How to Avoid Underspending in Retirement By Using Guardrails and Guaranteed Income

Anthony Watson |



  • Two risks concern many retirees: underspending and outliving their savings.

  • Conventional retirement planning uses portfolio asset allocation, or the mix of stocks and bonds, as the lever to control risk, which is inadequate in helping retirees balance enjoying life today without sacrificing tomorrow.

  • By expanding their retirement planning toolkit to include guardrails and guaranteed income sources (annuities), retirees can spend more and be better protected from running out of money.


If you are like most retirees (or pre-retirees), the risk of underspending and running out of money are at the top of your mind. Despite better solutions, many financial advisors anchor to the conventional and outdated approach of using asset allocation as the primary lever to control these retirement risks. By integrating two strategies -- guardrails and a guaranteed income “floor” -- retirees can design a retirement income plan that allows them to spend more and be better protected from outliving their savings.


Retirement Income Guardrails

Morningstar analyzed six retirement spending strategies in its annual research paper to evaluate their tradeoffs. While many spending strategies exist beyond those in this study, it shows why we employ income guardrails for our clients. Namely, it does the best job of addressing many of our clients' most pressing concerns: (1) underspending and (2) running out of money.

Retirement income guardrails involve spending more when investment returns are good and less when they are bad, which is intuitive. If you are new to this concept, here is a good primer. Since we write a lot on that topic, we won’t spend much time on it here. Instead, let’s look at how we can improve the guardrails spending strategy by combining it with guaranteed income (i.e., annuities).


Why Annuities?

Annuities have a bad reputation, and for good reason. Many annuities come with high costs and unnecessary complexity and often benefit the salesperson and insurance company more than the annuitant. To be clear, we do not suggest buying those types of products. Instead, we encourage retirees to consider boring, commission-free single premium immediate (SPIAs) or deferred annuities.


Annuities tick many boxes for retirees. Their benefits include reducing the sequence of returns risk, protecting against longevity risk (i.e., outliving your money), and giving retirees the confidence to spend more than if they were relying solely on a mix of volatile investments. And because they use “risk pooling” (i.e., annuitants who die early subsidize payments for those who live longer), they can provide higher payouts than bonds.


Pairing Guaranteed Income with Guardrails

Let’s assume our client, Rose, retired in 2024 at age 65. She has saved well, amassing a $3M investment portfolio ($2M IRA and $1M taxable brokerage account) invested in 60% stocks and 40% bonds. She loves to travel and wants to maximize her spending in early retirement to take the trips she put off during her working years. But she’s also concerned about outliving her money since her parents lived well into their 90s. Given the longevity in her family, we are planning for Rose to live longer than 90% of people her age, meaning her investments will need to sustain her spending for ~35 years (until age 99)!


Guardrails Only

Rose’s situation is where guardrails shine. By planning to spend more when times are good and trimming back when times are bad, she can spend more in retirement by better managing risk. As we see, she can withdraw $10,800/month (or ~$130k/year) before tax from her investment portfolio (follow this link for more on spending capacity). For simplicity, we didn’t include her social security benefit.


Building an Income Floor with an Annuity

Out of the myriad ways to use annuities for retirement planning, we suggest first exploring the benefits of building an income floor. Income flooring is a strategy where a reliable income source, like annuities, produces income for essential living expenses in retirement. By setting up an income floor, basic living needs no longer need to be funded by volatile investments, which provides comfort and allows the portfolio assets to be invested more aggressively (since they aren’t funding essential spending) for greater growth!


Rose’s essential spending is $5,500/month, which includes costs like housing, groceries, and a little bit of travel (“essential” is subjective). To generate $5,500/month for life, she pays a one-time, $900k premium for a single premium immediate annuity (SPIA), which she sources from the bond allocation of her investment portfolio. This leaves her with a $2.1M portfolio balance invested in approximately 85% stocks and 15% bonds.


By swapping bonds for the annuity and investing her remaining portfolio more aggressively, she increases her spending capacity to $139k/year – a ~7% increase compared to the guardrails-only plan! But that doesn’t tell the whole story.




Protecting Against Sequence of Returns Risk

Since its inception in 1957, the S&P 500 Index has had an average return of ~10%. However, due to the volatility of returns, if you were an investor in the index over that period, you would rarely receive the average return in any given year. This matters to retirees because the order and timing of investment returns greatly impact how long portfolio assets will last.



To simulate the real-world experience of sourcing living expenses from volatile investments, we must use Monte Carlo simulation to generate many random sequences of investment returns to “test” Rose’s retirement income plan for resiliency. In this case, we run 1,000 simulations spanning Rose’s 35-year retirement, each with its unique sequence of investment returns. The results highlight a big benefit of the annuity that is overlooked if we only focus on spending capacity.


In the tables below, the results of the Monte Carlo simulation are ranked by percentile. For example, the “Worst” column represents the worst sequence of investment returns (like Investor 1 from the above graph) out of the 1,000 observations. For each percentile, we see the monthly income range (Highest, Lowest, Average) Rose would have received over her 35-year retirement. If we look at the Median result (or 50th percentile), where half of the observations are below, and half are above, Rose received an average monthly income of $13,500, which is higher than her initial spending capacity of $10,800 (or ~$130k/year). While the Median result is excellent news, we can see that if Rose were to experience a poor sequence of returns, as shown in the “10th percentile” and “Worst” columns, there would be years during which her investment portfolio was unable to provide enough income for her $5,500/month essential spending.


However, by simply building an income floor with an annuity to cover essential spending, Rose has neutralized the sequence of returns risk, as seen below.



As the cherry on top, Rose’s average income across all observations is meaningfully higher for the retirement income plan that includes the annuity. A $2,300/month ($15,100 - 12,800) or $27,600/year difference for the median result! By better protecting her from poor investment returns, the annuity increases her spending capacity throughout retirement and allows for more portfolio growth to combat longevity risk.


If you want to design a retirement income plan that allows you to spend more while better protecting against the risk of running out of money, we are here to help. You can click here to schedule an informal, introductory Zoom call to get started.