Using Financial Guardrails to Make the Most of Financial Independence

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Using Financial Guardrails to Make the Most of Financial Independence:
There are many strategies that investors have utilized over the years to make the most out of their investing experience. Today we discuss one of those strategies known as financial guardrails. Financial guardrails is an adjustment to how an individual makes their withdrawals in the drawdown phase of financial independence and retirement. It's primary goals are to lessen the risk of outliving your savings and potentially increasing your overall income in your golden years. But does it succeed in accomplishing those goals? Let's find out!
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[@endeavorparis8653]

Early retirement is the dream. I refuse to accept that I have to be at the end of my life to enjoy time freedom. Let's hustle to financial independence!

[@virginandho1191]

Lately I've been considering setting up an investment account for retirement, I have set asides $400k but somewhere along the line, I get cold feet maybe because I'm a rookie and have no idea what I'm doing, please I could really use some guidelines.

[@elizabeththe10th10]

@@virginandho1191 I have the same fear too because I think I'll make a mistake

[@endeavorparis8653]

@@virginandho1191 If you are new to the markets, I'd advise you get some kind advise or assistance from a financial consultant or Investment coach. That’s the most ideal way to jump into the market in these uncertain times.

[@dianajung6126]

@@endeavorparis8653 I agree with this, Investment coaching sounds like a great idea, thought about it before but never knew how to go about it, Have you used a coach? what is the experience like?

[@endeavorparis8653]

@@dianajung6126 can’t disclose too much , but yea I’ve been using a coach since March 2020, growing my portfolio from $275k to $700k approx. It is pretty straightforward, not as complicated as it used to be.

[@ashleyjc-tryingtogetfired1056]

Amazing! We have never heard of Financial Guardrails, but we love it! Definitely something we will think of using! It's like a BOUNCER for our financial independence party. Can't get too drunk on it! Thanks for this, following you and your channel!

[@NextLevelLife]

Thanks! And, yes, the bouncer for your financial independence is a very good way to describe them :)

[@LivingSwedish]

Super useful video! Thank you! 🙋🏻‍♀️

[@NextLevelLife]

You're so welcome!

[@vixeljotagaming9449]

Great video! This 'guard rails' concept is very interesting, but I couldn't avoid immediatly thinking: "what would happen if I am super conservative and only use the upper guardrail?"

[@NextLevelLife]

Good point, haha! First unless you're beginning with an abnormally high safe withdrawal rate or are anticipating some major expenses after reaching FI, it would probably be more conservative than you'd need to be in most cases :) Second your inflation-adjusted income would eventually start to fall (though by how much and whether or not it would ultimately matter to you would depend on other factors like the performance of the investments, your initial withdrawal rate, lifestyle, etc.) And third, you probably end up with a pretty sizable nest egg in later life to do with as you please which is not a bad thing to have! And I love how that's where your mind went immediately because it's basically how my mind works too ;)

[@gururaj0072]

Same thoughts here😅

[@terryadams1830]

Yep. I think they are worth it.

[@bartbellmore1401]

I'd like to see the guard rail method combined with 3 bucket strategy video. Great video.

[@NextLevelLife]

Thanks, Bart! That would be an interesting thing to look into though I'm not sure if there would be enough to say to justify doing an entire video on the subject. However, I've been considering trying to livestream down the road (don't have the required equipment to do it right now) since I get so many comments like yours that bring up interesting hypotheticals that would be fun to explore even if they might not make for great videos. I think it'd be fun to interact with everyone and go through those hypotheticals together to see what we find out!

[@KR-bn4bg]

Idk I actually second this... you might have just found the most ideal strategy for retirement lol. Say a 5% withdrawal rate plus guardrails plus the cash reserves to cover the deepest parts of market crashes

[@NextLevelLife]

K R, thanks for adding your input! Given that you both (as well as others judging by the comments) are interested in seeing the difference that could be made by combining these types of strategies together I will add it to my list of video topics to look into. It definitely would make a difference but I also think that there would be some other things to take into consideration before implementing it (not necessarily deal breakers mind you, but things to keep in mind).

[@fififinance7469]

Thumbs up! Well done! 😍

[@NextLevelLife]

Thank you!

