In the end, many retirement plans will fail for these two basic reasons.
1. Too much emphasis is put on average rate of return found in recent past data.
2. Too often proposals are created to show that a client’s wildest dreams can come true.
Consultants should be asking for a client’s input into a plan, but should they ask the client to tell them what they think is the most suitable plan? That’s like the surgeon asking the patient where to cut. For many people, the big mistake of our time is simulation-based retirement planning that puts little emphasis on the possibility of error and gives little guidance as to the most probable successful outcome. I say to clients, “Use your common sense. If it sounds too good to be true it probably is. Or if it appeals to a little greedy voice down in your soul, then run from the temptation.”
Although good advisors never depend on good luck to replace skill, there are times when some retirees can get lucky. For my example, I looked at a twenty-year period from the beginning of 1980 to the end of 1999. If we invested $250,000 into the S&P 500 and withdrew at a rate of 8.5 percent (plus 3 percent increase per year) as T. Rowe had done in their example above, by the year 2000 this account would have been worth $296,173, rather than zero. Examining the same twenty-year period with a withdrawal rate of 6 percent (increasing at a rate of 3 percent per year), by 2000 the $250,000 would have grown to $1,077,908. Rather than running out of money in the fourteenth year or the twenty-seventh year this more recent twenty-year period delivered stunning returns with plenty of money for years ahead and for leaving to charity or to heirs. Even after the major corrections in the market in 2000 and 2001 you would not have lived penniless. While good prevails, there are those unforeseen crises that influence markets throughout the ages.
