Talking about what keeps clients up at night — the top 5 fears — is critical for an early discussion.
Fear No. 1 is outliving their money, and it is two-pronged. The second prong of fear is something that happens that requires a drastic change to lifestyle. I remember a call I received in October 2008 from my client in Manhattan, New York. I was in Costa Rica just leaving my hotel room when my phone rang. It was my client Joe from Manhattan, New York, who had recently sold his business.
He had recently retired, and for the first 10 years of his retirement, the payments from the new buyer were to pay Joe for the purchase of his plant and to cover his income needs. Joe was calling from Sun City, Arizona, in his new $750,000 motor home, and he was fearful as the market was plunging day after day, 1,000-point drops, as we experienced the horrific events in 2008. Joe said, “Curtis, at the beginning of the week I was worth $100 million, and I will be lucky if I am worth $50 million at the end of the week!” Joe’s business was making parts for the auto industry, and he was beginning to fear that his new buyer would not be able to make his payments.
Joe was wondering if he should sell his motor home and go back to work. You see, Joe wasn’t worried about eating potatoes; he was worried about his lifestyle changing! So, it’s not always about running out; it may be about catastrophic events that cause a significant reduction in lifestyle.
Fear N. 2 is control of money. Many advisors and pre-retirees have an illusion of control. When constructing traditional retirement portfolios using stock, bonds and mutual funds, they perceive all retirement assets are liquid and in full control. However, utilizing a traditional portfolio to plan for retirement requires the discipline of a safe withdrawal rate.
In the early 1990s, William Bengen, a retired financial advisor, created the 4 percent rule. The 4 percent rule was based on 20th-century markets and 20th-century longevity. This rule defined that $1 million of assets must be held for every $40,000 of income needed. These assets were “held hostage” to finance the retirement income needs, and it was an illusion that these assets were liquid.
Today, researchers have retested the 4 percent rule and have determined that with 21st-century markets and the 21st-century longevity of Americans living longer, it is now a 3 percent rule. In fact, had these market and longevity realities been true for Bengen when testing his research, we would now have a 3 percent rule and not a 4 percent rule.
Many researchers will argue over a 2.2% up to a 4% safe withdrawal rate. And yet, there are many who still want to argue for a 4% withdrawal rate and as high as 6%. I must warn you, however, that the only way these higher withdrawal rates work mathematically is if the retirees are willing to vary their income as markets ebb and flow. If markets decrease by 30%, they must lower their income in those years by 30%. Not many retirees I know are willing to do this.
Curtis V. Cloke, LUTCF, RICP, is a 21-year MDRT member from Burlington, Iowa. Hear more in the new episode of MDRT Presents: