You’re asking the wrong question; ask this instead!

I see it everywhere, and I’m sure you’ve seen it too.

“Delay claiming Social Security to age 70. It’ll grow your guaranteed benefits by 24%!”

If you’re asking, “When should I claim Social Security to get the most money?” delaying is often good advice, and sometimes even excellent advice. But it can lead you into a trap that even smart retirees fall into.

When to claim is the wrong question to ask first.

The better first question is, “What risk am I trying to protect myself from through my Social Security claiming strategy?”

If you ask the wrong question, you may end up making a decision that looks great on the surface, but quietly works against you, given your personal situation.

Two Potentially Valid Approaches

If you ask when to claim, your best answer could be at age 70 to maximize your monthly benefit, or early, to start (smaller) benefits sooner.

Let’s do a deeper dive into the two paths.

Morningstar’s Approach: Treat Social Security as Longevity Insurance

Morningstar’s research frames Social Security less as an investment decision and more as insurance against the risk that you’ll live for a long time in retirement.

Into your late 80s, 90s, or beyond.

If that’s what you’re solving for, you want to maximize your guaranteed income by delaying until age 70.

The problem is that, unless you plan to keep working until age 70, your income will be much lower between retirement and age 70. Given that those will be your youngest, healthiest retirement years, you’ll want to spend more then, not less.

Morningstar’s solution is to “bridge” the income gap by drawing more from your nest egg during those years. They analyze three bridge strategies.

1. A ladder of Treasury Inflation-Protected Securities (TIPS): Withdraw several years’ worth of planned draws from your portfolio and buy TIPS maturing in a year, two years, and three years. This protects you from sequence-of-returns risk by covering your expenses for the first few years of retirement, and ensures the money keeps up with inflation, even if it spikes.
2. Forgoing inflation adjustment if your portfolio drops: This somewhat reduces how much of your portfolio you may need to sell at lower prices, at the cost of potentially trimming your planned spending. If inflation spikes at the same time, that cut could be large.
3. Forgoing inflation plus cutting draws by 20%: While this can significantly increase your lifetime spending and remaining balance after 30 years in retirement, it does so by aggressively cutting your spending exactly when you want to spend the most.

All three draw more from your portfolio until age 70 to let you delay claiming Social Security benefits until that age.

This is emotionally appealing for several reasons:

• Maximal guaranteed benefits to address fast-rising health expenses, which is especially helpful once financial flexibility declines and cognitive capability may drop. 
• Reduced dependence on market returns.
• Targets one of retirees’ biggest fears – running out of money late in life. 

Even if you end up with lower lifetime benefits (if you die before breaking even), you’re buying current confidence for your oldest possible age. That emotional payoff can be more important than optimizing your financial math.

Vanguard’s Approach: Protect Against Regret and Overspending Risk

Vanguard looks at the same decision and highlights a different risk.

Instead of asking, “How do I insure against living a very long time?” Vanguard asks, “What happens if I delay and that turns out to be the wrong bet?”

They don’t say delaying is necessarily a bad choice, but rather that it isn’t optimal for everyone. For example, if you’re wealthy enough (relative to your desired retirement lifestyle) that running out of money isn’t a real concern, and/or you’re not likely to live long enough to break even.

Their suggested approach works to reduce regret and mismatch.

They point out the costs of delaying to age 70:

• Drawing down investments faster than comfortable until age 70.
• Being forced to constrain spending exactly when you’re healthiest and likely want to spend more, especially if the markets don’t do well during those early years.
• Potentially spending less than you could, because you’re uncomfortable seeing your portfolio shrink.
• The risk of lower lifetime benefits if you die before breakeven.
• The mismatch of higher eventual income in years when most retirees naturally spend less (the so-called “slow-go” and “no-go” years).

If you’re unlikely to live past breakeven, the math of delaying gets flipped.

But even if your personal life expectancy makes you likely to live beyond the breakeven age, if your portfolio throws off far more income than your desired retirement budget, and especially if much of your budget is discretionary (think travel, dining out, gifts, etc.), so you can draw less in market down years, Social Security isn’t your safety net. It’s just one element of a larger financial picture.

As such, early claiming offers multiple benefits:

• Reduces the risk of having to sell assets during down years, preserving your portfolio’s longevity.
• Supports estate goals.
• Offers higher income when you’re healthier and can enjoy spending more.

