guardrails withdrawal strategy

Guardrails Withdrawal Strategy: A Dynamic Retirement Income Strategy

Posted On December 1, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

This post is for U.S. baby boomers and pre-retirees with $500,000–$5M in investable assets who want a retirement income strategy that adapts to markets and works with a remote financial advisor.

The guardrails withdrawal strategy is a dynamic retirement income approach that adjusts your annual withdrawals when market performance moves your portfolio outside defined upper and lower boundaries.

This is not a static 4% rule, like Bengen’s 4% Withdrawal Rule. The Guardrails approach — based on the work of Jonathan Guyton and William Klinger — gives retirees a logical framework to increase withdrawals in good markets and reduce them in bad markets, aiming for sustainability and flexibility. It can be especially useful for baby boomers and pre-retirees with $500,000–$5 million in investable assets who want expert retirement planning guidance, even if they work with an advisor remotely.

What Is the Guardrails Withdrawal Strategy?

The guardrails withdrawal strategy establishes a range of acceptable withdrawal rates rather than a single fixed percentage. This range (or guardrails) is typically about ±20% around your initial target withdrawal rate. When your effective withdrawal rate moves outside those bounds due to market performance, the strategy calls for an adjustment — up or down — to bring you back into the target range.

Like Bengen’s framwork, Guyton looked at historical market performance over a 30-year retirement. Here are the main points of his Guardrails Withdrawal Strategy:

  • Your initial withdrawal rate could be 5.4%.
  • You increase withdrawals for inflation annually, EXCEPT in years when the portfolio has fallen in value, OR if your withdrawal percentage exceeds the original rate of 5.4%. In those years, you keep the same withdrawal amount as the previous year.
  • If a market drop causes your current withdrawal rate to exceed 6.48%, then you need to cut your withdrawal dollars by 10%.
  • If market gains cause your withdrawal rate to fall below 4.32%, then you can increase your withdrawal dollars by 10%.
  • This strategy worked with allocations of 65/35 and 80/20. With a 50/50 portfolio, the safe withdrawal rate drops from 5.4% to 4.6%.
  • After a year when stocks were down, withdrawals should only come from cash or bonds. On years when the market is up, he would trim stocks and add to cash to meet future withdrawals.

How Do the Guardrail Rules Work?

The Guardrails approach establishes an ongoing withdrawal range of 4.32% to 6.48%. That is a 20% buffer from your original 5.4%. If your withdrawal rate goes outside of this range, you should decrease (or can increase) your withdrawals. The static 4% rule only focused on your initial withdrawal rate and then just assumes you make no changes regardless of whether your future withdrawals are high or low.

On a $1 million portfolio, the Guardrails approach suggests you could safely withdraw $54,000 in year 1. That’s significantly higher than the $40,000 under Bengen’s static 4% rule. And while you might forgo annual inflation increases if the market does poorly, you were already starting at a much higher income level. Even if you had a 10% cut in income, from $54,000 to $48,600, you are still getting more income than if you were using the 4% Rule.

This creates a flexible but disciplined system for adjusting retirement income based on real portfolio performance. Withdrawal strategies are most effective when coordinated with investment placement and tax planning for retirees, particularly when managing RMDs and Medicare premiums. Withdrawal rules are only effective when they are part of a broader retirement income planning framework that aligns spending, portfolio structure, and market behavior.

Timing Social Security benefits wisely can influence your withdrawal sustainability and sequencing — see how Social Security timing interacts with income planning.

How Does Guardrails Differ From the Traditional 4% Rule?

Unlike the static 4% rule — which assumes a fixed percentage of your portfolio each year regardless of market conditions — the guardrail approach is responsive and adaptive. The 4% rule was developed by Bill Bengen to test long-term sustainability based on historical data, but it does not adjust withdrawals when markets materially underperform or outperform. In many scenarios, retirees could have taken much more income than 4%. The 4% rule is an interesting study of market history, but I think retirees want to have a more strategic approach to managing market risk.

Guardrails are a dynamic safety net. They allow:

  • More income when markets have performed well
  • Reduced withdrawals when markets have struggled
  • Annual reviews rather than fixed expectations

This helps manage sequence of returns risk, a key concern for retirees in volatile markets.

Why This Strategy Is Valuable for Retirees With $500k–$5M

AI and retirement research suggest that static withdrawal rules can be too conservative or too rigid, especially for retirees who need both income and flexibility. Guardrails provide:

  • A structured yet flexible spending framework
  • A way to systematically respond to market volatility
  • Reduced emotional decision-making
  • Alignment with long-term goals, not market noise

We’ve talked about the challenges of sequence of returns risk, inflation, and longevity. While we can’t predict the future, having a dynamic approach to retirement withdrawals is appealing and intuitive. For many retirees, this means a more responsive retirement income plan that balances growth and preservation over time. And it can help to make sure that you do not outlive your investment portfolio.

Required Minimum Distributions can potentially disrupt your income planning and increase taxes which is why we help clients reduce RMDs as possible. Tax planning during low income years can potentially help extend portfolio longevity. In early retirement, health insurance cost planning (e.g., ACA marketplaces) interacts with income sequencing and withdrawal strategies.

When to Consider Professional Guidance

Implementing a guardrail withdrawal strategy well requires thoughtful modeling, ongoing adjustment, and coordination with your broader financial plan. While some retirees manage this on their own, many choose to work with an advisor who can:

  • Tailor guardrails to your risk tolerance and goals
  • Conduct Monte Carlo retirement simulations
  • Integrate taxes and Social Security timing
  • Monitor changes and recommend adjustments over time
  • Manage Capital Gains and reduce your tax burden in retirement to work with withdrawal strategies.
  • Coordinate withdrawal needs with Roth Conversion Strategy

Questions to Ask a Financial Advisor (And My Answers)

Many retirees work with an advisor to help monitor guardrails over time as tax laws, markets, and personal circumstances change. If you are heading into retirement with $500,000 to $5 million in assets and want help customizing a guardrail approach — including remote planning, tax coordination, and long-term monitoring — I work with clients nationwide and can help you build a retirement income strategy that adapts to your life and goals.

