Q. When I retired in mid-1999 at age 66  ½, I had $441,000 in IRA and 403b accounts. I hired an independent financial advisor who rolled the money into big-name mutual funds at Schwab. They were 60 percent stock, 30 percent bonds, and 10 percent money market.

For the first 2 ½ years I took $1,700 a month plus 10 percent for the IRS. For 2002 I reduced that to $1,200 plus 10 percent for the IRS. I've been trying to stay below a 5 percent withdrawal rate. I pay the advisor 1 to 1.5 percent. From the beginning my capital has declined faster than my withdrawals and it is now worth $327,000.

I calculate that if I stay on this track my money will be gone in about 7 years. If I let the advisor go things would be different. I could put what is left in CDs (or a can in the backyard) and the money will last 20 years. My wife (age 59) and I have no debts but no other income except $550 per month from a real estate mortgage that has 14 years remaining and $550 a month from Social Security disability for my wife.

The advisor says I should sit tight and wait for the upturn. As a panic alternative he suggest a 5-year annuity to pay my distributions while saving some capital for the boom "that is sure to come." What do you think?

---J.M., Irving, TX


A.   Burying your money in the backyard may seem like a good solution but 20 years simply isn't long enough. One of you--- you or your wife--- is likely to live a good deal longer. So you need to think about other solutions.

Your fundamental problem is something few people deal with because financial advisors don't like to think about it. It is your total withdrawal rate. Your total withdrawal rate is what you take out for yourself and taxes plus the cost of managing your portfolio. That cost has two parts--- the 1 to 1.5 percent your advisor charges and the additional cost of the mutual funds the advisor selects.

Your current personal withdrawal rate is 4.84 percent. If your advisor fee is 1.25 percent and your mutual funds reflect the average cost of funds on the Schwab Institutional Network, you've got an additional 1.16 percent in fund expenses. That's a total management cost of about 2.41 percent. That makes the total burden on your portfolio about 7.25 percent, a large and unsustainable figure.

How unsustainable? If you visit the Retire Early Home Page and click on the On-line version of the Safe Withdrawal Calculator, it calculates that a 60 percent stock, 40 percent bond portfolio with a 7.25 percent withdrawal rate has only a 55.7 percent chance of lasting 30 years. That's not good.

Cut the expenses of managing your money from 2.4 to 1.2 percent a year and the survival odds for the same asset allocation rise to 74.8 percent. This suggests you need to negotiate a better balance between your personal return and what the financial services industry gets.

Finally, if you cut the expenses of managing your money to 0.20 percent a year by eliminating your manager and switching to index funds, your portfolio survival odds rise to 90.8 percent. This is better than your backyard and better than where you are going with your advisor.

The issue here isn't performance. Nor is it the quality of advice you are receiving. Both are reasonable for the time period.

The issue is total expense burden. In a bull market with 15 percent returns annual investment expenses of 2.4 percent don't seem very important. In a bear market with scarce investment income, the same expenses become a portfolio killer. Retired people who depend on their investments for income need to start figuring out exactly how much it is costing them to invest.

If the total figure comes up to much more than 1 percent a year for financial services, you need to decide who's going to eat, you or your advisor.      

Sidebar of web resources:

The Retire Early Home Page

The On-Line Version of the Safe Withdrawal Calculator