This approach is emotionally appealing because:

• Most people dislike spending more of their assets if they can avoid it.
• It reduces the impact of a bad sequence of returns by reducing your dependence on portfolio-based income before age 70.
• Many people prefer “a bird in the hand” rather than “two in the bush.”
• People want to take advantage of their best health in retirement by spending more when they’re younger.

The emotional punch of this approach doesn’t come from longevity insurance, optimizing your longest-term future at the expense of your present self. 

It comes from a feeling of greater control and predictability where you live – in the present.

Reconciling the Differences

At first glance, these conclusions seem to contradict each other. They don’t.

The two finance giants are looking at the same problem, so why do they arrive at such different conclusions?

The answer is that they have different objectives.

Morningstar is concerned with mitigating the so-called longevity risk. That’s the risk that a retiree will survive to a very old age and may run out of money before they die. Vanguard, on the other hand, is trying to mitigate the more immediate risks of regret, stress over spending in early retirement, and a potential mismatch between lifestyle and available income.

Trying to compare their approaches is a classic “apples and oranges” problem. Both are fruits, but different ones, so neither is better nor worse than the other. It’s just a matter of which one you prefer to bite into.

The real mistake is if you try to think of Social Security as an investment to maximize, rather than an insurance to optimize.

The Problem with Considering Social Security as an Investment

Thinking of Social Security as an investment leads you to focus on lifetime benefits and breakeven age. This optimizes for:

• The age with the highest probable lifetime payout.
• The age you need to exceed to “win” the game.
• The internal rate of return.

All are interesting questions, just not the most important ones to consider.

It’s more useful to consider Social Security as insurance against specific retirement-related risks.

These are the real risks you’re insuring against:

1. Living longer than expected.
2. Dealing with eventual cognitive decline.
3. Loss of spending flexibility later in life.
4. Regret if you end up dying before breakeven.
5. Your widow(er)’s survivor benefits if you die first and your benefits are higher than hers/his.
6. Emotional stress over higher spending early in your retirement, leading to a mismatch between your desired lifestyle and what you allow yourself to spend.
7. Sequence of returns risk, if the market crashes just before retirement or in your early retirement years, in which case not having guaranteed Social Security income hurts your portfolio worse.
8. Poor health limiting your ability to enjoy spending later in your retirement.

By focusing on risk management over maximizing returns, you realize that you aren’t choosing a claiming age for the eventual financial return. Instead, your choice should be against which risks you want more protection.

If your highest priority is protecting against the first four risks, that tilts the balance toward late claiming. If, on the other hand, you want better protection against the last four risks, early claiming will serve you better.

The decision isn’t a mathematical one that you can solve with a calculator or spreadsheet. It’s a philosophical/emotional one.

It’s about which risks you’re more comfortable with; which potential problems you’re better positioned to deal with financially, and more importantly, from an emotional perspective; and how you want those risks and issues to distribute over the length of your retirement.

The best plan isn’t necessarily the one that offers the better idealized spreadsheet solution; it’s the one you will be comfortable executing. A technically optimal strategy that makes you anxious is not optimal for you.

If you’re more fearful of late-life poverty, you should strongly consider delaying your claim to age 70. If you’re more fearful of missing out on doing things when you’re still healthy enough to enjoy them, an early claim is likely to be a better fit for you.

Both fears are justified.

The problem isn’t that you have them. It’s pretending they don’t apply to you, leading you to ask and answer the wrong question.

What the Pros Say

I asked several financial advisors for their take on Social Security claiming strategies and their experience with clients around this topic. Here’s what they say.

Brett N. Fry, Managing Director at Forteris Wealth Management, relates, “A couple I met with today recently retired and were looking to optimize when to claim Social Security. The numbers came back saying to delay until age 70, but for them, it was a hurdle to know that they would be relying on their portfolio so heavily for the next few years until they got their benefits. 

“One of the primary reasons was that they spent their entire lives saving this amount up, and it was hard for them to fathom dipping into the principal to fund their retirement. They were also concerned they would hesitate enjoying life in retirement if they didn’t have some sort of ‘mailbox money’ coming in. Fortunately for them, the numbers for claiming Social Security at their full retirement age, much earlier than 70, also worked, so it was a win-win.”

Claire Pywell, CFP®, of Highline Advisors, reports, “As an advisor, I frequently have open conversations with my clients about their mortality (and feelings about it)! Fear of missing out (FOMO) is a big driver behind the decision to take Social Security earlier than age 70.”