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Good Life Wealth Management
Read More
The 4% Withdrawal Rule

The 4% Withdrawal Rule

Posted On November 20, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

Many retirement income projections are based on the work of William Bengen, a financial advisor who created the 4% withdrawal rule. Today, in part three of our five-part series on creating retirement income, we look at Bengen’s 4% Rule and what it can mean for your retirement.

Bengen’s Research

Twenty-five years ago, there had been little research done on how to create retirement income from a portfolio. Thankfully, most people had pensions which guaranteed their payments. However, with the rise of 401(k) plans, the responsibility for retirement income shifted from the employer to the employee and their investment portfolio. We needed a more rigorous framework for retirement planning.

Bengen looked back at the history of the stock and bond returns and considered a 30-year retirement period. Since inflation increases your cost of living, he assumed that retirees would need to increase their retirement withdrawals annually. He then calculated, for every period, the maximum withdrawal rate that would have lasted for the full 30 years, adjusting for inflation.

He examined this for every 30 year period with available data. For example, 1930-1960, and then 1931-1961, 1932-1962, etc. all the way up to the present. In the all 30-year periods, retirees were able to withdraw at least 4% of their initial sum. In the worst case scenario, retirees with a $1 million portfolio could withdraw $40,000 in year 1, and increase it every year with inflation. This is the Safe Withdrawal Rate, or SAFEMAX as Bengen called it.

Interestingly, Bengen did not name this the 4% Rule. In interviews with reporters, they started calling it the 4% Rule and the name stuck.

Portfolio Implications

Bengen originally used a simple two asset portfolio using one-half US Large Cap Stocks and one-half US Intermediate Treasury Bonds. He assumed annual rebalancing, which helped with stock market volatility. He found that the 4% Rule would work with about one-half to three-quarters invested in stocks. With higher allocations to stocks, the portfolio became more likely to implode during bear markets. And with higher allocations to bonds, the portfolio could not keep up with the inflation-adjusted withdrawals. So, the sweet spot for a retirement allocation seemed to be from 50/50 to 75/25.

In the majority of 30-year periods, the potential withdrawal rate was much higher than 4%. In a few periods, it even exceeded 10%. The 4% rate was the worst case scenario. 4% worked for all of the 51 different 30-year periods starting in 1926 that Bengen considered in his original paper. At a 4% withdrawal rate, your money actually grew in most of the periods. If you started with a $1 million portfolio and took 4% withdrawals, your portfolio would have actually exceeded $1 million, 30 years later, in the majority of cases.

Later, Bengen added Small Cap stocks to the mix, with a portfolio of 30% large cap, 20% small cap, and 50% bonds. With this portfolio mix, he found that the safe withdrawal rate increased to 4.5%. Bengen considers this work to replace his initial 4% Rule. Unfortunately, the name had already caught on and Bengen will forever be known as the creator of “The 4% Rule”, but he would rather it was called “The 4.5% Rule”.

There is definitely room for higher withdrawals than 4%. The problem is that we don’t know what future returns will be and we don’t know the sequence of returns. So, the safest bet remains to start at only a 4% withdrawal. For people who retire before age 65, we may want to plan for a longer potential horizon than Bengen’s 30 year assumption. A longer retirement might require a lower rate than 4%.

Summary

The 4% Withdrawal Rule is a good rule of thumb for retirement income. When we use other analytical tools, such as a Monte Carlo evaluation, it often generates results similar to Bengen’s rule. If you want to use a 4% rate, your nest egg needs to be 25-times your annual needs. This is a very high hurdle for most people. It’s incredibly challenging for most Americans to save 25 times their annual expenses during their working years.

So while it is a conservative way to calculate retirement income, the 4% rule may make people over-prepared in most periods. As a result, people could have spent more money in retirement. Or they could have retired years earlier, but waited to accumulate enough assets to meet the 4% Rule. That’s a flaw with the 4% Rule.

The other weakness is that it is based on history. Just because it worked in the past century is no guarantee that it will work in the future. For example, if we have very low bond yields, poor stock returns, or higher inflation, it’s possible that a 4% withdrawal fails. One researcher, Wade Pfau, tried to apply the 4% Rule to investors in other countries. He found that it didn’t work for every country. We have had a really good stock market, and low inflation, here in the US and that’s why it worked historically.

Bottom line: the 4% Withdrawal Rule is a good starting place to understand retirement income. But we can do better by having a more dynamic process. We can adjust withdrawals based on market performance. Or you can delay or reduce inflation adjustments. We can avoid selling stocks in down years. All of these strategies can enhance the 4% rule and potentially enable you to start with a higher withdrawal rate. We will consider two such strategies in the next articles, considering Guardrails and a 5-year Bucket Approach.

Bengen is retired now, but still writing and continuing his research. He realized that his initial research left a lot of money on the table for retirees. Two months ago, he produced a new article looking at stock market valuations and inflation to refine the initial withdrawal rate. If you are retiring when stocks are expensive, future returns are likely to be lower, and you should start with a lower withdrawal rate. If stocks are cheap, you might be able to start with a higher withdrawals than 4%. Bengen believes this new process could calculate a safe-withdrawal rate of 4.5% to 13%. (The present calculation using his new method is 5.0%.) Time will tell if his new research gains wider acceptance, but for now, he will be best known as the father of the 4% withdrawal rule.

Read More
Guaranteed Retirement Income

Guaranteed Retirement Income

Posted On November 12, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

Guaranteed Retirement Income increases satisfaction. When you receive Social Security, a Pension, or other monthly payment, you don’t have to worry about market volatility or if you will run out of money. You’re guaranteed to receive the payment for as long as you live. That is peace of mind.

Research shows that people prefer pension payments versus taking withdrawals from an investment portfolio. When you were working, you had a paycheck show up every month and you didn’t feel bad about spending it. There would be another paycheck next month. Unfortunately, with an investment portfolio, retirees dislike spending that money. There is “range anxiety” that their 401(k) or IRA will run out of money. There is fear that a market drop will ruin their plans. After spending 40 years building up an account and it’s not easy to reverse course and start to spend that nest egg and see it go down.

