Should you use Guyton-Klinger guardrails for your retirement planning?
- Noel Watson CFPᵀᴹ - Chartered Wealth Manager
- Jun 13
- 6 min read
Updated: Jun 23
In a previous blog post, we looked at Bill Bengen's inflation-linked withdrawal strategy and the many challenges a U.K. retiree using this approach faces. We also covered the three unknowns:
longevity
inflation
investment returns
making retirement planning a particularly challenging problem.
We believe there are typically three financial "worries" for a retiree.
Running out of money.
Having to take large income reductions during retirement to avoid running out of money.
Dying with too much money.
As a reminder, Bengen's approach is effectively a one-factor model, in which the only variable affecting portfolio withdrawal adjustments is the current level of inflation. Bengen's model has historically resulted in a wide range of portfolio balances at the end of a 30-year retirement. Taking an inflation adjusted 4% from a global portfolio of 50% stocks and 50% bonds saw the money run out after around 21 years, while the best case had the final balance at almost six times the starting balance (in real terms) after 30 years. The reality of Bengen's approach is that there is a very good chance that you will die with more money than you started with. Or you may run out before the thirty years are up. Either outcome is suboptimal.
What if we were prepared to be more flexible with our spending? Would this help a retiree avoid running out of money or dying with too much money? How much flexibility would we have to accept?
Guyton-Klinger guardrails
Variable withdrawal-rate guardrails typically allow us to commence retirement with a higher initial withdrawal rate than the Bengen approach, provided we are prepared to cut spending during challenging inflation/markets. I covered numerous approaches in my book 'Planning for Retirement: Your Guide to Financial Freedom', but for this article, I will focus on the popular Guyton-Klinger approach. In 2004, Jonathan Guyton published a paper titled "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe"?
Guyton established the following guidelines for determining the maximum safe initial withdrawal rate:
Never requiring a reduction in withdrawals from any previous year.
Allowing for systematic increases to offset inflation.
Maintaining the portfolio for at least 40 years.
Guyton examined only one period, from 1973 to 2003, and employed a more diversified asset allocation than Bengen's original work. Two portfolios were used, one with 65% stocks and the other with 80%. The 65% stock portfolio consisted of the following assets:
10% cash
25% fixed income
44% U.S. equities
15% international equities
6% real estate
Guyton determined that this approach allowed initial withdrawal rates between 5.8% and
and 6.2%, far more than the (approximately) 4% proposed by Bengen, and that's not to mention that Bengen's research was based on only a 30-year retirement period rather than the 40 years in Guyton's research!
There were several reasons for this improvement in initial withdrawal rates:
Better portfolio diversification.
Forgoing an inflation-adjusted increase in withdrawals following a year in which the portfolio's total return is negative.
The maximum inflationary adjustment is capped at 6%.
This paper differs from Guyton's original work in the following ways:
Three asset allocations are tested: 50%, 65% and 80% stocks.
The 6% inflation cap is removed.
Two new rules are introduced, the capital preservation and prosperity rules, which act as "guardrails".
The capital preservation rule is triggered when the current year's withdrawal rate exceeds the initial withdrawal rate by more than 20%. If this is triggered, the withdrawal is reduced by 10%. This rule applies until the retiree is within 15 years of their predicted life expectancy.
The prosperity rule is triggered when the current year's withdrawal rate has fallen more than 20% below the initial withdrawal rate. If this is triggered, the withdrawal is increased by 10%.
The paper concludes that initial withdrawal rates of 5.2%–5.6% are sustainable at the 99% confidence level for a portfolio containing at least 65% stocks.
Has it fixed our three worries?
We will take the middle of the three portfolios analysed and use a "No Brainer" global portfolio consisting of 65% shares and 35% global bonds, and take a starting amount of 5.2% from the portfolio (at the lower end of the GK research) and measure over a 40-year retirement horizon.
If we start by examining the portfolio balances, we can see that:
Running out of money: In the worst-case scenario, the balance is positive after 40 years. A success!
Dying with too much money: In the best case, the balance is around twice that of the starting balance. While it doesn't fully solve the issue, it does a far better job than Bengen's approach.
What about potential reductions in income? If we look at nominal terms (not inflation-adjusted), we can see that, in the worst case, income has fallen from £52,000 to just under £40,000 over the first decade. Some may consider this a reasonable trade-off for the increased starting withdrawals compared to the Bengen approach.
However, examining real (inflation-adjusted) income reveals where potential problems may lie. Our unfortunate 1915 retiree would have to face a real-terms income reduction of over 50% by the end of the first decade!
Things were almost as challenging for someone retiring in the late 1960s.
Many retirees would find this unacceptable, especially for those whose core retirement income primarily relied on this approach.
Reducing the starting withdrawal rate to 4% doesn't fix the problem, with real income halving in the first decade in the worst case.
This major issue with the GK approach is rarely addressed, with most of the literature focusing on its advantages over Bengen's approach. Karsten Jenske wrote a series of articles on his EarlyRetirementNow blog in 2017, concluding:
"If you want to use GK yourself, make sure you’re aware of the downside (literally!), i.e., be prepared to curb consumption by 50% if things don’t work out."
More recently, an article titled "Why Guyton-Klinger Guardrails Are Too Risky For Most Retirees (And How Risk-Based Guardrails Can Help)" was published on Kitces. It again highlighted the issue of potential cuts in real income, a 45% cut during the Great Depression.
Has GK addressed the potential challenges that the 4% rule faces?
Even if a retiree is happy to accept the potential major downside of the GK approach, we would suggest it doesn't align with real-world retirement challenges (see the 4% rule analysis), including:
Not taking into account future sources of income (e.g., state pension), which might mean that spending cuts during challenging periods in early retirement are unnecessary.
Doesn't allow you to front-load retirement spending and enjoy the early years while you're still healthy.
Has a fixed 40-year retirement horizon and, therefore, doesn't take into account variations in expected longevity.
Doesn't explicitly cater for fees/investor misbehaviour.
Is U.S. focused and doesn't take into account the U.K.'s sometimes challenging relationship with inflation.
Positives
As with Bengen's work, we may seem overly critical of the GK logic. That is deliberate - we only get one chance at retirement, so it's worth fully understanding the downsides to ensure no nasty surprises once you enter retirement and decide how much of a 'worst case' you want to plan for. It's worth mentioning that with a reasonable tailwind, you may be able to enjoy significant increases in real income.
Conclusion
In this article, we examined Guyton-Klinger guardrails - as with Bengen's work (perhaps more so), we believe that real-world challenges mean that the GK approach should possibly remain an academic concept rather than something that a retiree should implement, particularly with risk-based guardrails becoming a more established alternative. We'd therefore suggest Guyton Klinger guardrails are an example of a retirement planning idea that sounds good in theory but not in practice.
About Pyrford Financial Planning
Pyrford Financial Planning is an Independent Financial Adviser based in Weybridge, Surrey.
We specialise in retirement planning and provide independent financial advice, including pension and investment advice, and inheritance tax planning.
We offer a no-obligation introductory meeting, which will be held over Zoom.
Our office telephone number is 01932 645150.
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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Although best efforts are made to ensure all information is accurate, you should not rely on this blog for your personal situation or planning.
The value of your investment can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
About the author
Noel is passionate about helping clients plan for retirement, preparing and guiding them through this key life transition. He has written a book on retirement planning and regularly publishes retirement research on this blog.
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