A Tale of a Baby Boomer’s Retirement Nest Egg

A Baby Boomer friend of mine has sent me his WRAP Account results through to June 2008. We both decided in November 2006 that we would hand our retirement nest eggs over to the “Professionals” so we could spend our time doing other things as we move into semi-retirement.

Our retirement nest eggs were put straight into a diversified portfolio of mutual funds within a few days of giving our financial planner our money.

It turns out that our timing could not have been any worse. From November 2006 through to November 2007 the markets became more volatile. Property was in the doldrums already but then we got hit with International fixed interest losses because the Aussie dollar was rising against the US Dollar. Then we got hit again with dropping interest rates in the USA. The International share losses offset the Australian share gains to give us zero returns.

I was hoping to get a “profit cushion” before the market turned so that if my capital was safe I would stick it out. But this was not to be. It became clear that all asset classes were under siege.

In June the sub prime issues started to surface and there were a couple of market hiccups with a serious retracement around October.

At one point my nest egg was down around 8%. This may not seem a lot but I have been a trader for 10 years and believe in not losing money if at all possible. I was also of the view that the stock market in Australia had been in one of the longest Bull markets ever recorded and maybe it was time for a serious pull-back.

I kept asking my financial planner what could be done to protect my nest egg from a significant loss. The response was I should forget about it and let the market do what it wants because it always comes back. Having used stop losses in all my trading and investing for 10 years I just could not accept watching my nest egg lose value and not do anything to protect it.

So on 13th November 2007 I asked for my money to be redeemed and returned to me. This time my timing could not have been better. The market rallied and even though it took over two months to get all my money back I actually made a very small profit. So my capital was intact. Rule #1 – Avoid Large Losses in Retirement was observed.

All this time my friend and I had been comparing notes on our WRAP accounts and I thought he was also going to ask for his money back. But he did not and he is still in the WRAP Account after a roller-coaster ride since November 2007.

I asked him if I could show how his nest egg has performed to June 2008 in a Post on this blog and he has agreed.

In summary this is the Portfolio position:

Date Amount Percent overall Percent of Risk-Based
June 2007 1,268,480 100.00 N/A
June 2008 1,134,214 89.42 N/A
Net Profit/Loss -134,266 10.58 23

On the surface it doesn’t look that bad. He is only 10% down on his capital and based on long term averages (which I strenuously disagree with but will take the financial planner view here) it should not be too hard to make that up.

On further analysis he said that the equity based funds showed a loss of 23% over the

Quarter Results
Mar 07 -$14,184
June 07 -$6,850
Sept 07 $13,300
Dec 07 -$37,848
Mar 07 -$96,789

period. And this is the problem. The growth assets, the ones that are required to grow to recover the losses were down significantly but their losses are hidden by the “balanced portfolio” reporting and focus by the WRAP Account managers. The aim of the WRAP managers is to hide the volatility so that you don’t get too alarmed. They also get paid the same percentage fee for managing fixed interest funds which really can’t be that hard to do. In a balanced 50/50 WRAP account it is a nice way to double fees for no real effort on their part and hide the severity of the losses.

Losing 23% of the growth assets in retirement with inflation running at around 4%, fees of approximately 1% and taking a pension of 4% means that the balance is going to have to produce a return of around 50% to recover the loss in the first year, or maybe 15% a year to recover the loss within 5 years.

Even without stock market losses next year his portfolio has to contend with a 9% loss due to inflation, fees and charges AND THEN try to produce a return on equity. I’ve extrapolated the figures above from the article by Craig Israelsen called “The Math of Recovery in Retirement Portfolios“. The Math of Recovery is all about retirement nest egg survival. Don’t get lulled into a false sense of security looking at the average returns from mixing equity growth assets with fixed interest safe assets. This is more averaging nonsense aimed to keep you quiet.

My friend and I discussed his situation and we agreed on a plan. He decided to take money out of any fund that was close to break-even and put it in a term deposit in a bank. That meant he redeemed nearly all his fixed interest and cash funds. In Australia we can get 8% in a term deposit right now. Plus he is in transition to retirement which means any interest is tax free in his retirement account. So he moved $620K into a term deposit and is earning 8% on that money and has halved the fees to the WRAP manager. Even so the fees are around $7K.

Even though the equity funds are showing a 23% loss he can leave them alone and live off the money he has on term deposit. We agreed it is too early to consider taking a 23% loss on those equity funds. The interest from the term deposit is $50K, which is a reasonable sum to live on. Plus he still does some computer consulting work.

Go and read all about Greg Heiple’s Teeter Totter Principle. He states you must separate your risk-based assets from your safe assets. This is especially so when in retirement.

Whilst the situation is not ideal my friend does have the comfort of knowing he can probably live off the interest on his safe assets for some time to come without having to sell risky assets at fire sale prices. Plus he can now see how those risky assets are really performing because they are not hidden or smoothed by the safe assets performance.

3 Responses to “A Tale of a Baby Boomer’s Retirement Nest Egg”

  1. […] Frank Armstrong wrote an interesting post today onHere’s a quick excerptLosing 23% of the growth assets in retirement with inflation running at around 4%, fees of approximately 1% and taking a pension of 4% means that the balance is going to have to produce a return of around 50% to recover the loss in the … […]

  2. Dave: I think this is very worth while information and definitely we all need some help these days…Would you like to cross link with my site…carolstanley1.com…Take a look at my book “For Kids 59.99 and Over”…Anyway I can be of help..THere is a lot of info out there and this really has a lot of merit…Carol Stanley author “For Kids 59.99 and Over”

  3. admin says:

    Hi Carol,

    Thank you again for your kind comments. I have had a look at your site and think it is a great one for Baby Boomers to visit. You put a very positive spin on things too. With the way the world is going right now we could easily get dragged into a mire of depression and doubt and just stay on bed.
    So sites like yours which offer advice and suggestions covering all facets of Baby Boomers lives in retirement is well worthwhile I think.

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