Corporate and Municipal pensions have been in decline for decades. As a result, most of us have only a Social Security benefit as guaranteed income. That’s too bad. 401(k) plans are a poor substitute for a good pension. You need to accumulate a million bucks just to get $40,000 a year at a 4% withdrawal rate. It places all the responsibility on American workers to fund their own retirement, and this has led to wildly disparate retirement readiness between people. Even those who accumulate significant retirement accounts still have the worries about running out of money. Sequence of Returns, poor performance or mismanagement, cognitive decline, or longevity are all risks.

The solution to create guaranteed lifetime income is a Single Premium Immediate Annuity, or SPIA. A SPIA is a contract with a life insurance company in which you trade a lump sum in exchange for a monthly payment for life. For as long as you live, you will get that monthly check, just like a Pension or Social Security. When you pass away, the payments stop. For married couples, we can establish a Survivor’s Benefit that will continue the payout (sometimes reduced at 50% or 75%) for the rest of the survivor’s life, if the owner should pass away.

How much would it cost? For a 65-year old man, a $100,000 premium would establish a $537/month payment for life. That is $6,444 a year, or a 6.4% rate on your premium. For a 65-year old woman, it would be $487, a month, or $5,844 a year (5.8%) For a couple, if the wife was also 65, that same premium would offer $425/month for both lives (100% survivors benefit). That’s $5,100 a year, or 5.1%. The greater the expected longevity, the lower the monthly payment.

There are some fairly obvious advantages and disadvantages of a SPIA.

Pros

  • Lifetime income, fixed, predictable, and guaranteed
  • No stock market risk, no performance concerns, no Sequence of Returns risk

Cons

  • Permanent decision – cannot reverse later
  • Some people will not live for very long and will get only a handful or payments back
  • No money leftover for your heirs
  • No inflation protection – monthly payout is fixed

I’ve been a financial advisor since 2004 and I have yet to have a client who wants to buy a SPIA. For some, the thought of spending a big chunk of money and the risk that they die in a year or two, is unbearable. However, the payout is fair, because some people will live for much longer than the average. The way insurance works is by The Law of Large Numbers. An insurance company is willing to take the risk that someone will live for 40 or 50 years because they know that if they sell thousands of annuities, it will work out to an average lifespan across the group. Some people live longer than average and some live less than average.

Two Ways to Use a SPIA

Although they remain unpopular, SPIAs deserve a closer look. Let’s immediately throw away the idea that you should put all your money into a SPIA. But there are two ways that a SPIA might make sense as part of your retirement income plan.

  1. Use a SPIA to cover your basic expenses. Look at your monthly budget. Assume you need $3,000 a month to cover all your expenses. If you have $2,200 in Social Security benefits, buy a SPIA that would cover the remaining $800 shortfall. For the 65-year old couple above, this $800/month joint SPIA would cost $188,235. Now you have $3,000 a month in guaranteed lifetime income to cover 100% of your basic expenses. Hopefully, you still have a large investment portfolio that can grow and supplement your income if needed.

The nice thing about this approach is that it takes a bit less cash than if you follow the 4% rule. If you needed $800 a month ($9,600 a year), a 4% withdrawal rate would require you have a portfolio of $240,000. The SPIA only requires $188,235.

Let’s say you have a $1 million portfolio. You could (a) put it all in the portfolio and start a 4% withdrawal rate, or (b) put $188,235 into the SPIA and keep the remainder in the portfolio. Here’s what that would look like for year one:

  • a. $1 million at 4% = $40,000 potential income
  • b. $188,235 SPIA = $9,600, PLUS $811,765 portfolio at 4% = $32,470. The combined income from the SPIA and portfolio is now $42,070

You have increased your income by $2,070 a year and you have established enough guaranteed income to cover 100% of your monthly needs. Then, you are not dependent on the market to cover your basic expenses each month.

2. The second way to think of a SPIA is as a Bond replacement for your portfolio. Instead of buying Treasury Bonds and worrying if you will outlive them, you can buy a SPIA, and the insurance company will buy very safe bonds. The insurance company then assumes your Longevity risk.

Back to our example above, let’s say your $1 million portfolio is invested in a 60/40 allocation (60% stocks, 40% bonds). Just consider the SPIA as part of your fixed income sleeve. If you had a target of $400,000 in bonds, rather than letting them sit in 10-year Treasuries earning 0.7% today, go ahead and put $188,235 in the SPIA and keep $211,765 in bonds. Your $600,000 in stocks remains the same. Now, on your SPIA, you are getting a withdrawal rate of 5.1% to 6.4%. And although you are eating your principal with a SPIA, you have no longevity risk, it’s a guaranteed check. You have reduced the withdrawal requirement from your equities and can better weather the ups and downs of the stock market.

Is a SPIA Right For You?

A SPIA isn’t going to be for everyone. But if you want lifetime guaranteed retirement income a SPIA is a solid, conservative choice. Used in conjunction with the other pieces of your income plan (Social Security and Investment portfolio), a SPIA can help you sleep well at night. Especially for investors who are in great health and with a family history of longevity, it may be worth putting some money into a SPIA and turning on that monthly check. It can help offset the stock market risks that could derail your plans.

I know many parents think putting money into a SPIA will reduce money for their kids to inherit. That might be true. Of course, if you live a long time and run out of money, you won’t be leaving any money to your kids either. Our goal with any retirement income solution is to make sure you don’t outlive your money, which hopefully also means you are able to leave some money to your heirs.

What if the insurance company goes under? Isn’t that a risk? It is. Thankfully, most states protect SPIA policy holders up to $250,000. If you are planning to put more than $250,000 into a SPIA, I would seriously consider dividing your funds between several companies to stay under the limits. Read more: The Texas Guaranty Association. (Note that this information is provided solely for educational purposes and is not an inducement to a sale.)

In the next three articles in this five-part series, we will look at different withdrawal strategies for your investment portfolio. These approaches include the 4% rule, a Guardrails approach, and 5-year Buckets. All of these will help you manage the risks of funding retirement from stocks. But before we get to those, I wanted you to realize that you don’t have to put all your money into stocks to create retirement income. These withdrawal approaches are likely to work, and we know they worked in history. But if you want to buy your own pension and have a guaranteed retirement income, a SPIA could be the right tool for the job.

