If retirement distributions are going to be more flexible on an ongoing basis, a critical issue that must be figured out by advisors for their clients is how to best set retirement-income guardrails to make portfolio adjustments when necessary, according to Derek Tharp, lead researcher at Kitces.com.
Setting up guardrails for clients helps keep their retirement spending plans “on track” so they can avoid a “catastrophic situation” such as running out of money or not spending enough money, he said Tuesday during the webinar “Using Risk-Based Retirement-Income Guardrails For More Flexible Retirement Spending.”
Retirement income guardrails are planning strategies that set predefined thresholds triggering an increase or decrease in retirement spending as needed.
Unlike often-used withdrawal-based guardrails, risk-based guardrails are not limited to a single analytic method and account for client-specific cash flows and risk preferences.
Setting guardrails based on a “safe” range of withdrawal rates is another commonly used framework, but that approach doesn’t always accurately reflect a client’s dynamic income sources or their actual spending behaviors, he said.
Risk-based retirement-income guardrails, on the other hand, offer the same benefits of communication and clarity, while also modeling a client’s retirement income sources and spending patterns more realistically, according to Tharp, who also serves as senior advisor at Income Lab, assistant professor of finance at University of Southern Maine and financial planner at Conscious Capital.
During the latest Kitces monthly webinar, Tharp discussed risk-based guardrails and stressed a few facts about them that all advisors should know. In the gallery above are eight of them.