[@clee8768]

Pretty sure this is the first time I have heard billions used as some sort of result in a personal finance video targeted to the non-elite. Even inflation unadjusted though that is a 15% CAGR over 50 years starting with $1M. That's some pretty good returns.

[@aaronjosephs2560]

Yeah, these numbers seem kind of wrong?

[@NextLevelLife]

C Lee, the average ending net worth figure is for the average net worth of all cycles as of 2020. The average 50-year ending net worth is broken out separately. So it's not quite as impressive as a 15% CAGR as some of the early cycles (say the one starting in 1927) had over 90 years to build its net worth and that drags the average up (just as the ones from the later years would drag it down). Granted we were withdrawing money during those years of the simulation as well, but you get the point. It's not quite 15% CAGR.

[@clee8768]

@@NextLevelLife Ok. That all makes sense. Good to understand the numbers. Thanks.

[@bryanlogan4409]

Have you explored Vanguard's "dynamic spending rules"? It's a similar concept with a couple important differences.

[@charlesrinear9024]

I like the your age divided by 20 percentage of withdrawl, so 70/20 would be .035 and 80/20 would be .04 percent. What do you think?

[@NextLevelLife]

I think that in the vast majority of cases it would ensure that you don't outlive your money. In fact you'd probably end with more than you retired with initially (so great in terms of risk)! It's also simple and easy to calculate/manage which is always nice ;)

[@jhaybiebasco8529]

Can you make a video showing how successful it would be to implement these guardrails while at the same time maintain (and replenish as needed) 2-3 years' worth of expenses in a modified 2-bucket strategy?

[@NextLevelLife]

Not sure there would be enough new insights to make an entire new video out of it. Is there any questions you're specifically trying to answer by comparing the two approaches or is it more out of curiosity? Thanks for the question!

[@jhaybiebasco8529]

@@NextLevelLifeI'm curious because the examples out there of a bucket strategy show how you can ride out a market crash by living off of your cash savings, but nobody seems to talk about actually refilling this bucket after the market recovers. I'd love to see how that works! Thanks again for the amazing content!

[@NextLevelLife]

I'll admit that I've never looked into the effects of refilling the bucket after its initial use. Generally the idea is that if the SWR rules of thumb are going to fail it'll either be due to sustained higher levels of inflation or a market downturn early on. The cash buffer is meant to mitigate the risks of the latter. It's certainly possible that refilling it (or simply increasing its initial size as you've suggested in other comments) would lead to both a higher initial SWR and generally elevated income figures during financial independence but I'd have to look into it to see if that's the case (and even if it is whether or not it makes a material difference or if its only a very small difference that's dependent on specific situations [i.e. multiple crashes happening close together like the 2000s] and/or asset allocation). We have to keep in mind that, unless you pick up some part time work, refilling the bucket during FI likely means having to take money out of our investments (which typically carry higher long-term returns) and putting it back into the bucket which may or may not override the additional benefit of having a refilled bucket ready for the next downturn. I'll look into it and see if I find anything interesting. If so, I'll be sure to either do some sort of update video on it or at the very least add it into future asset allocation videos (thanks to comments like yours I've actually added a new section for those videos examining how things like cash buffers [not refilled at the moment], guardrails, etc. impact these metrics [or at least I've added it for the ones that aren't already well into production, so you'll likely see the change sometime this summer depending on how the upload schedule shakes out between now and then]). Thanks again for the comments!

[@pabloperezlarrubia6050]

Great video! Thanks for the content. What happens if after the adjustment you are still not between the range of the guardrails? I mean, in the example of the third year (minute 5:04), what happens if the portfolio grew to 1.500.000 instead of 1.420.200? If you made the adjustment and retire 58.350, you will retire 3.9% (58350/1500000=3.89%). Should you make a second adjustment that same year and retire 64.185 (58350 + 10%) or should wait until next year to make the adjustment?

[@NextLevelLife]

Great question! Generally when it comes to using financial guardrails people simply wait until the next year to make another adjustment if the first one isn't quite enough to get them inside the desired range. Though I suppose you could make it in that first year if you really wanted. It would essentially be just like treating your guardrails as spending ceilings/floors.

