It's All About Guardrails

By Glenn J. Downing, MBA, CFP®

As a financial planner, I work with a lot of couples planning for retirement.  Retirement brings on a sea-change in thinking.  Up until then most people have been in an accumulative stage of money management – saving up against the day they stop working.  Come retirement, what is saved is spent down over many years.  The fundamental question:  Will I outlive my money?

Will I Outlive My Money?

With software, we can answer the question, and with some specificity.  To model the answer, though, requires good data inputs.  Those inputs include spending requirements, inflation and earnings assumptions, future medical expenses, and a host of other things, both quantitative and qualitative.  But we always begin at the beginning, which is the spending plan, aka the budget. 

We recently worked with a couple on retirement planning.  We found them to be in enviable financial shape.  But one spouse had trouble with the concept of spending limits.  She’d always worked on commission and been a high earner.  Never a spendthrift, she’d always been accustomed to having what she wanted, because she could always work a little harder/more to generate the necessary commission income for next month.  To her, living within financial guardrails seemed like being in a straitjacket. 

Freedom Within Form

That led to a discussion of freedom within form.  A case in point:  God gave us 10 Commandments.  They are the form, and we enjoy tremendous freedom within them.  I am prohibited from murdering others.  Much as I’d like to at times, the commandment protects both me and the other person.  It is a constraint on my behavior – a guardrail, if you will.  I can experience freedom within the form.  Freedom, because literally I’m not imprisoned for murdering anyone.  It is the same with all the other commandments:  no adultery, bearing false witness, worshiping false gods, etc.  The commandments are there ultimately for my good, to enjoy the freedom within the form.

That was what I tried to communicate to my client:  that a spending plan isn’t a straitjacket, but a self-chosen form which gives freedom.  During a time when assets are being spent down, there must be some kind of plan and self-imposed discipline.  Clearly all one’s money can’t be spent in the first few years of retirement, or there’d be nothing left for later on.  So spending guardrails must be established.

What do guardrails do for us on the highway?  They are there to keep a crash contained in the direction of travel.  They keep cars from jumping over the median into oncoming traffic, and making a bad situation worse.  They’re there to save lives, in other words.  When we bounce up against them we may get bruised, but they do their work and keep us travelling in the appropriate direction.

What Do Financial Guardrails Do for Us?

What do financial guardrails do for us in our financial lives?  They force us to make spending choices.  At the end of the month if income less expenses is a negative number, there are only two choices:  increase income or reduce expenses.  We may not be able to afford everything we want, but most likely we can provide for all of our needs. 

Financial guardrails force us to make choices that are in our best interests.  What I was trying to communicate to my clients is that the choices you make today, early on in your retirement, will affect your well-being and peace of mind for the next 20 or 30 years. 

At the end of the day, financial planning is all about guardrails.  Self-imposed guardrails.  We look at the reality of our cash flows, and actively make spending and saving choices.  This is the form that we give ourselves, and within that form there is tremendous freedom and peace of mind. 

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