One of the big questions I hear from clients heading into their ‘next chapter’ (blissful retirement!) is: how much can I actually spend each year without running out of money? Welcome to Blog 259, Guardrails for Irish Retirees!

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It’s a great question – and one that deserves a well-thought-out answer. As financial advisors, it’s part of our job to help you figure that out, and there are a few different ways we can go about it.

• Take what Revenue tells you to!
• OR
• Take a dynamic approach each year, to try optimise your income and legacy

In each of the above we’ll assume that you are not buying an Annuity (whereby you hand the entire pension pot over to an insurance company, and they guarantee to pay you a certain income for ‘life’). While annuities have been growing in popularity (a bit!), they are still not the preferred route for most people, given the pot dies with you or your partner.

Take what Revenue tells you to take!

‘Section 790D Taxes Consolidation Act 1997’ sets out the rules for a scheme of imputed
distributions (annual payments to you) for Approved Retirement Funds (ARFs) and vested Personal Retirement Savings Accounts (PRSAs).

So if you own either of these, and you have triggered your pension by making a withdrawal and are over 60 years of age, you’ll be getting ‘imputed distributions’ every year, whether you like it or not. You can read more on this hot topic in Chapter 28 of the Pensions Manual from Revenue! Important to note that this sets out the ‘minimum’ you must take. It does not say you can’t take more!

Some of the more traditional methods rely on what we’ll call “static” approaches – like the well-known 4% Rule, which simply says you can take out 4% of your investment portfolio each year. Simple, right? But, as you might imagine, the real world is a bit more complicated than that, especially when markets can be up one year and down the next.

And in Ireland, the imputed distributions state that once you are in draw-down phase, you must do the following;

• Age 60 to 70 you must take 4% of the pot each year
• Age 71 onwards you must take 5% of the pot each year
• If you have more than €2m in the pot, you must take 6% each year

Interestingly, the % of the pot each year is calculated on the 30th Nov each year – giving time each year to calculate and pay any additional income/distribution, and time for Trustee to pay any tax on the incomes by the following February, per their obligations.

Retirement Income – Take What Revenue Tells You To Take:

Let’s take Hypothetical Mary as an example. She has an Approved Retirement Fund (ARF) worth €1 million when she retires and at the advice (or lack thereof) from her broker, follows the imputed distribution approach. So, in her first year, she withdraws €40,000 to cover her living expenses. Not bad at all, right? Mary is happy, and sees that she pays practically zero tax on that, is on the pig’s back.

But then let’s imagine the market has a bad year, and her portfolio drops by 35% in 2025, bringing her ARF value down to €650,000. If she sticks with the 4%, her income for the year drops to €26,000 in 2025. That’s a €14,000 pay cut – not the kind of change Mary wanted when she is trying to enjoy her in new-found freedom?!

Then, let’s say the market bounces back in 2026 by 35%, bringing her portfolio back up to about €877k. Following the 4%, her income in 2026 rises to c€35,000. While it’s better than the previous year, her income is still down over 10% compared to the €40,000 she started with. And that is before we consider what inflation might have done over those 2 years.

This is where the Imputed Distribution rules can feel a bit rigid and repressive, in our view. Mary’s income drops drastically when the market has a bad year, and while it recovers somewhat in the good years, it doesn’t fully get back to where it started. It may take a few years to recover in that scenario – and all the time, Mary is having to potentially sacrifice lots of fun things, while she still has a relatively large pension pot in the background.

Of course, one needs to balance preservation of the pot with enjoyment – but this imputed distribution approach often does people out of freedom and enjoyment, and leaves too big a legacy. Over time, this can create stress and uncertainty for people who may rely on a consistent income.

Dynamic Approach: The Guardrails Method

That’s where dynamic approaches come into play, offering a more flexibility and cushioning when markets fluctuate, while still achieving capital preservation.

One such approach is the ‘Guardrails Strategy’. (Podcast 183). With this approach, instead of sticking rigidly to 4% of whatever your portfolio is worth at the time, you adjust your withdrawals within certain limits, or “guardrails.”

The various ‘levers’ can be set depending on the advisor & client priorities, but here is an outline;

The Capital Preservation Guardrail:

The capital preservation rule is designed to reduce withdrawals a little to preserve the pot for multiple decades. It’s triggered when a current year’s withdrawal rate has risen more than say 20% above the initial withdrawal rate (to say 5%+) because of a fall in portfolio value. If this is triggered, the withdrawal rate is reduced by say 10% (to 4.5% say). It gives a little more lee-way than the imputed distributions while protection long term sustainability.

The Prosperity Guardrail:

The prosperity rule is designed to ensure you get to enjoy the good times and not die with too much! It’s triggered when a current year’s withdrawal rate/amount has fallen more than say 20% below the initial withdrawal rate, because of a rise in portfolio value, you get an additional bonus to spend. If this is triggered, the withdrawal is increased by say 10%.

Retirement Income – Take A Dynamic Guardrail Income

Here’s how it could work for Hypothetical Mary. In the same situation, she starts off with an ARF of €1 million and plans to withdraw €40,000 in her first year. Now, let’s say 2025 comes along, and her portfolio drops by 35% again, bringing her ARF down to €650,000.

So her planned withdrawal €40k of €650k is 6.1%. Her withdrawal has risen by more than 20%, from the 4% initial. Therefore, the Preservation Guardrail kicks-in. But this time, we don’t cut Mary’s income to €26,000 as we saw with the static approach! Instead, Mary would reduce her income by the 10% only, because of the guardrails strategy.

So, instead of taking €40,000, she would take €36,000. At 5.5% of current pot, it is still well in excess of the Imputed Distribution, so no complaints from Revenue! It’s still a reduction of course, but a much smoother one compared to the harsh drop in the static approach.

Now, let’s fast-forward to 2026, when the markets hypothetically bounce back by 35%. Mary’s ARF climbs back up to around €877k. The calculation is now showing that €36k/877k = 4.1% is this years’ withdrawal. It is between the guardrails, so no adjustment necessary. In addition though, she may take an increase for inflation of say 5%. So her income is set at €37,800 for the following year. Balancing preservation and prosperity.

Instead of the rollercoaster income changes from €40,000 to €26,000 and then back to €35,100 as we saw in the static example, Mary’s withdrawals would be much smoother – from €40,000 to €36,000 and then to €37,800. And not forgetting this was during a pretty epic market swing, both up and down.

What it means it that her journey through the ups and downs of the market is far more predictable and less stressful. She avoids drastic pay cuts in tough years, and even though she might not see massive pay increases in good years, her overall lifestyle is more assured.

Why It Matters – Guardrails for Irish Retirees

Now, you can see why the guardrail approach, can help to make retirement a lot less nerve-wracking. While the Imputed Distribution rules are a line in the sand, and a regulatory obligation, they are not the only way of doing things. It doesn’t account for the unpredictability of markets and can lead to big swings in income. The guardrail approach is not perfect, it does help adjust withdrawals more smoothly, aiming to protect both your lifestyle and your portfolio from extreme changes.

At the end of the day, the goal is to make sure we can enjoy our Next Chapter without worrying about running out of money or dying with too much. Sometimes, that means taking a more nuanced approach, which is why we’re here to help!

I hope it helps.

Paddy Delaney QFA RPA APA

The team at Informed Decisions Financial Planning are highly qualified Independent Financial Advisers based in East Meath, and serving clients all over Ireland. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.

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