Chris Chen, CFP®, owner of Insight Financial Strategists, agrees and expands, “I find that many people fear not getting a return on their Social Security contributions if they happen to pass away before 70, a form of FOMO. 

“It makes sense for most people to delay Social Security to 70. The return you get is difficult to match. It makes a meaningful difference in most financial plans. The best example of when taking social security early makes sense is when people have terminal conditions, so they expect to pass away soon. More generally, people who don’t have enough income or assets to bridge until 70 may need to take social security early. 

“My only rule of thumb here is that if you don’t actually need the benefits, you should postpone claiming.

“The biggest regret I see happens when a husband who is a few years older takes the benefit early, and then realizes their wife could have had a higher benefit when he eventually passes away, especially if the wife’s benefit is significantly lower.”

Brady Lochte, Fee-only Financial Advisor & Founder of Axon Capital Management, offers a similar take, “Delaying to 70 is a clear win for clients with longevity in their family, sufficient assets to bridge the gap without portfolio stress, and a need for inflation-protected guaranteed income later in retirement. It doesn’t necessarily make sense if you’re in poor health, need the cash flow now to avoid selling depressed assets, or would deplete retirement accounts so aggressively that you’d face higher RMDs and tax bombs later. 

“If you delay claiming and have to bridge, the biggest mistake is using taxable brokerage accounts while leaving 401(k)s untouched, then getting hammered by Required Minimum Distributions (RMDs) later on.

“Fear of missing out on early retirement years drives far more decisions than the math suggests it should. Clients routinely say, ‘I want to enjoy it while I’m healthy,’ even when they have $3 million in assets. It’s emotional, not financial. 

“The most common regret I see is claiming early without understanding the permanent haircut to survivor benefits. Widows who lose the higher earner’s benefit because they both claimed early realize too late they optimized for the short term and sacrificed decades of higher income.

“Overall, we find that behavior dominates the math. The math says delay if you can, but clients who are psychologically uncomfortable spending down assets will claim early, no matter what the breakeven analysis shows. They view Social Security as ‘permission’ to retire, not as longevity insurance to optimize.”

Ben Simerly, CFP®, Financial Advisor & Founder of Lakehouse Family Wealth, rounds things out, “​If a client is more concerned with maintaining a current account balance than with growth, we encourage them to wait before claiming Social Security. An overly conservative investment portfolio is a common reason why the Social Security amount may grow faster in the government’s hands than in your own accounts. 

​​“Often, clients who are willing to take more risk could do better by taking Social Security earlier and investing the money while they continue to work. Starting Social Security does not mean you need to spend the money. This can also work great for those concerned about future cuts, but still willing to work. 

“By and large, the wealthier the client, the more it’s about the math. For clients on the cusp of having enough money to retire, in the $600,000 to $2,000,000 range at retirement in current dollars, we find many clients have already come up with a retirement age in their mind, and likely won’t deviate from it more than a year or two.  

“Fear of delaying retirement is the number one driver I’ve seen in making the final decision to begin Social Security or not. For those willing to work part-time or delay retirement, the decision becomes more math-based. But at some point, if you’re burned out from work, the decision becomes about retirement, not math. 

“The most common regret we see is when a client or a spouse gets sick, and they regret not retiring sooner. Often, they made the right decision, but the fear of missing out becomes overwhelming. This is why we often encourage clients who are on the fence regarding retirement, due to the math, to work part-time and find a bit of relief from work, but still reduce distributions from their retirement accounts. 

​“My best advice is, whatever you do, work with someone who can help you do the math. I have yet to see one rule of thumb that consistently works, given how many complex strategies exist surrounding the Social Security decision. Social Security decisions tie into workplace contributions, significant tax planning changes, and more. If I have any rule of thumb, it’s that the first idea folks have often turns out to be the most costly, and doing the math reveals significant gains.”

The Bottom Line: Ignore Slogans, Implement Useful Decision Rules

I wish there were a simple and easy choice that I could recommend, and that I could implement in my own life, now that I’m beyond the earliest claiming age and (mostly) retired!

Unfortunately, it isn’t. 

As I often say, personal finance is exactly that – personal.

This applies to Social Security claiming strategies. There’s no universally best claiming age. There’s just the question of which retirement-related risks are your higher priority, which fears take precedence for you.

That’s why both “Always delay claiming to age 70” and “Always claim early” are seductive, but misleadingly incomplete. Following either one blindly replaces a considered, deeply personal insurance decision with a slogan that may not serve you well.

