Q. I am at a loss about what to do. My husband suggested I write to you before pulling what's left of my retirement and taking a huge penalty. I retired from SBC in 2001 with a lump sum. I rolled it over to Merrill Lynch for financial security.  I'm only 53.

In one and a half years time, they have lost over $250,000 of my lifetime savings of $565,000. I trusted them for financial direction since that is not and never has been my expertise. I told my financial advisor I wanted to be conservative in my investments and they convinced me that if I did not take some risk I would go through all my money by age 83. I want to leave some to my children so I became what they call a moderate investor, which they showed me on paper as building to over $1 million by the time I am in my eighties.

I currently take a monthly income of $3,000. They have my account set up as 40 percent aggressive growth, 47 percent growth, and 13 percent asset allocation. I want to pull out what is left and invest in Jumbo CD's for my monthly income. I want to conserve what is left of the principal. Does this sound like a reasonable plan?

---R.R, by e-mail

 

A. I can understand why you'd like to move to the security of CDs. But you would be doing the exact opposite of what your salesman did. That isn't a wise idea, either.

From the information you provided--- which is what's printed above--- it would appear that your salesman knows just enough to make him dangerous.

I'm sure he did not do this from malice. But it is letters like yours that encourage belief that so-called professional management is seldom an improvement on the naïve and uninformed guesses people make on their own. You'll understand if you walk through this with me, step by step.

At age 53 your life expectancy is about 29 years. That means half of all 53 year olds will die in 29 years.  There is a 10 percent chance you will live another 45 years. So you need to plan on living a long time.

That's why your salesman was correct in suggesting your portfolio should have some equity investment. Historically, equity investment has been a good way to offset inflation.

Unfortunately, your salesman then made two fundamental mistakes.

His first mistake was asset allocation. How anyone would call an account that is 47 percent growth, 40 percent aggressive growth, and 13 percent asset allocation "moderate" is beyond comprehension. Either you've misread your investment statements or your salesman believes having about 94 percent of your retirement assets in volatile equities is "moderate." I've never met a real financial planner who would make any such suggestion. 

His second mistake compounded your risk. When you make large withdrawals from volatile assets you can suffer a loss from which you can't recover. The greater your withdrawal rate, the worse the odds for long-term survival. Using an on-line calculator based on a research methodology developed by three Trinity University researchers, I found that your 6.37 percent annual withdrawal rate gives your portfolio only a 43 percent chance of lasting 40 years--- if your withdrawals are adjusted for inflation and your annual management expenses are 1.5 percent.  (In fairness to your salesman, $54,000 of the $250,000 you've lost is what you spent in 18 months of $3,000 withdrawals.)

Similar research shows that having a portfolio that is about 75 percent stocks will support a withdrawal rate of about 4.0 percent, not higher.

If you had invested 75 percent in equities and 25 percent in fixed income--- as in the "aggressive" Couch Potato Portfolio--- and had withdrawn $3,000 a month over the 18 months ending December 31, 2002, you would have ended with $414,000.  That's still a loss, but it's more, and safer, than the $315,000 remaining in your managed account.

The fact that high withdrawal rates can injure your portfolio is no secret. The idea has been prominent in financial planning journals for years. You can learn about it on your own and experiment with withdrawal rates and allocations between stocks and bonds by visiting John P. Greaney's "Retire Early Home Page", www.retireearlyhomepage.com.

The real tragedy of conventional brokerage is that salesmen are called advisors and consultants. They aren't. They are salesmen.

  Take your money. Run.

Sidebar of web resources:

The Retire Early Home Page

The On-Line Version of the Safe Withdrawal Calculator

My columns on portfolio withdrawal rates

My columns on Couch Potato Investing:

2002 Couch Potato Portfolio Performance

Couch Potato Investing

The Living to 100 Life Expectancy Calculator