InSight

Understanding the Guyton-Klinger Guardrails Method: A Superior Strategy for Retirement Income Management

Financial Planning Dentist

When it comes to managing retirement income, the Guyton-Klinger guardrails method stands out as a robust strategy, offering a dynamic approach to withdrawals that adjusts based on market performance. Unlike static withdrawal strategies, such as the 4% rule, the Guyton-Klinger method provides a flexible framework that helps retirees adapt their spending in response to changing market conditions. But who is this method best suited for, and why is it considered superior to traditional methods of managing investment risk and distributions?

Who is the Guyton-Klinger Guardrails Method Best For?

The Guyton-Klinger guardrails method is particularly well-suited for:

Retirees Seeking Stability and Flexibility: Retirees who want a systematic approach to adjusting their spending in response to market fluctuations will benefit from this method. It offers clear guidelines for when to increase or decrease withdrawals, providing peace of mind and reducing the stress associated with market volatility.

Advisors and Clients Focused on Long-Term Sustainability: Financial advisors and their clients who prioritize the sustainability of retirement portfolios will find the Guyton-Klinger method advantageous. It helps ensure that retirees do not outlive their savings by making necessary adjustments when needed.

Those Comfortable with Variable Income: Individuals who can tolerate some variability in their annual income will appreciate this approach. The method’s built-in adjustments mean that spending can increase in good years and decrease in bad years, which requires a degree of financial flexibility.

Boulder financial advisors, cash generation investing

 

Why is the Guyton-Klinger Method Superior?

The Guyton-Klinger guardrails method offers several advantages over traditional static withdrawal strategies:

Dynamic Adjustments: Unlike the 4% rule, which suggests withdrawing a fixed percentage of the initial portfolio each year adjusted for inflation, the Guyton-Klinger method adjusts withdrawals based on the performance of the portfolio. This dynamic approach helps protect against the risk of depleting the portfolio during prolonged market downturns.

Clear Guidelines for Adjustments: The method establishes specific “guardrails” for when to increase or decrease withdrawals. For instance, if the portfolio withdrawal rate falls 20% lower than the initial rate, withdrawals are increased by 10%. Conversely, if the withdrawal rate rises 20% higher, withdrawals are decreased by 10%. These clear, predefined rules remove the guesswork and help maintain the portfolio’s longevity.

Reduction in Spending Volatility: By avoiding knee-jerk reactions to market declines and instead implementing gradual adjustments, the method smooths out income volatility. This is crucial for retirees who rely on their portfolio for steady income.

Enhanced Communication and Client Understanding: For financial advisors, the Guyton-Klinger method provides a framework that makes it easy to communicate with clients. The specific guardrails offer a transparent and understandable plan for managing withdrawals, which can help build trust and ensure clients feel more secure about their financial future.

The Mechanics of the Guyton-Klinger Method

To better understand why this method is superior, let’s delve into its mechanics:

Initial Withdrawal Rate: Set at the beginning of retirement, this rate is typically between 4% and 6%, depending on individual circumstances.

Upper Guardrail: If the portfolio’s withdrawal rate drops 20% below the initial rate, it triggers a 10% increase in withdrawals.

Lower Guardrail: If the portfolio’s withdrawal rate increases 20% above the initial rate, it triggers a 10% decrease in withdrawals.

Inflation Adjustments: Withdrawals are adjusted for inflation annually, but this adjustment is skipped if the trailing 12-month return is negative.

Longevity Consideration: No decreases in withdrawals are triggered during the final 15 years of the retirement plan, ensuring that retirees are not forced to make severe spending cuts late in life.

The Guyton-Klinger guardrails method represents a significant advancement in retirement income planning. By providing a structured yet flexible approach to withdrawals, it helps retirees manage their portfolios more effectively, ensuring long-term sustainability and reducing the anxiety associated with market volatility. This method is particularly beneficial for those who seek a balance between stable income and the ability to adapt to changing market conditions. For financial advisors, it offers a clear, communicable strategy that enhances client trust and understanding. In a world where retirees face increasing uncertainty, the Guyton-Klinger guardrails method stands out as a superior approach to managing investment risk and distributions.

