Let’s walk through our approach to create a retirement paycheck for our Shell retiree clients with the Retirement Income Guardrails.

Using the same hypothetical Shell retiree with a $4 million portfolio, our Guardrails approach produces a $12,800 monthly retirement paycheck after fees and taxes. That’s an additional $3,300 per month over the 4% rule!

Our Guardrails approach uses a rules-based, dynamic withdrawal strategy designed to help our clients:
– Make their money last.
– Get the most out of their portfolio so they can enjoy the retirement they’ve worked so hard for!

As a reminder, this retirement paycheck is in addition to any pension and Social Security payments.

When markets perform well, the Guardrails approach allows for raises. When markets decline significantly, it calls for modest reductions in spending to help preserve the portfolio.

Behind the scenes, we’re also focused on maintaining the right asset allocation with a “war chest” of bonds and cash, properly diversified investments, systematic rebalancing, minimizing lifetime taxes, and maintaining discipline.

Full Transcript:

How do we maximize our retirement paycheck and ensure that we never run out of money?

In my last video, John calculated his retirement paycheck using the 4% rule. Today we’re going to go over the Guardrails approach. My preferred methodology for optimizing your retirement paycheck. Now, I encourage you to check with your financial advisor regarding your unique situation and the best approach for you.

Now, with the Guardrails approach, we’re going to use that same hypothetical $4 million portfolio. And then instead of multiplying it by 4%, like in the 4% rule, we’re going to use a dynamic distribution rate. We use a dynamic distribution rate of 4.8% and this is after or net of investment fees. So the actual withdrawal gross is slightly higher. We multiply $4 million times 4.8%. Then that yields $192,000 before taxes.

Now of course, taxes will vary based on each unique situation. In this example, we’re going to assume a 20% effective tax rate. So therefore, they have to pay $38,400 in taxes, which means that their take home is $153,600 per year, or $12,800 per month.

That $12,800 per month using the Guardrails approach is $3,300 higher of net take home pay per month than the 4% rule. So, this really helps optimize their nest egg and their retirement paycheck so they can get the most out of retirement.

Now let’s talk about why this works. We call a dynamic distribution rate because we know that the markets will go up, and we know the markets will go down. We just don’t know which one is going to happen when. So, we set guardrails on their portfolio.

So, when the markets go up, we have this upper guardrail. For a $4 million portfolio, we’re going to start this guardrail at $5 million. Now in addition to regular inflation raises, when their portfolio hits $5 million, they’ll hit that upper guardrail, and they’ll get a raise on their paycheck. So, their take home pay will then go up from $153,000 per year to $169,000 per year. About a 10% raise. Now, this helps ensure that they don’t die with the proverbial mattress stuffed full of money. We really want to make sure that they’re optimizing their retirement and getting the most out of their nest egg.

Now, on the flip side, we know that markets also go down. So, when the markets go down, not if, but when they go down if their portfolio then drops down to $3.33 million, then they got to tighten their belts a little bit. We got to take a slight pay cut to ensure that they never run out of money. So, in this case, if the markets went down first, they would go from $153,000 per year to $138,000 per year. About a 10% reduction in take home pay.

Now, in order for this to work, it’s really important that everything behind the scenes with the investments is done correctly. So, to start, we got to make sure that they have the right asset allocation, the right amount of stocks for growth and a war chest of bonds and cash to smooth out the ride for when the stock market is down.

Next, we have to make sure that we’re following a disciplined investment approach, investing across different sectors and systematically rebalancing when needed.

Now, the last thing that we’re doing, of course, is we ultimately want to maximize this take home pay. So, we’re being very efficient with our investments and tax regime, looking at ways we can minimize lifetime taxes. By reducing taxes, you ultimately increase the amount that you get to take home each month.

I hope you found this video valuable, and if so, I encourage you to like it on social media and share it with your colleagues.