What Is the Guyton-Klinger Guardrails Approach for Retirement?

When you retire, there are plenty of opinions on a safe withdrawal rate to support your lifestyle without running out of funds. While most readers here likely know the 4% rule—a strategy that assumes you can withdraw 4% of your assets indefinitely—you’ll find plenty of critiques and variations. The Guyton-Klinger guardrails give you more flexibility, generally allowing a 4%-6% withdrawal rate.

Let’s look at the Guyton-Klinger guardrails approach to see if it could make sense for medical professionals during their golden years.

What Is the Guyton-Klinger Guardrails Approach?

The Guyton-Klinger guardrails approach is a retirement withdrawal strategy developed by Jonathan Guyton and William Klinger in 2006. It was first published in an article in the FPA Journal. The strategy prescribes five rules that define how much one can draw annually.

1. Initial withdrawal rate: The Guyton-Klinger model says 99% of retirees can start with an initial draw rate of 5.2%-5.6%.
2. Upper guardrail: If the portfolio withdrawal rate falls 20% lower than the initial rate due to increases in the portfolio value, increase dollar withdrawals by 10%. This is known as the “Prosperity Rule.”
3. Lower guardrail: If the portfolio withdrawal rate rises 20% higher than the initial rate due to poor investment performance, reduce dollar withdrawals by 10%. This is known as the “Capital Preservation Rule.”
4. Inflation adjustments: Based on the Consumer Price Index (CPI), adjust withdrawals for inflation up to a 6% annual increase.
5. Longevity: When you expect to have 15 years or less remaining (I know, it's kind of morbid), you remove the lower guardrail rule.

The general idea is to start with a safe withdrawal rate of around 5% of your assets. For example, if you have a $4 million retirement portfolio, you could initially withdraw $200,000 per year. That rate goes up or down slightly based on your portfolio performance and inflation.

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Benefits of Guyton-Klinger Guardrails

The benefits of Guyton-Klinger are the flexibility to withdraw more during retirement when your portfolio performs well. Whether due to economic factors or your investing prowess, you’re rewarded with higher annual withdrawals if your investments significantly increase.

The lower guardrail protects you from running out of funds if your investments experience a major downturn. While the investment markets tend to perform well over long periods, you’ll likely see more variation year-to-year. If you happen to be living through a down period in the markets, this method protects you from overdrawing.

It also gives you a higher initial withdrawal rate compared to the standard 4% rule some investors prefer. While 4% is probably safer, it also can hold you back from making the most of your portfolio.

Drawbacks of Guyton-Klinger Guardrails

One of the most prominent drawbacks of Guyton-Klinger is predictability. If the stock market dips, you may have to adjust your budget significantly. That makes it harder to plan for the future, as you may have less to spend next year than this year. This would also be the time you'd have to worry about sequence of returns risk, which could decimate a retiree's portfolio if the stock market has lousy returns during the first few years of that person's retirement.

Depending on your assets and retirement plans, you could wind up overcorrecting with the lower guardrail, drawing less than you could have otherwise. That’s a tradeoff for taking a more conservative approach during down periods in the market.

And, of course, results are not guaranteed. There’s always some risk you’ll outlive your retirement savings. And there’s some risk you’ll draw too little and could have lived a more luxurious lifestyle. I’d personally be more worried about running out of cash, as I’d like to leave my kids a sizable nest egg for their future. However, everyone has different goals in that department.

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Guyton-Klinger Guardrails Pros and Cons

Here’s a quick summary of the main pros and cons of the Guyton-Klinger guardrails method:

Pros

• Provides a clear plan for adjustments to prevent overspending or underspending
• Addresses market performance as your portfolio value changes over time
• Offers higher initial withdrawal rates compared to static approaches like the 4% rule

Cons

• Potential for significant reductions in retirement income during market downturns
• May overcorrect for market losses, preserving more capital than necessary at the cost of living standards
• No guarantee your withdrawals will align with your lifespan and portfolio

Do Guyton-Klinger Guardrails Make Sense for Your Retirement?

The Guyton-Klinger guardrails approach certainly has its merits. They did a lot of testing using data from the last few decades to ensure a withdrawal rate calculation that works the vast majority of the time. One could argue it would work for most retirees with enough assets to live comfortably following a withdrawal rate of around 4%-6% of their retirement assets.

However, many financial professionals argue against Guyton-Klinger, particularly noting the potential for sharp income declines in some years and the likelihood of over-preserving capital during down periods.

I’m more in favor of following a simple 5% withdrawal rate, as you don’t have to do as many complicated calculations and adjustments to your retirement income and withdrawals. But that’s just my two cents.

What are your thoughts on the Guyton-Klinger Guardrails approach? Is that something you'd think about for retirement withdrawals? Or is there another system you'd prefer?