Read More
Creating Retirement Income

Creating Retirement Income

Posted On November 5, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

Today, we are starting a five-part series to look at creating retirement income. There are various different approaches you can take when it is time to retire and shift from accumulation to taking withdrawals from your 401(k), IRA, or other investment accounts. It is important to know the Pros and Cons of different approaches and to understand, especially, how they are designed to weather market volatility.

In upcoming posts, we will evaluate SPIAs, the 4% rule, a Guardrails Approach, and 5-Year Buckets. Before you retire, I want to discuss these with you and set up an income plan that is going to make the most sense for you. Today, let’s start with defining the challenges of creating retirement income.

Sequence of Returns Risk

During accumulation, market volatility is not such a bad thing. If you are contributing regularly to a 401(k) and the market has a temporary Bear Market, it is okay. All that matters is your long-term average return. If you invest over 30-40 years, you have historically averaged a return of 8-10 percent in the market. Through Dollar Cost Averaging, you know that you are buying shares of your funds at a more attractive price during a drop.

Unfortunately, market volatility is a big problem when you are retired and taking money out of a portfolio. You calculated your needs and planned to take a fixed amount of money out of your portfolio. If the market averages 8% returns, can you withdraw 8%? That should work, right?

Let’s look at an example. You have a $1 million portfolio, you want to take $80,000 a year in withdrawals. Imagine you retired in 2000, having reached your goal of having $1 million! Here’s what your first three years of retirement might have looked like, with $80,000 annual withdrawals:

  • Start at $1,000,000, 9% market loss = $830,000 ending value
  • Year 2: start at $830,000, 12% market loss = $650,400 ending value
  • Year 3: start at $650,400, 22% market loss = $427,312 ending value

This would blow up your portfolio and now, your $80,000 withdrawal would be almost 20% of your remaining funds. This is Sequence of Returns Risk: the order of returns matters when you are taking income. If you had retired 10 years before these three bad years, you might have been okay, because your portfolio would have grown for a number of years.

Because a retiree does not know the short-term performance of the stock market, we have to take much smaller withdrawals than the historical averages. It’s not just the long-term average which matters. Losses early in your retirement can wreck your income plan.

Longevity Risk

The next big risk for retirement income is longevity. We don’t know how long to plan for. Some people will have a short retirement of less than 10 years. Others will retire at 60 and live for another 40 years. If we take out too much, too early, we risk running out of funds at the worst possible time. There is tremendous poverty in Americans over the age of 80. They didn’t have enough assets and ran out of money. Then they end up having to spend down all their assets to qualify for Medicaid. It’s not a pretty picture.

And for you macho men who intend to die with your boots on – Great. You may wipe out all your money with your final expenses and leave your spouse impoverished. She will probably outlive you by 5-10 years. That’s why 80% of the residents in nursing homes are women. You need to plan better – not for you, but for her.

Read more: 7 Ways for Women to Not Outlive Their Money

We plan for a retirement of 30 years for couples. There’s a good chance that one or both of you will live for 25-30 years if you are retiring by age 65. There are different approaches to dealing with longevity risk, and we will be talking about this more in the upcoming articles.

Inflation Risk

Longevity brings up a related problem, Inflation Risk. At 3% inflation, your cost of living will double in 24 years. If you need $50,000 a year now, you might need $100,000 later, to maintain the same standard of living.

A good retirement income plan will address inflation, as this is a reality. Luckily, we have not had much inflation in recent decades, so retirees have not been feeling much pressure. In fact, most of my clients who start a monthly withdrawal plan, have not increased their payments even after 5 or 10 years. They get used to their budget and make it work. Retirement spending often follows a “smile” pattern. It starts high at the beginning of retirement, as you finally have time for the travel and hobbies you’ve always wanted. Spending typically slows in your later seventies and into your eighties, but increases towards the end of retirement with increased health care and assistance costs.

When we talk about a 4% Real Rate, that means that you would start at 4% but then increase it every year for inflation. A first year withdrawal of $40,000 would step up to $41,200 in year two, with 3% inflation. After 30 years (at 3% inflation), your withdrawal rate would be over $94,000. So, when we talk about a 4% withdrawal rate, realize that it is not as conservative as it sounds. Even at a low 3% inflation rate, that works out to $1,903,016 in withdrawals over 30 years. It’s a lot more than if you just were thinking $40,000 times 30 years ($1.2 million).

Periods with high inflation require starting with a lower withdrawal rate. Periods with low inflation enable retirees to take a higher initial withdrawal amount. Since we don’t know future inflation, most safe withdrawal approaches are built based on the worst historical case.

Invest for Total Return

There is one thing which all of our retirement income approaches agree upon: Invest for Total Return, not Income. This is counter-intuitive for many retirees. They want to find high yielding bonds, stocks, and funds. Then, they can generate withdrawal income and avoid selling shares.

It sounds like it would be a rational approach. If you want a 5% withdrawal rate, just buy stocks, bonds, and funds that have a 5% or higher dividend yield. Unfortunately, this often doesn’t work as planned or hoped!

Over the years, I’ve invested in everything high yield: dividend stocks, preferred stocks, high yield bonds, Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), Closed End Funds, etc. They can have a small place in a portfolio, but they are no magic bullet.

Problems with Income Investing

  • Value Trap. Some stocks have high yields because they have no growth. Then if they cut their dividends, shares plummet. Buy the highest dividend payouts and your overall return is often less than the yield and the share price goes no where. (Ask me about the AT&T shares I’ve held since 2009 and are down 14%.)
  • Default risk. Many high yield investments are from highly levered companies with substantial risk of bankruptcy. Having 5% upside and 100% downside on a high yield bond or preferred stock is a lousy scenario. When you do have the occasional loss, it will be greater than many years of your income.
  • Poor diversification. High yield investments are not equally present in all sectors of the economy. Often, an income portfolio ends up looking like a bunch of the worst banks, energy companies, and odd-ball entities. These are often very low quality investments.

Instead of getting the steady paycheck you wanted, an income portfolio often does poorly. When your income portfolio is down in a year when the S&P is up 10-20%, believe me, you will be ready to throw in the towel on this approach. Save yourself this agony and invest for total return. Total return means you want capital gains (price appreciation) and income.

For investors in retirement accounts, there is no tax difference between taking a distribution from dividends versus selling your shares. So, stop thinking that you need to only take income from your portfolio. What you want is to have a diversified portfolio and a good long-term rate of return. Then, just make sure you are able to weather market volatility along the way.

