Could These Retirement Guardrails Help You Avoid Running Out of Money - Even During the “Worst Time” to Retire?

KEY TAKEAWAYS:

• When was the worst time to retire? While the Great Depression seems like an obvious choice, retirees during the late 1960s stagflation era fared worse due to high inflation (peaking at 14%) and poor investment returns (only 0.8% inflation-adjusted annual return).
• Unlike static withdrawal strategies (e.g., the 4% Rule), risk-based guardrails adjust spending based on market conditions, ensuring retirees don’t overspend or underspend as circumstances change.
• A retiree in 1968 with a $3M portfolio using risk-based guardrails would have temporarily reduced spending by 36% but still maintained a ~$1.5M portfolio balance by 1989, whereas a static spending plan would have depleted their funds entirely.

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Looking back to the beginning of the 20th century, when would you say was the worst time to retire??

The Great Depression seems like the obvious answer. After all, US stock prices dropped more than 85%, and unemployment reached 25%. However, despite these staggering statistics, there’s a period when retirees’ relying on a mix of stocks and bonds to fund their retirement would have fared worse: the late 1960s (stagflation era).

From 1968 to 1982, retirees were hit with the double whammy of rampant inflation, peaking at 14%, and dismal investment returns, averaging an inflation-adjusted 0.8% annually. This is enough to derail all but the most conservative retirement income plans.

So, how can you develop a strategy that can help protect you from bad timing??

If you’ve read our other Insights, you know we’re not bashful in advocating for?“risk-based” retirement guardrails. And for good reason: their dynamism leads to better outcomes than static, conventional retirement income plans.

What are Risk-Based Guardrails?

Retirement income “guardrails” is a framework that aims to prevent retirees from spending too much or too little by adjusting as circumstances change. This contrasts with conventional income plans based on a static portfolio withdrawal rate or spending amount (e.g., the 4% Rule). It’s like the difference between using GPS navigation that dynamically adapts to traffic conditions versus a (static) paper map.

There are many ways to implement a guardrail income plan. As retirement planning specialists,?our preference is the "risk-based" approach.

Risk-based guardrails use spending rules to maintain a target risk level based on the probability of a retiree underspending (or overspending). Here’s an example:

• Initial Withdrawal Rate: Begin by spending an amount with a 70% probability of?underspending (30% overspending).
• Upper Guardrail: If the probability of?underspending rises to 100%, increase spending to a level that has 30 points higher risk (70% probability of underspending).
• Lower Guardrail: If the probability of?underspending falls to 25%, decrease spending back to a level that has 10 points lower risk (35% probability of underspending)

Risk-Based Guardrails Vs. Static Spending

Let’s take a look at how risk-based guardrails would have fared during the stagflation era of the late 1960s. In the following examples, we assume a 65-year-old retires with a $3M investment portfolio invested in 60% stocks and 40% bonds. We target a 70% probability of underspending (using the spending rules above), which results in a ~5.8% initial withdrawal rate ($173k annually). For simplicity, other income sources, like social security, are not included.

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Using historical investment and inflation data, we can transport this retiree back in time to see how the rampant inflation and poor investment returns of this era would have impacted their income. The dark blue line represents the income they’re spending (initially ~$14,400/month or ~$173k/annually) and how the lower and upper guardrails, represented by the dashed lines, adjust spending along the way. By 1981, spending had been reduced to $9,100/month (~$109k annually) to maintain the plan’s target risk level. Following the strong investment returns, spending increased to $14,000/month in 1987 (slightly below the initial withdrawal).

While the above results may not seem impressive, given that the risk-based guardrails called for a 36% reduction in spending by year 13 of the plan, it's vastly better than the alternative of not making adjustments.

As we can see, this retirees' portfolio would have been depleted 21 years into retirement (1989) if they chose not to dial back spending in response to deteriorating financial and economic conditions along the way. In contrast, the risk-based guardrail plan would have still had a ~$1.5M balance.

Failure Is Not an Option in Retirement

History serves as a sober reminder that employing a retirement income plan that works in good?and bad times is crucial. So, would your retirement income plan have passed muster if you had the bad luck of retiring at “the worst time”? If you want help answering this question,?contact us today?to schedule a complimentary consultation with one of our retirement planning specialists.