 Mr.
and Mrs. Smith, a financially successful couple, expected
to maintain their lifestyle throughout a long retirement
that began in 1999. They selected a prestigious trust
firm to manage their savings using balanced investment
and systematic withdraw strategies. Even during the 2000
and 2001 markets – worst years – they realized
net returns of 1% and 2%. However, after 2 ½ years
their total wealth had decreased by 30%. How is this
possible?
Their 5% income draw was financed by selling a small
portion of their portfolio each month. The theory being
that sometimes you sell in up conditions and sometimes
in down conditions. It should “average” itself
out and result in a rising income and rising principal.
| Monthly investment sales
over continued down market performance depleted the
Smith’s principal significantly leaving less
to work toward recovery. They had planned for average
performance not worst-case performance.
Let’s turn this tragedy into a Teeter Totter Principle achievement. Assume that the Smith’s
positioned 70% of their wealth in 3% cash savings and
30% in investments. During the economic slump, the
majority of their money was gaining 3% and only 30%
was in declining market investments. Their income came
from cash accounts leaving investments untouched to
wait for the market recovery.
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