Read more: Avoiding The High Yield Trap

Ahead in the Series

Each of the retirement income approaches we will discuss have their own Pros and Cons. We will address each through looking at how they address the risks facing retirees: Sequence of Returns Risk, Longevity Risk, and Inflation Risk. And I’ll have recommendations for which may make the most sense for you. In the next four posts, I’ll be explaining SPIAs, the 4% Rule, a Guardrail Approach, and 5-Year Buckets.

Even if you aren’t near retirement, I think it’s vitally important to understand creating retirement income. Retirement income establishes your finish line and therefore your savings goals. If you are planning on a 4% withdrawal rate, you need $1 million for every $40,000 a year in retirement spending. Looking at your monthly budget, you can calculate how much you will need in your nest egg. Then we can have a concrete plan for how much to invest and how we will get there. Thanks for reading!

Read More
maximize FAFSA financial aid

Maximize FAFSA Financial Aid

Posted On October 25, 2020 By Scott Stratton, CFP(R), CFA In College Savings /  

We are going to discuss three specific strategies:

  • Moving Assets from reportable sources to non-reportable locations
  • Reducing cash by paying down debt
  • Avoiding assets in the child’s name

Before we get to the details, a few caveats. First, some of the expected family contribution is based on the parent’s income. If you have a high income, your reported assets may not make a big difference in financial aid. Second, it’s possible that the college’s solution to your financial need will be to offer more loans, rather than a scholarship. We want to be careful about taking large loans for college, as these are increasingly becoming a significant burden for students and parents. Some schools have a generous amount of need-based financial aid available and at those schools, these strategies may increase the scholarships your student receives.

Non-Reportable Assets on the FAFSA

Non-reportable assets include:

  • All Qualified Retirement Accounts, such as 401(k), 403(b), IRA, Roth, SEP, and SIMPLE plans
  • Your home
  • Small businesses
  • Household items and personal possessions

If you are planning on a child going to college in a few years, you may want to put as much as you can into your non-reportable assets, such as retirement accounts, and not into a savings account or taxable investment account. If you have a lot of cash, look at maximizing your 401(k) and IRAs to shift your investments into retirement accounts.

Paying Down Debt

If you have credit cards, car loans, or a home mortgage, that debt does not get considered on the FAFSA. Your cash, however, will be counted towards your expected Family Contribution. If you want to maximize your eligibility for student aid, you could pay down debt. This will reduce the cash you have as a reportable asset. And your home, cars, and personal assets are not considered on the FAFSA.

Obviously, you want to make any changes well in advance of applying for financial aid and make sure you keep enough cash for your emergency fund.

Avoid Assets in the Child’s Name

Assets of the child will have an expected contribution of 20% a year, whereas an asset of the parent has a maximum contribution of 5.64%. Having a lot of money in the name of a college kid will reduce their financial aid eligibility. This is a problem with the UGMA account for minors – colleges expect that this account will be fully available for tuition and expenses.

If your pre-college student has earned income, it may be preferable to put their assets into a Roth IRA than into a savings account. In the year of the FAFSA application, a retirement contribution is typically counted as eligible income, but not as a reportable asset. The assets in a Roth IRA accumulated before college are not a reported asset. This way, the money your child earns before college can start to grow for them and not get sucked into college expenses.

College funding is an important part of financial planning. A lot of people think college planning means getting a 529 plan. There is more to it than just 529 plans. By managing your reportable assets, you can maximize your FAFSA financial aid.

Read More
Questions to Ask a Financial Advisor

Questions To Ask A Financial Advisor (And My Answers)

Posted On October 20, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /  

Choosing a financial advisor is a significant decision, especially as you approach retirement.

If you are a baby boomer or pre-retiree with $500,000 to $5 million in investable assets, you should understand exactly how an advisor is paid, how they invest, what it costs, and how the relationship works — before you hire them.

I work with clients nationwide and meet with them remotely, so these are the same questions I encourage prospective clients to ask any advisor they are considering. Below, I’ve included my direct answers so you can decide whether my approach is a good fit for you.

1. Are you a Fiduciary?

Yes. I am a fiduciary and am legally required to place client interests ahead of my own.

As an independent Registered Investment Advisor (RIA), I am not tied to any single company or product. I do not receive commissions or incentives to recommend one investment over another.

My goal is to do the best I can to help every client, and the fiduciary standard ensures that advice is given in your best interest — not mine.

2. How do you get paid?

We have an annual asset-based fee of 1% and a minimum investment of $250,000.

The fee is charged quarterly in advance. Clients know exactly how much they pay and have the right to leave at any time if they are unsatisfied.

By charging a fee based on the value of your portfolio, our incentives are aligned:

  • If your account goes up, I get paid a bit more
  • If your account goes down, I get paid less

I believe this alignment creates accountability and supports long-term relationships rather than short-term transactions.

Read more: The Price of Financial Advice

3. What are my all-in costs?

Aside from the advisory fee above, I do not charge any additional planning fees or receive investment commissions.

The core of our portfolios consists of low-cost funds from companies such as Vanguard, iShares, and SPDR. We build portfolio models in-house, so you will never be charged:

  • Outside management fees
  • Wrap fees
  • Overlay or third-party strategist fees

Some firms charge an upfront planning fee, an ongoing management fee, and then outsource portfolio management to another provider who charges yet another fee. My focus is on keeping investment costs as low as possible.

4. What are your qualifications?

I hold both the CFP® and CFA® designations and have been a full-time financial advisor since 2004.

I received a Certificate in Financial Planning from Boston University. Prior to becoming a financial advisor, I taught at several colleges and continue to approach my work as an educator.

My academic background includes:

  • Bachelor’s degree from Oberlin College
  • Master’s degree and Doctorate in music from the University of Rochester

You should also look up any advisor you are considering on the SEC’s Investment Advisor Public Disclosure website to review disciplinary history, bankruptcies, or legal settlements. I do not have any.

5. How will our relationship work?

Financial planning comes first, and investment management follows from that plan.

I work with a relatively small group of families so I can provide a high level of service. Financial planning is a long-term process — not a one-time event. We work remotely, using video chat, phone calls, and email.