Slogans are catchy and easy to remember.

They’re just not necessarily the best guidance for your personal finances.

Once you accept that Social Security is best understood as insurance against your highest-priority risks, your decision becomes clearer. You stop chasing the highest theoretical payout and design your strategy to help you sleep better at night.

For some, it’s protecting against late-life poverty and loss of independence. For others, it’s mitigating sequence-of-returns risk and matching current income to a desired lifestyle while healthy enough to enjoy it.

Your best bet is to stop obsessing over spreadsheet perfection and optimize for what helps you feel the confidence and emotional stability that lets you execute your financial plans. If that means you want to secure the highest income floor in late retirement, that’s perfectly valid. If it’s enjoying early retirement as much as possible, it’s equally valid.

The trap isn’t in choosing one or the other.

It’s asking the wrong question, solving for the wrong thing, and implementing a slogan rather than what personally helps you most. The right Social Security timing decision isn’t the one that maximizes your benefit check. It’s the one that lets you stop worrying about it.

Now, all I need to do is follow my own advice!

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

Learn More About Opher

If you’re within 5-10 years of retirement, or already drawing from your nest egg, and still using the 4-percent rule, it’s past time to upgrade your plan.

Here’s why and how.

What Is the 4-Percent Rule?

Created by financial planner William Bengen in the 1990s based on historical stock and bond returns, it works like this:

• Invest your nest egg 50/50 between large-cap US stocks and US bonds.
• For Year 1 of your retirement, withdraw 4 percent of your portfolio to fund your expenses.
• For Year 2, adjust your Year-1 withdrawal to account for inflation.
• Rinse and repeat each year thereafter.

Simple, straightforward, and from the 1920s to the 1990s, there was not a single 30-year period where this would have caused you to run out of money in retirement.

What Are the Main Problems with the 4-Percent Rule?

This “rule,” or more accurately, withdrawal strategy, has several significant drawbacks.

1. Monte Carlo simulations using more recent market assumptions show about a 13 percent chance of failure for a 30-year retirement.
2. If your retirement is longer than 30 years, e.g., if you retire very early, your risk of failure grows.
3. Unless you retire at exactly the wrong point in time, your net worth will likely grow far above where you started. This means you will not enjoy as good a retirement as you can afford to.

What’s a Better Strategy?

Introduced by financial planner Jonathan Guyton and computer scientist William Klinger in 2006, the “Guardrails Approach” is a dynamic retirement withdrawal strategy that aimed to address the shortcomings of static approaches such as the 4-Percent Rule.

The classic version of the Guyton-Klinger Guardrails Approach works like this:

• Invest your nest egg in a prudently diversified fashion.
• For Year 1 of your retirement, withdraw a reasonable fraction of your portfolio’s value, say 5.2 percent.
• For Year 2, adjust the prior year’s withdrawal amount to correct for inflation.
• Check your new withdrawal rate (new dollar amount divided by current portfolio balance). If it’s 20 percent above your starting rate, cut spending by 10 percent. If it’s 20 percent below, raise spending by 10 percent.
• Rinse and repeat each year thereafter, until you enter the last 15 years of your retirement, at which point you stop bumping your draws down, no matter what your portfolio does, because you’re beyond the “sequence of returns risk” danger zone.

For example, say you start out with a $1 million portfolio and initially draw 5 percent, or $50,000, and for simplicity, we’ll neglect inflation. At the start of the following year, if your portfolio is worth over $1.25 million, that same $50,000 would be less than 4 percent, which is 20 percent lower than the initial 5 percent draw rate, so you’d bump your draw up 10 percent to $55,000. This lets you enjoy in the present the benefits of strong returns.

On the flip side, if your portfolio dropped to under $833,333, making the $50,000 over 6 percent of the portfolio’s new value, you’d chop your withdrawal by 10 percent, to $45,000. This reduces the number of shares you need to sell at lower prices.

What Are the Benefits of the Guardrails Approach?

This dynamic approach provides important benefits relative to the static 4 percent rule.

1. It lets you start with a higher initial draw with a lower risk of failure than a static approach, allowing you to spend more over a 30-year retirement.
2. People naturally tend to reduce spending when their portfolio value drops and increase spending when it soars.

