RISk vS. SAFE RETIREmENT INcOmEwatched in horror month after month as her account value kept plum-
meting. She would call her broker worried, looking for some guidance
and counsel, and it seemed he kept saying the same thing every time
she would call, “Don’t worry, the market will come back.” She had
faith in that statement as she had learned first hand from the tech bubble
in 2001-2002. It did come back. So the rest of the year she tried not to
worry and ignored the brokerage statements that came every month. By
the end of 2008 her 401K account was down to $550,000. She could not
believe it.
How would she ever get the money back that she lost. She did not work
anymore nor was she contributing to her 401K and she definitely was
not getting a match from her employer any longer.
Then the dreaded phone call from her broker came. He was now advising
her that if she did not want to possibly run out of money before she ran
out of life, she had to drop her withdrawal amount to 3-4% of her total
account value per year. What was once a healthy $70,000 a year income
turned to a very measly $20,000 a year withdrawal. Together with her
social security check, she had gone from $90,000 a year to $40,000. That
was not enough income for her to meet her financial obligations and the
standard of living she had grown accustomed to in the last two years.
The broker had made some major mistakes in the retirement planning
for Ms. Browne. Lets tackle the Broker’s first downfall – asset alloca-
tion during the retirement years. Brokers generally do a great job during
the working years of their clients – which we commonly refer to as The
Accumulation Phase. The problem is that when their clients start their
Distribution Phase they usually continue with the same mix of asset al-
location they used in the capital Accumulation Phase – meaning a high
percentage of the portfolio in stocks and mutual funds. In the case of Ms.
Browne, her Broker had her 100% invested in stocks and mutual funds.
That is absolute craziness to have a 69-year-old woman, who has just re-
tired, allocated with that much risk. Unfortunately, that became one of her
downfalls. You see, in 2008 when the stock market dropped by over 40%,
Ms. Browne was allocated 100% to risk by her Broker. So when the mar-
ket had a major correction, so did ALL of her holdings. There is a system
that I always adhere to with my clients. If most financial advisors used
this system in their planning, it would save the client a lot of heartache.
It’s called the Rule of 100.