[@diego6716]

Very good simulations! Greetings from a Brazilian 🇧🇷 FIRE 🔥

[@NextLevelLife]

Thanks, Diego! And congrats on reaching FIRE :)

[@paulm5873]

The die at 1:00 is not a fair die, the 2 and the 5 should be on opposite faces

[@Rickmc1427b]

Interesting, but you’re assuming some of these portfolios started at $1 million in 1929 and grew for 91 years? Wouldn’t it make more sense to start at each year and see where they end up after 30 years of retirement?

[@makikoo]

sorry to comment on a minute and irrelevant detail, but the dice is wrong.. two dots and five dots have to be on the opposite side

[@curtisdavis8594]

Thanks

[@NextLevelLife]

Sure thing!

[@serom1021]

sorry to be that guy (pet peeve of mine) that 6 sided die shouldn't have the 5 and 2 next to each other they should be on opposing faces. other than that great video as usual :)

[@NextLevelLife]

Yes, unfortunately its the image that comes with the video editing software so there's not much I can do about that particular oversight. I'm glad to hear that you're continuing to enjoy the videos outside of that though ;)

[@serom1021]

@@NextLevelLife Lol. Yes of course I enjoyed the vid. Have liked all of the content I have watched of yours. Keep it up you are doing a great job.

[@NextLevelLife]

Thanks! I'll do my best.

[@cato451]

Very useful video. I’ve been running similar simulations for the last few years trying to prepare for real life draw down starting next year. A 100% stock allocation makes my stomach hurt but I may have to trust the data and reconsider it. Hmmmmm...

[@NextLevelLife]

Glad it was helpful! I can certainly understand how an all-stock allocation that close to entering the drawdown phase would be stressful and I'm glad to hear that you are considering your decision carefully! The long-term returns of an all-stock approach certainly have been nice historically, but as we've seen in the asset allocation series on this channel it doesn't always lead to significantly higher safe withdrawal rates. Even when it does would the gap between it and a less stressful approach be significant enough to make up for the additional stress?

[@jhaybiebasco8529]

@@NextLevelLife Would it be safe to assume any draw down strategy you recommend includes 2-3 years' worth of expenses in a cash/CD account? And if so, could the same savings (perhaps increased to 3-4 years) act as a buffer to help with the volatility of an all-stock allocation?

[@NextLevelLife]

Jhaybie, I try not to recommend any specific strategy to anyone in my videos. I'm merely trying to present the case of the strategies (what they are, what they're typically used for, and whether or not they tend to do it well relative to other approaches) and let the viewer decide whether or not its a good fit for them. Obviously everyone's goals and situations are different so recommendations from some random guy on the internet would not be very helpful ;) As for the cash question, no assuming there's a cash buffer would not be a safe assumption to make (for instance a 2-3 year cash buffer was not used in the figures for this video). If I do utilize a cash buffer strategy I make sure to mention that in the video itself as it can make a noticeable difference in the numbers :) Lastly, utilizing a cash buffer (whether a 2-3 year one or an increased 3-4 year one) can certainly help with mitigating the risks associated with the volatility of an all-stock allocation (or any allocation really)! I've actually got some videos planned for later this year that will examine that idea. Good thoughts and thanks for asking about the buffer clarification!

[@kevindudson2344]

I didn't buy an iPhone but I bought Apple stonks so I retired at 31. Now I'm 32 and bored outta my mind. But still the boredom ain't worse than working a minimum wage Job.

[@bornkinggamer3347]

"Oh no I accidently built a mountain of money!" Anti-ageing is on it's way, I'm 24 I think I'd like to get richer in financial freedom as opposed to trying to break even.

[@Talkinglife]

Nice

[@NextLevelLife]

Thanks :)

[@smallmj2886]

So financial guardrails make it safer to have a more aggressive portfolio at a higher withdrawal rate.

[@MatthewBuntyn]

Comment for Algo the Rithm

[@janobr]

I'm sorry, but someone had to bring it up... The dice icon is wrong - Two opposing sides of a dice always equal 7 - and you have two non-opposing sides showing 2 and 5, which would never be the case in real life - I know its a stupid detail, but given the subject matter, I think it could bother some of the audiance

[@gaymoderate4403]

John investing in Bernie Madoff's fund, I see...

[@bliston8425]

Stick to the normal video style...Too fast, and Wayyyyy too much information to process in this video

[@AndrewDCDrummond]

You are able to slow the replay speed down on KZbin!

[@harisbeg7026]

I actually watched this video on 1.5x speed