How do I explain guardrails changing between client meetings?

Clients often interpret guardrails as fixed values. They might think that if, say, their lower guardrail is at $1 million, whenever their balance hits $950,000 they will need to take a pay cut, whether that's tomorrow or ten years from now. But that's not true. Guardrails are point-in-time values.

Guardrail: What is the balance that, if I saw it suddenly today, would make a change in income and spending prudent?

For guardrails to work right over time, they have to be updated. As circumstances change, guardrails change. If they don't, they're not working right. Here are some of the things that change over time and that make guardrails change:

1. Plan length/longevity: Each month, the plan length is re-calculated based on new ages and the fact that the clients survived another month
2. Mortality assumptions: Each month, mortality adjustments for the likelihood of future cash flows arriving (e.g., joint Social Security, or a single-life pension) are updated based on the fact that clients survived another month.
3. Inflation: Although the retirement paycheck / spending capacity of a plan that is being tracked and monitored doesn't change every month, the purchasing power of that retirement paycheck DOES change. That results in subtle changes to the overall plan. (Eventually, inflation accumulates enough that the plan will call for a cost of living adjustment.)
4. Returns, withdrawals, and contributions: Actual monthly returns, withdrawals, and contributions affect account balances. That means the plan now has a different balance than before, leading to a recalculation of all plan risks and a resetting of guardrails. (Again, remember that a guardrail is more of an “instant change” circuit breaker).
5. Economic context: If the plan is using historical analysis with economic context, as the months pass the economic situation changes (inflation, unemployment, etc.), leading to a different risk calculation and changing guardrails.
6. Timing of non-portfolio cash flows: With each passing month, cash flows that begin in the future come closer (e.g., claiming Social Security), expenses that will end in the future grow shorter (e.g., paying off a mortgage), etc. These changes in timing of cash flows affect the guardrail calculations.

In practice, if things haven't changed drastically, month-to-month changes in guardrails won't be large. But over time, they will change quite a bit. (In fact, the static nature of guardrails in Guyton-Klinger withdrawal rate guardrails is one of the key reasons they fail to produce good outcomes in real life.) 

A thought experiment might help: Imagine today you have a 30-year plan with a lower guardrail of $1 million. Now imagine 20 years pass and you have the same balance as you have today. The plan is now likely more like 12-13 years. Should the lower guardrail still be $1 million? No! In fact, $1 million could now well be the UPPER guardrail, meaning a $1 million balance could now trigger an increase in income rather than a decrease.

This is an extreme example, but the smaller month by month changes we see in plans are simply the building blocks of this larger change over the long term.