   
   Personalised content can be shown to you based on a profile about you.

 * APPLY MARKET RESEARCH TO GENERATE AUDIENCE INSIGHTS
   
   Switch Label
   
   Market research can be used to learn more about the audiences who visit
   sites/apps and view ads.

 * CREATE A PERSONALISED CONTENT PROFILE
   
   Switch Label
   
   A profile can be built about you and your interests to show you personalised
   content that is relevant to you.

 * MEASURE CONTENT PERFORMANCE
   
   Switch Label
   
   The performance and effectiveness of content that you see or interact with
   can be measured.

 * CONTENT SELECTION COOKIES
   
   Switch Label
   
   This group is so Content Selection IAB group can have an id

List of IAB Vendors‎ | Detailed Purpose Descriptions Opens in a new Tab
Non-IAB Cookies‎

SOCIAL MEDIA COOKIES

Social Media Cookies

These Cookies are set by social media platforms on the Services to enable you to
share content with your friends and networks. Social media platforms have the
ability to track your online activity outside of the Services. This may impact
the content and messages you see on other websites you visit.

Non-IAB Cookies‎


BACK BUTTON PERFORMANCE COOKIES



Vendor Search Search Icon
Filter Icon

Clear
checkbox label label
Apply Cancel
Consent Leg.Interest
checkbox label label
checkbox label label
checkbox label label


 * 33ACROSS
   
   HOST DESCRIPTION
   
   VIEW COOKIES
   
   
    * Name
      cookie name

Confirm My Choices


We and our partners collect information from your device, such as device
identifiers, IP address, and your browser type to personalize and deliver
content, marketing and advertising—across devices and platforms; for analytics
and measurement, so we can improve our services and develop new ones; to match
and combine offline data with your online activity; and for social features. We
share this information with selected partners with your consent. By clicking “I
accept”, you consent to our use of these Cookies. Click Manage Choices to learn
more about these. We will also use other Cookies that are essential for our site
and Services, including for security and fraud prevention. To learn more about
some of our partners select Show Vendors. You can adjust your preferences at any
time via the “Manage Cookie Preferences” link in the footer of relevant
NBCUniversal websites or in-app settings. Visit our Cookie Notice and Privacy
Policy to learn more.


WE AND OUR PARTNERS PROCESS DATA FOR THE FOLLOWING PURPOSES:

Store and/or access information on a device. Personalised ads, and ad
measurement. Personalised content, content measurement, audience insights, and
product development. List of IAB Vendors

I Accept Manage Choices