Ben Simerly, CFP, Financial Advisor and Founder of Lakehouse Family Wealth, uses guardrails frequently, “As we primarily work with near/pre-retirees and recently retired people, income strategies are a daily topic of discussion with clients. At a high level, we use a guardrail-type strategy with every client. A Guyton-Klinger guardrail-type strategy improves outcomes in almost all cases. The key is that it can improve not only the likelihood of success, ensuring money lasts throughout retirement, but also increase overall income.

“We can account for both current income needs and the need to keep up with and possibly surpass inflation. My favorite aspect of guardrails is that they amplify the success of the portfolio’s underlying components. And when you get down to it, our job as advisors is to provide the client with as many opportunities for success as possible.”

Jordan Gilberti, Founder and Financial Planner at Sage Wealth Group, also likes dynamic guardrails. “I discuss dynamic withdrawal strategies with all of my clients who are nearing retirement. It’s an incredibly effective approach to retirement distribution planning, and it works well with clients because they know their retirement spending is not static and that markets are highly unpredictable. The value here is flexibility, but it requires discipline and monitoring, which is not a fit for everyone.

“The Guyton-Klinger Guardrails approach can feel intuitive since it ties spending to changes to the performance of your investment accounts, while risk-based guardrails focus more on probability and sustainability of one’s portfolio. The tradeoff is simplicity vs. precision, and neither approach eliminates the need for ongoing monitoring and review.”

Dr. Steven Crane, Founder of Financial Legacy Builders, agrees, “I’m a fan of dynamic withdrawal strategies, but not because the math is perfect. I like them because they respect human behavior. Most middle-class retirees don’t fail because their spreadsheet was wrong; they fail because fear or guilt causes them to underspend early or panic later. A flexible approach gives people permission to spend when life is good and pull back when it’s not, which is far more realistic than telling someone to blindly take the same dollar amount every year, no matter what’s happening in their life or the market.”

Brennan Decima, Owner, Decima Wealth Consulting, is also a big fan, “I absolutely recommend dynamic withdrawal strategies with my clients. Many of my clients are accustomed to receiving bonuses during their working years. With dynamic spending plans, we help our clients understand the bonus that the market has given them and what their safe amount of additional spending can be. If clients want to save their ‘bonus’ for a rainy day, we really want to determine what they actually consider a rainy day.”

But there’s a catch that most people, even some pros (present company excluded 😊), don’t see coming.

Criticism of the Guyton-Klinger Guardrails Framework

The Guyton-Klinger approach is a huge improvement over the static 4-percent rule. But it’s far from perfect, as detailed by Derek Tharp, PhD, and Justin Fitzpatrick on Kitces.com, “… this strategy … can result in sharp reductions in retirement income that would be unfeasible for some retirees. Additionally, these income reductions tend to overcorrect for market losses, meaning that far more capital is often preserved than necessary at the cost of severe reductions in the retiree’s standard of living.”

The authors back-tested the Guyton-Klinger Guardrails over the past century or so and found that even if retirees start with a relatively tame 4.3 percent (14 percent smaller than a more typical 5 percent initial draw), four specific periods result in dramatic income cuts (in increasing order of severity).

• Retiring in 2007, through the Global Financial Crisis, would have resulted in a 28 percent drop in income a few years into retirement, staying at that low for several years, and spending most of the first 15 years of retirement with income below the initial draw.
• Retiring in 1999, through the Dot-Com Bubble, would have resulted in an almost immediate set of cuts, totaling a 36 percent drop in income, staying at that low for several years, and spending most of retirement with income lower than the initial draw.
• Retiring in 1936, during the Great Depression, would have resulted in an almost immediate set of cuts, totaling a 45 percent drop in income (!), staying at that low for years, and spending most of retirement with income lower than the initial draw.
• Retiring in 1965, during the Stagflation Era, would have resulted in an almost immediate set of cuts, totaling a 54 percent drop in income (!), staying for years under half the initial draw, and never recovering to the initial draw.

They also note that another author found that a retirement starting in 1966 would have resulted in a maximum 59 percent cut in income, while a retirement starting in 2000 would have suffered a 50 percent cut. 

Admittedly, these periods were outliers, but the authors note that retirement researcher Wade Pfau published results of a Monte Carlo simulation with a Guardrails approach starting at 4.8 percent draw that showed the median scenario (i.e., one that’s better than half and worse than the other half of scenarios) led to cuts ending at 36 percent below the initial draw by the end of a 30-year retirement.

