Using ‘Guardrails’ to optimise your client’s withdrawal rate

Guardrails help you to ensure your clients are taking the optimum amount from their portfolio to meet their financial and tax planning goals. Here’s how they work…

You simply set an initial withdrawal rate. Then put up the guardrails around this percentage to alert you when you need to take action.

For example, suppose you are drawing £5k a year from a £100k portfolio, this translates to an initial withdrawal rate of 5%.

An upper guardrail at say 6% could be set to preserve the portfolio in poor market conditions,

which means you’d reduce the withdrawal if this level is breached.

If the portfolio falls in value to £80k for example, your withdrawal translates to a withdrawal rate of 6.25%.

This breaches the guardrails, and withdrawals should be reduced to a sustainable level, say £4.5k for example.

On the other hand, the lower guardrail can be used as a trigger to raise the level of income.

If the portfolio rises to £130k in this example, the initial withdrawal of £5k translates to 3.8% of the current portfolio.

So dropping below a lower guardrail of, say, 4% might trigger an increase in the withdrawal rate, to £6k a year, for example.

The exact level of the guardrails and the change to the withdrawal are adjustable parameters at the discretion of the adviser …

We’ve made a short video to add clarity to this powerful process. Enjoy.

Thomas is Product Manager at Timeline.

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