Retirement Guardrails: How to Navigate Market Volatility Without Derailing Your Golden Years

When you’re driving across I-90 during the summer, you don’t think twice about the guardrails lining the highway. But come wintertime, you’re thankful they’re there. Not because you plan on using them necessarily, but it’s nice to know that when conditions are less than ideal, they’ll keep you safe.

The same concept applies to your retirement. Market downturns can feel just as slippery as a snowstorm, and without a plan in place, it’s easy to veer off course. Retirement guardrails provide some much-needed structure to keep you moving forward without fear of disaster.

For many retirees, the timing of a potential market downturn is just as worrisome as whether a downturn will happen in the first place. In fact, a downturn early in retirement has the potential to derail someone’s long-term financial security—if they don’t have the right guardrails in place. 

But with a systematic approach, you can navigate uncertainty without panic. Let’s take a closer look.

What Is Sequence of Returns Risk?

Imagine two retirees: One who left work in 2000 and another in 2009, both invested in broadly diversified portfolios. 

Our first retiree, we’ll call him John, experienced three consecutive years of negative returns in 2000—right at the start of retirement, when withdrawals were also beginning. The combination of poor performance and sizable withdrawals amplified John’s losses and left less capital to grow during the recovery period afterward.

By contrast, Sarah began retirement in 2009, just as markets were rebounding, creating a far smoother ride. While she still took withdrawals, the hits to her portfolio’s value weren’t amplified by negative returns. Rather, her portfolio continued to grow gradually thanks to positive market performance.

John, our “unlucky retiree,” shows us why sequence of returns risk is so important. 

The Power of Retirement Guardrails

So, what exactly are retirement guardrails? Think of them as predetermined spending adjustment rules that guide your withdrawals based on how your portfolio is performing. Instead of sticking to a rigid strategy (like the 4% rule), guardrails create flexibility.

You’ll start with a baseline withdrawal rate, say 4%, and then establish upper and lower limits, typically about 20% in either direction. If your portfolio grows significantly, the guardrails indicate you’re safe to increase withdrawals by up to 20%. If your portfolio shrinks, the same idea applies, and you trim spending by around 20%.

Guardrails enable retirees to act calmly in volatile markets—and feel confident enough to spend a little more during periods of positive performance. Rather than making emotional, in-the-moment decisions, you follow the rules already put in place and avoid costly mistakes, like selling too much in a downturn or overspending after a rally.

How to Incorporate Guardrails into Your Retirement Strategy

First, define your baseline withdrawal rate. This will commonly fall between 3.5% to 4.5% depending on your age, risk tolerance, and goals. Next, establish your guardrails. 

As an example, with a $1 million portfolio and a $40,000 baseline withdrawal, your lower guardrail might be $32,000, while your upper guardrail could be $48,000.

With a plan in place, consider checking in on your guardrails annually (ideally with the help of an advisor). If your portfolio dips enough to cross the lower guardrail, it might be time to tighten your spending. If it grows beyond the upper guardrail, you have permission to spend more—or even lock in gifts to children or charities.

You may want to categorize your expenses into essential versus discretionary spending as well. Doing so can make it easier to determine where your budget can expand or contract as needed.

Essentials like housing, food, and healthcare should be covered regardless of market swings. But travel, dining, and other discretionary spending can flex within your guardrails. This way, you protect your quality of life while still having room to adjust.

Special Considerations for Ohio Retirees

Tailor your retirement guardrails to more accurately reflect the cost of living and tax environment of your desired retirement destination. Cleveland, for instance, offers a relatively moderate cost of living compared to national averages, but healthcare expenses can still add up quickly for retirees in any city. 

If you’d like to help cover major expenses for your family (say a grandchild’s wedding), building flexibility for multi-generational planning should be a priority as well. Guardrails can help balance these commitments without jeopardizing your own security.

Consider also how guardrails integrate with your Social Security strategy. Deciding when to claim benefits affects your baseline withdrawal rate, and your benefits timing could change how much flexibility you need from your portfolio.

Preparing for Retirement? We Can Help

The bottom line? Retirement should feel secure, not scary. Guardrails can protect your portfolio from overspending during bad market conditions, while giving you the assurance to fully enjoy the fruits of your labor when times are good.

We help retirees design personalized strategies that account for both the financial and emotional realities of retirement. If you’d like to explore how guardrails can strengthen your plan, let’s talk. Together, we can build a retirement strategy that keeps you safe on the road ahead.