Most retirees would find such cuts unacceptable. Ironically, rather than resulting from aggressive draws, they stem from overly conservative rules.

A Better Guardrails Approach

To address the above shortcomings, the authors suggest a different method of calculating the necessary draw corrections, using risk scores rather than current portfolio values.

Specifically, they suggest starting with a draw rate that would lead to an 80 percent likelihood of “success,” where that’s defined as the probability of ending retirement with a positive balance (even $0.01 qualifies).

Each year, the probability of success is recalculated, and if the likelihood of success reaches 100 percent (because the portfolio has grown so much), one would increase spending to whatever level would return that likelihood to the initial 80 percent.

On the other hand, if the likelihood of success drops to 25 percent (!), one would reduce the draw to a level with a 45 percent likelihood of success. 

At first glance, a 75 percent failure probability sounds terrifying. However, as the authors state, the whole success/failure terminology is misleading, since the strategy will, by definition, modify draw levels to ensure success. 

Thus, it’s acceptable to wait until the probability of success falls that much before cutting spending. In plain English, you don’t cut spending just because the market had a bad year. You cut only when your long-term plan is genuinely at risk.

An analysis of income levels for retirements starting at the same four periods mentioned above, using the same 4.3 percent initial draw, shows:

• Income drops by at most 3 percent vs. 28 percent for the Global Financial Crisis, with most of the initial 15 years of retirement spent with higher income.
• The Dot-Com Bubble start would have resulted in no cut at all, with income rising far above the initial level from about 15 years into retirement.
• The Great Depression, the worst period for US investments in well over a century, would have led to cuts of at most 8 percent, rather than 45 percent.
• The Stagflation Era would have resulted in cuts of up to 32 percent, but that’s in place of 54 percent, and would have only lasted a few years instead of through the entire retirement period. Comparatively speaking, while not great, this is a far better worst-case scenario.

The goal isn’t to slash your lifestyle every time markets wobble. It’s to make small, intentional budget adjustments, but only when you need them to avoid catastrophic cuts later.

Finally, the authors evaluated the portfolio size for retirees starting retirement in 2000. They found that by 2023, the original Guardrails Approach with a 4.3 percent initial draw would have led to a portfolio value that’s 59 percent higher than at the start of retirement, while their revised approach would have dropped by 29 percent relative to the starting balance.

The remaining balance, throughout the first 23 years analyzed, would have been lower for the new approach compared to the initial Guardrails strategy. This is a feature, not a bug. Avoiding excessive cuts naturally leaves a smaller remaining balance.

This is ok if leaving a large bequest is not a priority. Obviously, if it is a priority, you can set the upper guardrail target at, say, 90 percent instead of 80 percent, and the lower guardrail at a success likelihood level of, say, 50 percent instead of 25 percent. Such changes would almost certainly result in worse income cuts, but would also leave more for your heirs.

But does all this work for most people? 

Crane isn’t sure. “From a psychological standpoint, guardrails work because they create boundaries, not because they optimize returns. The Guyton-Klinger approach feels more intuitive to real people because it ties spending adjustments to portfolio reality, not abstract probabilities. Risk-based guardrails make sense on paper, but many everyday retirees don’t emotionally connect with percentages and Monte Carlo outcomes. If someone doesn’t understand the rule, they won’t follow it when emotions are high, and that’s when plans usually break.”

Decima also points out a potential psychological problem with guardrails: “The single biggest challenge with guardrails is that the majority of people we work with love the option to spend more in good times, but really don’t want to consider reducing their spending in down times. Wealth is meant to be a tool to make our quality of life better. If every headline gives retirees anxiety that their spending will have to be cut, it becomes very difficult to stick with a plan.”

Would Retirement Income Jump Up and, More importantly, Down a Lot?

With the original Guardrails approach, the answer depends heavily on the market era. When markets behave themselves, you wouldn’t expect many cuts.

However, as pointed out by Tharp and Fitzpatrick, there were multiple periods when this approach would have hit the upper guardrails repeatedly, leading to massive income cuts. That’s why they proposed their risk-based modification.

The table below compares the depth of maximum income cuts for the two guardrail approaches in four problem periods.

While no cut is pleasant, all but the worst case here are manageable, and even the worst is temporary and bearable.

Discretionary Budget Size: Your Secret Lever to Higher Safe Initial Draws

The thing that determines how aggressive you can be with your initial draw level is the discretionary fraction of your retirement budget (think travel, entertainment, eating out, gifts, charity, etc.). 