We begin with an in-depth Discovery Meeting to understand:

  • The quantitative details of your financial situation
  • Your goals, values, and preferences

We gather statements, tax returns, and relevant documents for analysis. All clients complete a Finametrica Risk Profile, which we review together.

Using a modular planning process, we focus on the planning areas most relevant to your situation.

During the first year, much of the work involves building your plan. Starting in year two, we typically meet twice per year for ongoing monitoring and planning. Clients are encouraged to reach out whenever questions arise or circumstances change.

6. What’s your investment philosophy?

I believe investors are best served by a passive, long-term investment strategy.

My role is to manage diversified portfolios based on a target asset allocation designed for buy-and-hold investors. I create and manage a series of Portfolio Models to reflect different goals and risk tolerances.

Each model uses a Core + Satellite structure:

  • Core holdings: low-cost ETFs across major asset classes such as U.S. stocks, international stocks, bonds, and cash
  • Satellite holdings: tactical positions that may change over time based on relative value

Satellite investments may include emerging markets, real estate, commodities, preferred stocks, convertible bonds, or other categories.

I do not believe value is added through market timing, individual stock picking, sector rotation, or speculative strategies — especially when considering the additional risks involved.

7. What asset allocation will you use?

Your asset allocation is determined by your individual goals, risk tolerance, and financial situation.

Our models typically include 10–15 ETFs or mutual funds and are diversified across thousands of securities.

Target allocations may include:

  • Ultra-Equity: 100% Equity / 0% Fixed Income
  • Aggressive: 85% Equity / 15% Fixed Income
  • Growth: 70% Equity / 30% Fixed Income
  • Moderate: 60% Equity / 40% Fixed Income
  • Balanced: 50% Equity / 50% Fixed Income
  • Conservative: 35% Equity / 65% Fixed Income

8. What investment benchmarks do you use?

We use simple, globally diversified benchmarks to evaluate performance.

  • Stocks: MSCI World Index (Total Return)
  • Fixed Income: Bloomberg Barclays U.S. Aggregate Bond Index

Read more: How a Benchmark Can Reduce Home Bias

9. Who is your custodian?

Client assets are held at Charles Schwab & Co.

This allows clients to work with an independent fiduciary advisor while also benefiting from the scale, technology, and security of one of the largest custodians in the industry.

10. What tax hit do I face if I invest with you?

Tax efficiency is a key consideration in how portfolios are built and managed.

For high-net-worth families, we focus on:

  • Asset location
  • Low-turnover funds
  • Tax-loss harvesting
  • Tax-efficient investment vehicles

Portfolios are typically rebalanced once per year, which helps limit unnecessary short-term capital gains. All tax decisions are made in the context of your individual situation.

Read More: 9 Ways to Manage Capital Gains

Final Thoughts

These are the questions I believe every investor should ask before hiring a financial advisor — whether you work with me or someone else.

If you have other questions, feel free to reach out. I’m always happy to have a conversation and help you determine whether working together makes sense.

Good Life Wealth Management is an independent fiduciary financial advisor helping baby boomers and pre-retirees nationwide with $500,000 to $5 million in investable assets, working 100% remotely.

Read More
Tax Strategies Under Biden

Tax Strategies Under Biden

Posted On October 2, 2020 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

With the Presidential election next month, investors may be wondering about what might happen to their taxes if Joe Biden were to win. Let’s take a look at his tax plan and discuss strategies which may make sense for high income investors to consider. I am sharing this now because we might consider steps to take before year end, which is a short window of time.

Let’s start with a few caveats. I am not endorsing one candidate or the other. I am not predicting Biden will win, nor am I bashing his proposals. This is not a political newsletter. Even if he is elected, it is uncertain that he will be able to enact any of these proposals and get them passed through the Senate. The discussion below is purely hypothetical at this point.

My job as a financial planner is to educate and advise my clients to navigate tax laws for their maximum legal benefit. I create value which can can save many thousands of dollars. Some of Biden’s proposals have the potential to raise taxes significantly on certain investors. If he does win, we may want to take steps before December 31, if we think his proposals could be enacted in 2021. I would do nothing now. I expect no significant changes under a continued Trump administration, but I will also be looking for tax strategies for that scenario.

Other Biden proposals will lower taxes for many people. For example, he proposes a $15,000 tax credit for first-time home buyers. I am largely ignoring the beneficial parts of his tax plan in this article, because those likely will not require advance planning.

Tax Changes Proposed by Biden

1. Tax increases on high earners. Biden proposes to increase the top tax rate from 37% back to 39.6%. He would eliminate the Qualified Business Income (QBI) Deduction, which would penalize most self-employed business owners. He would limit the value of itemized deductions to a 28% benefit. For those with incomes over $1 million, he proposes to increase the long-term capital gains and qualified dividend rate to the ordinary income rate, an increase from 20% to 39.6%, plus the 3.8% Medicare surtax. He proposes to add 12.4% in Social Security payroll taxes on income over $400,000.

Strategies:

  • Accelerate earnings, capital gains, and Roth Conversions into 2020 to take advantage of current rates.
  • Accelerate tax deductions into 2020, such as charitable donations or property taxes. Establish a Donor Advised Fund in 2020.
  • Increase use of tax-free municipal bonds, and use ETFs for lower taxable distributions. Shift dividend strategies into retirement accounts.
  • Use Annuities for tax deferral if you anticipate being in a lower bracket in retirement.

2. 26% retirement contribution benefit. Presently, your 401(k) contribution is pre-tax, so the tax benefit of a $10,000 contribution depends on your tax bracket. If you are in the 12% bracket, you would save $1,200 on your federal income taxes. If you’re in the 37% bracket, you’d save $3,700. Biden wants to replace tax deductibility with a flat 26% tax credit for everyone. On a $10,000 contribution to a 401(k), everyone would get the same $2,600 tax credit (reduction). This should incentivize lower income folks to put more into their retirement accounts, because their tax savings would go up, if they are in the 24% or lower bracket. For higher earners, however, this proposal is problematic. What if you only get a 26% benefit today, but will be in the 35% bracket in retirement? That would make a 401(k) contribution a guaranteed loss.

