Guardrails vs Buckets for Retirement Spending
Daniel P. Johnson, CFP?, EA
Helping high-stress physicians enjoy life while their health, wealth, and time are at their peaks.
Today I want to talk about two retirement distribution/investment strategies. I am getting back to shorter articles, so we will not be going down the rabbit hole with this one. It is a three-minute read.
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The TL/DR (Too Long. Didn’t Read) version is – Why Not Both!
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First, let’s talk about Guardrails. In the simplest terms, Guardrails look at your investments, other income sources (Social Security, pension) and spending projections and projects out how much you can spend per month or year in retirement. The nice thing about Guardrails is it adjusts as your investments change value and also tells you what happens if the values go up or down by certain amounts.
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Again, not getting in the weeds, but let me share a simple example. You have a retirement nest egg of $3 million. Once everything is factored in the Guardrail approach says you can spend $10,000 a month or $120,000 a year.
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Here is where one of two ways I find Guardrails to be beneficial. It also projects that if your nest egg grows to $3.5 million maybe your spending can increase to $11,000 a month. On the flip side, if the nest egg drops to $2.4 million your monthly spending needs to reduce to $9,500 a month (all numbers are out of thin air and just for examples).
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Oh, the second way I like Guardrails is because it tells you this is the amount you can spend monthly instead of a 88% Monte Carlo probability projection.
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Let’s talk Buckets quickly. Again, I have covered this before and will stay high level.
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You take that $3 million nest egg and divide it into three buckets. Bucket One is super conservative and the investment timeframe is the next two years. Bucket Two is still conservative and is for years three through seven. The final bucket is more aggressively invested and is designed not to be touched for at least eight years.
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At the end of the day Buckets work like a 60/40 portfolio. However, there is one MASSIVE benefit and why I like them for clients. And it is all behavioral. If the market pulls back 10%, which is normal about once a year, knowing you have everything you need for your spending goals for the next two years helps keep your anxiety down about what the market is actually doing and will it mess up your retirement. Knowing that 10% pullback is concentrated in Bucket Three that you won’t touch for almost a decade makes a world of difference. Well, at least for my clients.
Instead of trying to pick which one is better, why not use both? Simply, once you know your Guardrail number you can start designing the Buckets to reflect it. Yes, there are all kinds of other factors like taxes, RMDs, etc. However, by using these two strategies you can have a solid idea of how much you can spend a month while also designing the investments to not stress you out. I think you have better things to do in retirement than worry about investment performance. At least I hope you do??