 

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Account Types: Individual / Solo 401(k)

Getting corporate retirement plan benefits for when you are going it alone Annual Contribution Max: $57,000 or 25% employees pretax income Why we like Solo 401(k)’s: Easy to administer, low-cost retirement plan designed for self-employed individuals and owner-only (spouse can be included) businesses.  The plan can allow either traditional pre-tax or Roth (after-tax) contributions and can be updated as your InSight-full® plan requires They have a verbiage familiar to investors and are very similar to an employer sponsored 401(k)  High contribution limits as contributions can be both employee deferrals and employer contributions Can add a profit sharing plan in addition to 401(k) called non-elective employer contributions.  Employee elective deferral contributions don’t count against the plan contribution limit of 25%, so large contributions can be made (limited to $57,000 per person for 2020 ($63,000 if the participant is age 50 and over) Access to loans Why we don’t like Solo 401(k)’s: Limited to business owner and spouse Is a little more complicated to set up than IRAs Solo 401(k) plans, will also be referred to as individual or one-participant 401(k) plans, and can help maximize retirement savings for self-employed people and business owners that don’t have employees other than yourself or spouse. They work a bit like regular 401(k) plans, except that they allow you to add funds as both employer and employee. First as an employee, you are able to contribute up to 100% of your self-employment income, to a max of $19,500 in 2020 or $26,500 if you’re age 50 or over. Generally as the employer you can add up to an additional 25% of your business’ income (or around 20% if you operate as a sole proprietor). Depending on your income level and the types of revenue practices you own, this dual contribution formula may let you contribute more than with other retirement plans, such as SEP IRAs, although the maximum contribution limits are the same  ($57,000 if 50 or under/$63,000 if older). 

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Investing 2021
Market InSights
Kevin Taylor

Rudolph with Your Nose So Bright

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year.  Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets.  Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.   Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation.  Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

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Articles
Kevin Taylor

Financial Plan Principles For Dentists

Dentists have a unique professional path so they should have a unique financial plan. They can double as a full-time practitioner and a CEO of the practice at the same time. With this opportunity, they can have a rewarding career and secure their financial future. However, as a dentist, you can only have the financial future you desire with proper financial planning. This is not rocket science. Nothing special can be built without proper planning and management. By Kevin T. Taylor AIF® and Peter Locke CFP® Dental professionals have the responsibility to learn the key principles of financial planning and wealth accumulation for themselves, their family, practice, and staff. For these priorities, dentists should work side by side with a dental-centric financial advisor. A dental financial advisor can help you create a financial plan and provide you with a perfect place to start your journey of financial stability and prosperity. Whether you want to discuss investments, savings, spending, taxes, corporate retirement, or legacy planning, you will find help with InSight. Here are key financial principles to help dental professionals stay atop their finances. Quit the chase, have a real financial plan If you are in a chase with your colleagues or you have a certain amount of money you want to make, quit now. Who cares if your colleagues have the latest cars or tech.  Also, I promise you, when you reach that dollar amount, you’ll want more. Take time to think about what success looks like to you, who you want to do it with, and what it involves you doing or having.  Then build a plan to get there. Financial freedom means maintaining your current spending and not working. We will work for you and share our insight to guide you there. Protect your assets with financial planning You want to make sure you protect your gains over the years and your income. Make sure you have health and life insurance, car and home insurance, disability insurance, and business coverage. Have everything that protects your asset so that the wealth you’ve amassed over the years doesn’t erode. Let’s be clear, this is not a pitch to buy more insurance.  Having a well thought out risk management plan means knowing how much and what kind of insurance you need.  It means investing in yourself to protect your net worth and the others you support. Save, and keep saving Don’t stop saving! We coach clients to know exactly what their saving rate is, and it should be something you can quote. Not only do our clients know their savings rate, they know what their target rate is and why it’s important to their plan. Set up a savings plan that is automatic, goes into the right account, and immediately gets to work for you. There’s a reason why your 401(k) and home are typically your biggest assets.  You don’t look at them, tinker with them, or make emotional decisions with them. When’s the last time you sold your house because the value went down 2%? Never.  Treat your investments the same way. Our clients are coached to not only manage risk on their liabilities with insurance, they are managing the risk of cash flow disruption with savings and investments. One of the best advantages to having savings and investment accounts is that it can serve as an emergency source of funds for urgent situations personally or in your dental practice. That way, you don’t have to run around looking for loans or another way to accumulate more debt (unless it makes sense given your circumstance). If you aren’t saving yet, start now.  If you don’t know if you’re saving enough, schedule a consultation. Consider Tax Planning Tax planning is important and should be taken very seriously. 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