Strategies:

3. End the step-up in cost basis on inherited assets. Currently, when you inherit a house or a stock, the cost basis is reset to its value as of the date of death. Under Biden’s plan, the original cost basis will carry over upon inheritance.

Strategies:

  • If parents are in a lower tax bracket than their heirs, they may want to harvest long-term capital gains to prepay those taxes.
  • Life Insurance would become more valuable as death benefits are tax-free. Or Life Insurance proceeds could be used to pay the taxes that would eventually be due on an inherited business or asset. Read more: The Rate of Return of Life Insurance.

4. Cut the Estate Tax Exemption in half. Presently, the Estate/Gift Tax only applies on Estates over $11.58 million (2020). Biden wants to cut this in half to $5.79 million (per spouse).

Strategies:

  • If your Estate will be over $5.79 million, you may want to gift the maximum amount possible in 2020. Alternatively, strategies such as a Trust could be used to reduce estate taxes. (For example, the Intentionally Defective Grantor Trust (IDGT) or Grantor Retained Annuity Trust (GRAT).)
  • Be sure to use all of your annual gift tax exclusion, presently $15,000 per person.
  • Establish 529 Plans, which will be excluded from your estate.
  • Shift Life Insurance out of your Estate, using an Irrevocable Life Insurance Trust (ILIT).

While we don’t know the outcome of the election, there could be valuable tax strategies under Biden. We will continue to analyze economic proposals from both candidates to develop planning strategies for our clients. When there are significant changes in tax laws, we want to be ahead of the curve to take advantage wherever possible.

Read More
When To Sell A Fund

When to Sell a Fund

Posted On September 27, 2020 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

As part of monitoring your investments, you should have defined reasons when to sell a fund. It is important to distinguish between market timing and valid reasons for selling. Don’t sell an index fund and buy an actively managed fund just because the active fund has outperformed recently. That is performance chasing – and you need to guard against this.

There are a couple of scenarios when you might want to sell a fund, primarily if it is to fix your portfolio. There is probably not a bad time to do this, although investors often agonize over the timing of moves. We cannot predict the future. If you know your portfolio has problems, make those changes and move on.

Three Sales to Fix Your Portfolio

First, if you have narrow funds, such as a sector fund, I would suggest you sell those and get into a broader index fund. If you are up, and have a nice gain, go ahead and sell. Don’t wait until the fund or stock has tanked. If it has tanked, take your loss and learn a lesson. You may hope that it will come back, but hope is not a good investment rationale. While you are waiting for it to come back, perhaps you could be growing your portfolio in an index fund.

I’m not going to recommend that you try to own individual stocks in your portfolio. That is speculative and a distraction for most investors to growing your wealth. I know many millionaires who invest in funds, but not many who got there with individual stocks. The majority of people who are trading stocks have tiny accounts. According to the NY Times, the popular trading app, Robinhood has only an average account of $4,800. Focus on your accumulation and being a market participant, not a speculator. If you’ve had good luck with individual stocks, take your gains and get into index funds. 

Second, if you are invested in a fund or product that has high expenses, switch to a low-cost index fund. For example, if you have an actively managed fund, an A-share mutual fund with 12b-1 fees, or a fund in a Variable Insurance product, your expense ratio might be 0.75%, 1.00% or more a year. An index fund might be one-tenth of that, 0.10% or less for many categories. When your goal is long-term growth through market participation, costs are a direct drag on your performance. That’s a good reason to sell.

Interestingly, the average active manager often (slightly) beats their benchmark before fees. It’s just that the drag of a 1% expense ratio, in a market that returns 5% or 10%, eats up all the benefits the managers can create. Over time, low expenses are correlated with better performance.

Third, you may want to sell some of your funds to establish your target asset allocation. Most of your performance is based on your overall asset allocation. I see many younger investors who start out 100% in stocks and as they grow their wealth, eventually realize that they need some bonds. Other investors have some bonds, but no target allocation to use for rebalancing. So, start with your recipe first and adjust your funds to fulfill your target allocation. Otherwise, you end up with a poorly diversified portfolio.

Staying Invested

If you are already invested in a low cost, diversified index fund, why sell it ever? I can think of two good reasons: rebalancing and tax loss harvesting. Outside of that, investors can do quite well by having little or no turnover and sticking with low cost Index funds for not just years, but decades.

What aren’t reasons for a long-term investor to sell? Coronavirus. Elections. Business cycles. News.

Sure, those things can impact stock prices in the short-term. But staying the course in an Index Fund seems to work better than any other strategy. So, yes to selling sector funds, single stocks, and high-expense funds to replace them with an Index Fund. Yes to the occasional sale for rebalancing or tax loss harvesting. Outside of those reasons, try to keep your diversified allocation and stick with your index funds. Now, if you are within five years of retirement and are concerned about risks to your retirement income, let’s talk about how to make sure you are on the right path.

I am posting this because right now volatility seems to be picking up into the election. And over the next two months, I worry that a lot of investors are going to feel spooked. You’re going to hear a lot of opinions about what is going to happen. And markets could, indeed, go down. That’s always a possibility. That’s the inescapable reality of being an investor. But, our approach is to stay the course in turbulent times and be patient. As unique as today’s challenges are, there were unique challenges before. Markets prevailed.

Read More
Retirement Withdrawals Without Penalty

Retirement Withdrawals Without Penalty

Posted On September 16, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

If you have multiple retirement accounts, when can you start withdrawals without penalty? This is very important if you want to retire before age 59 ½ and be able to access your money. The rules vary by the type of account, so advance preparation can make it easier to plan your withdrawals.

In our retirement income planning, we carefully choose the order of withdrawals. This can make a big difference in your tax bills. It’s also helpful to have multiple types of accounts so you can select from capital gains, tax-deferred accounts, and tax-free accounts. Let’s start with the early retirement penalties, by account type.