Retirement research shows a significantly higher safe withdrawal rate if a large fraction of your retirement budget is discretionary. This is intuitively clear – If your discretionary spending comprises 50 percent of your budget, you can survive a much deeper income cut than if that fraction is just 5 percent.

Two things can make this even better. 

First, assuming you’re drawing from a tax-deferred retirement account (e.g., a traditional IRA), every dollar you reduce from your spending will result in more than a dollar lower draw since you don’t have to pay taxes on that dollar of avoided draw. Assuming your overall marginal tax rate is, say, 20 percent, a dollar lower spend means $1.25 less needed to be drawn. 

Second, having non-portfolio income means that a 10 percent cut in what you draw from your portfolio would result in a smaller cut in your overall retirement income that year.

Adding Buckets to Mitigate Market Loss Risk

But even with smarter guardrails, there’s still one problem left – what do you actually sell in a bad year?

This can be addressed by the so-called “Bucket System.” 

Here’s how I apply that system.

1. Hold enough cash to cover 2 years’ worth of draw needs. This isn’t necessarily the same as 2-3 years’ worth of spending, because most retirees have at least some non-portfolio income (e.g., Social Security, annuities, rental income, part-time work, etc.). Assuming a 5 percent initial draw, this equals about a 10 percent cash allocation.
2. Hold enough bonds to cover another 3 years’ worth of draws (possibly including international bonds to reduce the risk of rising domestic interest rates, but accepting the risk of those foreign markets experiencing increasing rates). With the same 5 percent draw level, this is another 15 percent of your portfolio.
3. Hold the remainder in diversified stock funds (US and international) and any other growth assets I understand and would be comfortable holding through a downturn. This risk or growth bucket would be 75 percent of the portfolio.

Spending comes out of the cash bucket, which partially depletes it, so I need to refill it. This refill comes out of whichever bucket is highest relative to its initial allocation. 

For example, say the growth bucket balance went up 15 percent, the bond bucket balance increased by 5 percent, and the cash bucket balance dropped by 50 percent (neglecting interest income, having spent half of the initial 2 years’ worth of draw). If we started from a $1 million portfolio, the initial amounts were $750k growth, $150k bonds, and $100k cash. At the end of this hypothetical year, the new balances would be $862.5k growth, $157.5k bonds, and $50k cash, for a total portfolio value of $1.07 million, and allocations of 80.6 percent, 14.7 percent, and 4.7 percent, respectively.

Assuming we don’t need to change the $50k overall draw (i.e., the risk-based guardrails didn’t activate), we need to bring the cash bucket back up to 2 years’ draw, or $100k, so we need to add $50k. The bond bucket, to return to 3 years’ worth of draws, has to return to $150k, so it can shed $7.5k. The growth bucket supplies the remaining $42.5k, dropping to $820k, a 76.6 percent allocation.

Let’s look at a less rosy hypothetical year next. Say the growth bucket crashes 25 percent, the bond bucket increases by 3 percent, and the cash bucket drops by the 50 percent we spend. The resulting balances would be $562.5k growth, $154.5k bonds, and $50k cash. The total balance is $767k, for allocations of 73.3 percent (growth), 20.1 percent (bonds), and 6.5 percent (cash).

We need $50k to top off the cash bucket, but selling $50k of the depressed growth bucket would deplete it by nearly 9 percent, rather than the 6.7 percent it would have taken had the growth bucket stayed flat. Thankfully, the bond bucket is up, so we take $50k from there. This drops the bond bucket to just over 2 years’ worth of draws, but that’s better than either allowing the cash bucket to fully deplete in the coming year or selling a much larger fraction of the remaining growth assets. Once the growth bucket recovers, and before the bond bucket fully depletes, we’ll refill the latter from the former.

But what if both the growth bucket and the bond bucket drop? In that scenario, we may need to trim discretionary expenses (the risk-based guardrails may well require this). We can also refill the cash bucket minimally, so it doesn’t fully deplete, and refill it more the following year from the growth or bond bucket, depending on which one performed better by then.

Since we’re spending from the cash bucket, that should not be impacted by market developments. However, if the growth and bond buckets crash massively, it’s plausible to trim spending mid-year.

What do the pros say about buckets?

