The Danger with Using Percentage Returns in Retirement

Not a day goes by when some financial guru tells you to stick with the plan and leave your money alone, even when the markets are tanking. They say you should not worry because this sort of market turmoil happens every 5-7 years.

Well hello Mr financial planner, if you know it happens every 5-7 years why do you not plan to avoid or minimize the torment and torture of your Baby Boomer client watching their nest egg drop 20-40% and then taking 5-7 years to come back?

Don’t they know that in retirement you cannot wait 5-7 years to recover the losses to your nest egg?

The market crashed in 2000 and by 2007 it was back. Well, well you just got your money back and now it has gone down gain.

I�m being facetious here because I don�t believe anyone should make statements like that. This last 25 years have seen market manipulation taken to an art form.

Governments have working in cahoots with the wealth managers to use financial stimuli to pump-prime the markets for a quarter of a century. Guru�s use this incredibly short period of a 25 years bull market to make statements about the markets as if they are proven facts.

But now the leverage used to stimulate the markets has just got too much. Maybe this time there may not be enough financial clout in all the world to bring it back in 5-7 years. No one knows for sure.

Exploiting people who cannot afford to buy houses and then packing that debt up and selling it as triple A rated investments was scraping the bottom of the barrel of investment �opportunities�, if you can call them investments.

Another really annoying thing gurus say is that you should not be too upset because you have had great returns since 2000. (In the US this does not apply). Why is it okay to justify failure to minimize losses by making you feel guilty?

Let�s take a look at some simple maths on the returns and the losses. The gurus tell us we have averaged a 16% return each year since 2003 on our super fund investments. Assuming a nest egg of 100K;

Year Ending Return $100K Accumulated Profit
2003 16% $116K $16K
2004 16% $135K $35K
2005 16% $156K $56K
2006 16% $181K $81K
2007 -6% $170K $70K
2008 -20% $136K $36K

Let�s just look at the figures.

From 2003 to 2006 you made 16% year compounded on your investments which realised an actual profit of $81K or 81% on the original $100K invested. In this case compounding works for you to accelerate your profits.

I know Aussie Managed Funds reported a loss of around 6% on super funds for 2007. Let�s assume in 2008 a further 20% will be lost. This is not unreasonable in the current climate with the market down over 35% with no end in sight.

The original investment at the end of 2008 shows a compounded return of only $36K. This means you have just lost 4 years worth of investment returns in two years. Compounding works against you to accelerate your losses.

The financial guru�s will tell you not to worry because you made 16% a year for 4 years and lost 13% a year for two years on average. What�s your problem!

But forget the percentages and look at the dollars because your pension is make up of dollar not percentages. You live off the dollars.

In 2006 you had a profit of $81K on $100K invested. In 2008 your profit was down to $36K on that $100K invested. That represents a loss of real dollars in your portfolio of $45K (if you want the percentage it is a loss of 55% of the profit since 2003.)

As a Baby Boomer in retirement this represents a serious loss of capital. You had $181K in 2006 and it is now only $136K in 2008. The $45K loss represents 25% of your nest egg from its highs in 2006. This is a serious loss of capital if you are in retirement and cannot replace it from other income sources.

If you have a $1M nest egg the figures are horrifying. Losing $450K will hurt like hell.

This is the first reason why you cannot afford to have large losses to your nest egg.

The second reason is that it is much harder to recover large losses when you are in retirement. I�ll go through that problem on another post.

The final insult is when guru�s tell you that if you are a long term investor the fact you might lose 20-40% of your nest egg should not be a concern. Again you are supposed to say nothing because you will get your money back in 5-7 years anyway.

They conveniently forget how much better off you might be if they actively manage your nest egg and avoid large losses in the first place. This is especially so if you are in retirement.

As long as they can convince you not to redeem your money, they know they will not lose out too much on their fees and charges as they will still get paid if your nest egg losses money. Financial Planning is a great business to be in don�t you think?

Unfortunately the horse has bolted and as such there is not much most Baby Boomers can do about their nest eggs right now if they have large losses.

What you can do is educate yourselves so you know the rules of the financial planning game. The market will come back at some point in time. When it does make sure you are ready to take control of your nest egg and know how to protect it in future. My book �What Every Baby Boomer Should Know about Protect Their Nest Egg in Retirement�. Don�t get caught out again believing what these financial gurus tell you. Learn to trust your own judgement. It got you this far in life didn�t it?

2 Responses to “The Danger with Using Percentage Returns in Retirement”

  1. DOR says:

    Hi David, I eagerly seek out your entries every day-such great wisdom. One small point though. On entering your site, the date September 22nd, 2008, remains at the top and for a while I wrongly assumed that was the date of the last entry. Is there a possibility that other visitors might also consider this to be the case? D

  2. admin says:

    Hi DOR,

    Thanks for your kind words and for your comment about the dates.

    That first post is a Featured Post and is designed to stay at the top of the Page.

    However I either need to stop using it or make sure people can see the latest post normally displayed just below it.

    Thank you


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