Five Retirement Plans with Different Rules

  1. 401(k) and 403(b): 10% penalty on distributions prior to age 59 ½.
  2. A 457 Plan can be accessed after you retire without penalty, regardless of your age. This is the easiest plan for accessing your money.
  3. Traditional IRA: 10% penalty for distributions prior to age 59 ½. This also applies to a SEP-IRA.
  4. SIMPLE IRA: 10% penalty prior to age 59 ½. Additionally, any distributions within the first two year of participation are subject to a 25% Penalty. Ouch. Don’t do that.
  5. Roth IRA. 10% penalty on earnings before age 59 ½, AND the five-year rule. You must have had a Roth open for five years before taking penalty-free withdrawals. So, if you open your first Roth at age 57, you’d have to wait until age 62 to get the tax-free benefit. However, you can access your principal at any time without tax or penalty. It is only when you start drawing down your earnings that the tax and penalty might apply. To withdraw tax-free and penalty-free, you must be over 59 ½ and have had a Roth for at least five years.

Read more: The Secret Way to Contribute $35,000 to a Roth IRA

Exceptions to the Penalty

  1. For 401(k) and 403(b) Plans: if you are at least age 55 and have separated from service, the penalty is waived. This means that if you retire between 55 and 59 ½, you can access your account without penalty. You would lose this exception if you roll your money into an IRA.
  2. 72(t) / Substantially Equal Periodic Payments (SEPP). If you are before age 55 and want to access your 401(k), 403(b), or Traditional IRA, you can take Substantially Equal Periodic Payments and waive the penalty. This means that you commit to taking the same amount from your account, annually, for at least five years or until age 59 ½, whichever is longer. Even if you later don’t want or need the distribution, you must continue to withdraw the same amount.  
  3. You may be able to avoid the 10% Penalty on an IRA or 401(k)/403(b) distribution if you qualify for these exceptions:
    • Total and Permanent Disability
    • An IRS Levy
    • Unreimbursed Medical Expenses in excess of 10% of AGI
    • Qualified Military Reservists called to Active Duty
  4. There are some exceptions which are available to IRAs (including SEP and SIMPLE), but not allowed from a 401(k) or 403(b). For these exceptions, you may want to roll your 401(k) into an IRA to qualify.
    • Qualified higher educational expenses
    • Qualified first-time homebuyers, up to $10,000
    • Health insurance premiums paid while unemployed

Full List from IRS: Exceptions to Tax on Early Distributions

Using Exceptions and Planning Your Income

I’m happy to let people know about these exceptions for retirement withdrawals without penalty before age 59 1/2. However, you should be very careful about tapping into your retirement accounts in your 30’s, 40’s or 50’s. This money needs to last a lifetime. I sometimes hear of people who take from their 401(k) accounts to buy a car or build a pool. And they have no idea that taking $50,000 now is stealing $400,000 from their future. Here’s the math: At 8%, your money will double every 9 years. That’s the Rule of 72. $50k will become $100k in 9 years, then $200k in 18 years, and $400k in 27 years. (Yes, this is a hypothetical rate of return, not a guarantee.)

The order of withdrawals does matter when planning your retirement income. While we can work to avoid the 10% penalty before age 59 ½, distributions from “Traditional” retirement accounts are still taxable as ordinary income. It’s often better to access your taxable accounts first. When eligible for long-term capital gains rate, that will be lower than IRA distributions which are taxed as ordinary income. And you have a cost basis on a taxable position, so only a portion of your sale ends up as a taxable gain.

Many retirees avoid touching their retirement accounts until they have to take Required Minimum Distributions. RMDs used to be at age 70 ½, but now are age 72. If there are years when you are in a low tax bracket (sabbatical, retired, year off, etc.), it may make sense to do a partial Roth Conversion. Start shifting money from a tax-deferred account into a tax-free account and save yourself on future taxes.

Once you reach age 72, you could be subject to a lot of taxes from RMDs. That’s the problem with being too good at waiting to start distributions from your retirement accounts. You’re creating a bigger tax bill for yourself later. While you are accumulating assets, it pays to plan ahead and know when and how you will be able to actually access your accounts. Have a question about retirement withdrawals without penalty? Let me know how I can help.

Read More
457 403b Plan

Choosing a 457 or a 403(b) Plan

Posted On September 13, 2020 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

Does your employer offer both a 403(b) and a 457 Plan? What should you do and what is a 457 anyways? A 457(b) Plan is an employer sponsored retirement plan for state or local government employees. It is a pre-tax, salary deferral plan, with an annual contribution limit of $19,500. Sounds just like a 401(k) or 403(b), right? Yes, but with one very interesting difference.

If you have more than one 401(k) or 403(b), your combined contribution to all 401(k) and 403(b) accounts cannot exceed $19,500 a year. 457 Plans are not included in this rule. That means that if you work for a government employer who offers both a 403(b) and a 457, you can contribute the maximum to both!

IRS Publication 4484: Choose a Retirement Plan for Employees of a Tax-Exempt Government Entity

457 Versus 403(b)

Besides the amazing tax-savings of doubling your contributions, there are a couple of other unique features of 457 plans.

The 457 has the same catch-up feature as a 403(b). Participants age 50 and higher can contribute an extra $6,500 a year. Additionally, if you are within three years of normal retirement age, you may be able to contribute up to two times the usual limit. Instead of $19,500, you could contribute up to $39,000 to a 457. Eligibility for this catch-up is limited by your previous contributions, so check with your HR to calculate your actual amount.

Most employers do not contribute to a 457 Plan. If they do, their contribution is counted towards your $19,500 limit. That’s a difference from a 403(b), where an employer contribution is on top of your individual limit.

There is no 10% penalty on distributions before age 59 ½. At whatever age you retire, you can access your 457 Plan without penalty. This is a big advantage compared to a 403(b) or IRA for people who want to retire early. And it’s a good reason to not rollover a 457 into an IRA. Once it’s in the IRA you would have to wait until after 59 ½ to avoid the penalty.

Let’s Evaluate Your Options

If your employer offers a 457 in addition to a 403(b), look into the 457. Want to contribute the maximum to both plans? That would be $39,000 for 2020, or $52,000 if you are age 50 or above. And potentially even higher if you are within three years of normal retirement age. Of course, you will also want to compare both plans being offered to you. Consider if any match is available, as well as the investment options and expenses of each plan.

You’d love to do both, but not sure you can contribute more than $19,500? Start here: 5 Steps to Boost Your Savings

Whatever type of retirement plan you have, let’s make sure you are taking full advantage of the benefits available to you. Not sure where to begin? I’m here to help, just send me a note.

Read More