Retired and Scared

Retired and Scared
Neal Frankle, CFP

Neal Frankle found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement. Neal sought out a financial advisor to help him invest his nest egg so that it would help put him through college. Instead, the advisor charted a self-serving course and was on the verge of burning through the money when Neal realized what was happened and fired him just in time to avoid losing everything.

The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions. Today, with more than twenty-five years of experience in the financial services industry, Neal is an author and avid blogger. To learn more, visit


If you are lucky enough to be employed or employable, the current economic crisis in the United States is “just” extremely frightening. Your investments have probably taken some big hits but if you’ve got (at least) another 10 years in the work force, chances are good that you’ll find a way to adapt that doesn’t include having cat food as retirement cuisine .

If, on the other hand, you are already retired, the situation is blood-chilling and terrifying. If you are in that situation, your portfolio might be down 30%, 40% or more. Folks in that camp, have to find answers fast. Of course, the most important question is how to structure your portfolio to generate the income you’ll need for the rest of your life.

Let me cut right to the chase. Interest rates are too low to consider CD’s or bonds as any long-term solution. You know that already.

So you are left with this reality: If you are retired today, you have to include equities in your portfolio unless you love the idea of Purina Cat Chow (chow chow chow) for breakfast lunch and dinner for the next 30 years. I know that statement might ruffle some fur out there.

Numerous studies have shown that if you have a 60/40 (stocks/bonds) portfolio, you can “safely” withdraw 4% to 5% (adjusted for inflation) for 30 years. This study goes back over 100 years and it includes the Great Depression among other fun historical periods. In the past, if you had a smaller percentage committed to equities, the chances of outliving your money went up – not a good thing.

Believe it or not, it’s safer to have a 60/40 portfolio today than it was a year ago or even over the last 12 years. (I know that it felt safer to own equities in the past several years but we all know now – it wasn’t). Of course, it could always get a lot “safer” down the road if stock prices keep melting.

I know that many readers will roll their eyes when they see this but it is safer today (although perhaps not safe) based on the chart below. This chart tracks the P/E 10 (Price/average earnings over last 10 years). As you may know, the P/E 10 has been a very reliable market indicator.

According to Michael Kitches, as the P/E 10 declines, the “safe” withdrawal percentage actually increases. In his report, Kitches presents the following data:



Currently, the P/E 10 is 13.99%. This argues that a “safe” withdrawal ranges from 4.8% to 8.3%.

But even I don’t have the brass to suggest a retiree should set up a withdrawal plan without any regards to our current financial crisis.

In fact, I feel that retirees should reduce their withdrawals right now to 4% or lower if possible. Retirees should NOT take inflation adjustments on their retirement withdrawals right now. In fact, they should eliminate withdrawals if possible.

Am I contradicting myself? If all these facts, figures, charts and graphs suggest that a 4% withdrawal rate is sustainable, why do I suggest withdrawals be curtailed? Two reasons:

The first reason is that although the P/E 10 has fallen significantly, it could certainly fall even further. Stock prices can drop. Earnings can drop too. Even if, miracle of miracle, stock prices find a bottom, if earnings fall through the floor, the now “fairly priced” stock market will become “overpriced” and dangerous.

The second reason I suggest that retirees reduce withdrawal rates is that I’m a chicken.

If you are retired the bottom line is:

1. You should do everything you can to reduce or eliminate withdrawals from your portfolio.
2. Your withdrawal rate should not exceed 4% right now. If you do take 4% – don’t talk yourself into the loony bin with worry. Over the long-run, you’ll probably be ok.
3. If you can work part-time in order to reduce your withdrawals, get going.
4. If your portfolio is set up with a 60/40 split, you may be taking on more risk right now if you try to time the market by moving everything to cash. Probably the best thing to do is stay put.
5. Just because it feels terrible right now, the best course of action may be to stay the course.



Could stock prices fall another 50% or more? Absolutely. In deed, these days it’s in vogue to forecast a very bleak future. I wish I could tell retirees that the best course of action is to put all their money into short funds. I would certainly feel better. The only problem is that such advice would fly in the face of all the facts.

What do you think? Is it reasonable to stay put right now or should retirees abandon their equities completely? Do you think such a move makes make the most sense over the long-run?


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