Decima says, “Most people have four components to their financial picture when they are working. They have a salary that pays the bills, a bonus they can enjoy or save for a rainy day, an emergency fund for unexpected expenses, and a retirement account for the future. When one pot of money is expected to perform all four tasks, it can be nerve-racking. In my experience, buckets are the best opportunity to align portions of the pot for each task. This allows retirees to know exactly what purpose each part of the plan serves.”

Crane also sees benefits. “Buckets aren’t about chasing returns; they’re about buying peace of mind. When retirees can clearly see which money is for ‘now,’ ‘soon,’ and ‘later,’ they make better decisions and sleep better at night. For middle-income retirees especially, buckets reduce the urge to overreact during market downturns because they know next month’s groceries aren’t tied to today’s headlines. The best retirement plans don’t just work financially; they work emotionally, and buckets are one of the simplest ways to make that happen.”

Gilberti sees a lot of value too. “Buckets work best as a behavioral tool that helps retirees visually separate short-term spending from long-term growth buckets. When designed with intention, buckets can reduce stress during periods of market downturns. If the markets are down 30 percent, but as an example, you have 2 years in cash that isn’t tied to the volatility of the market at any given time, that can be a massive relief when undergoing stress from the markets and news headlines.”

Simerly especially likes guardrails when combined with other systems, such as buckets. “The real power of guardrails and many other retirement strategies comes into play when you combine approaches. For example, combining a guardrails approach with buckets for different spending timelines. If we can help smooth out portfolio dips and use guardrails and buckets together, clients see far less volatile income. If guardrails are the brain, then buckets become our backbone. If a client communicates that they are seriously worried about a recession lasting for, say, 3 years, so they don’t want more aggressive investments, we can address that concern using a short-term bucket holding 3 years’ worth of income. 

“In good times, we can pull from the more aggressive investments that are doing well, in line with the income numbers calculated by the guardrails. In bad times, we can pull from cash or the short-term bucket, so the more aggressive bucket can recover.”

What Does This Look Like in Practice? (Your Annual Checklist)

To turn all the above into concrete action steps to take once a year:

1. Update your growth, bond, and cash balances.
2. Use a planning tool (ideally Monte Carlo) to recalculate your plan’s success probability. If you don’t have one, ask your advisor or use a reputable retirement calculator. However, keep in mind that these will be estimated probabilities, not guarantees.
3. If needed, adjust your draw (and thus your spending) per the above-described risk-based guardrails approach. However, run a sanity check to ensure the new draw still covers at least all your “needs” spending.
4. Update your non-portfolio income so you can more accurately determine how much you need in your cash and bond buckets.
5. Refill your cash bucket by rebalancing from your growth and/or bond buckets if those performed well, and defer full replenishment of the cash bucket if both growth and bond crashed. Note that you don’t need to slavishly rebalance to an exact percentage, just close to where you started.

Several additional steps may require some help, including:

• Calculating Required Minimum Distributions (RMDs), once they apply to you.
• Strategize (legal) tax minimization steps and estimate your resulting taxes.
• Decide on the optimal time to claim your Social Security retirement benefits.
• Identifying large unbudgeted expenses, if any (e.g., healthcare, long-term care, housing changes, etc.), and modifying your overall retirement plan accordingly. Large health or long-term care expenses aren’t handled by withdrawal strategies. They require insurance, reserves, or separate planning.
• Estate planning.

The Bottom Line

The venerable 4 percent rule is far riskier than most realize. You can reduce this risk and still start with higher withdrawals by using a dynamic approach such as the Guyton-Klinger Guardrails method.

However, redefining guardrails around plan risk instead of portfolio swings avoids potential unacceptably large cuts in retirement spending without materially increasing the risk of failure.

If you’re concerned about the potential impact of periods of high inflation, that’s why many retirement portfolios keep a large growth allocation, which historically returned about 7 percent above inflation over long periods.

What if you retire straight into a bear market (also known as “sequence of returns risk”)? While clearly not an optimal situation, that’s exactly what the risk-based guardrails and Buckets System are designed to address.

For obvious reasons, I can’t give you “the number” for your initial safe withdrawal rate. However, for most households using guardrails, somewhere in the range of 4-6 percent is common.

Keep in mind, though, this framework (as would be the case for any system) only works if you actually follow it. Continuing to spend more than your plan allows will likely sink your finances.

Finally, using the bucket method, in concert with the above dynamic withdrawal strategy, lets you avoid selling too much in depressed assets when your growth and/or bond holdings crash, so your portfolio recovers more easily from bear markets.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

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