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Interesting article on MSN by Liz Lulliam Weston wth a retirement sob story and 5 things you need to do to prevent it.

http://moneycentral.msn.com/content/Retirementandwills/Retireearly/P106449.asp

Phil Horstman retired at 55 with a nest egg of $1.5 million and a lot of confidence his best years were ahead.

Seven years later, the Murrieta, Calif., resident is down to $300,000 and is, as he puts it, "running out of money and options."

Horstman takes $28,800 a year from his retirement accounts for living expenses, a withdrawal rate that once seemed paltry but that now will have him broke in about 12 years -- far short of the 25 or 30 years he's expected to live.

Horstman is a poster boy for almost everything that can go wrong in retirement, from a bear market early on, to a withdrawal rate that proved unsustainable, to questionable financial advice that kept him invested in risky assets even as his portfolio plunged. Regular IRA?
Roth IRA?

</snip>


intercst




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This story is an excellent example of the importance of using proper asset allocation to protect yourself from losses, even if it means giving up some potential growth!!

Proper asset allocation becomes more and more important the closer you get to retirement, and it becomes absolutely essential during retirement.

Russ
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I dunno. Something quite wrong about this situation as well as the advice from where I'm sitting. From my reading, the guy is now 62 years old. They're suggesting he go back to work for 10-15 years?!? Doesn't he have any social security? I'm at a loss as to how someone that still has $300,000 and should be starting SS can't make it. My mom had a hell of a lot less than any $300,000 when she went on SS, and she's never looked back. Then again, she's always had a very meager lifestyle. I could understand their advice if the guy was in his 40s, but, come on!, he's 62, and Murrieta isn't Los Angeles.

Hedge
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Yeah, I was a bit confused as well. They talked about fixed annuities, annuities tied to inflation, variable rate annuities, and working longer.. I didn't see any mention of "cut up your credit cards, stop the trips to Europe, and take the bike out of storage". Assuming at 62 his house is paid off, I would surely hope he could live on 1k per month from his 401k plus his SS money.
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This is another bad investing article and at best glosses over the real story. The math just does not add up.

Seven years payout at $28,800 totals $201,600

He still has about $300,000

He started out with $1,500,000

There is about $1,000,000 missing and there is no mention of any income from dividents or interest over the last seven years.

The real story is probably that his lost a million dollars gambling in the stock market during the bubble.

Even with the weirdness of stocks over the last seven years if he had been in a S&P index fund he would be up about 15% in addition to generating 1 to 2 percent a year in dividends. Any money in bonds would have done very well over that time frame.

Not all propaganda or advertising is blatant lies, a lot of it is mostly true, but with a stealthy biased spin that

Greg
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Even with the weirdness of stocks over the last seven years if he had been in a S&P index fund he would be up about 15% in addition to generating 1 to 2 percent a year in dividends. Any money in bonds would have done very well over that time frame.

I think from the way the article was written that his entire portfolio was in QQQ or a handful of dot coms. That could easily account for the other million.

Russ
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I'm at a loss as to how someone that still has $300,000 and should be starting SS can't make it.

By my calculations, to live 'comfortably' (not extravagantly) during retirement, costs anywhere from $3600-$4500/month, including taxes. Even if you're collecting the maximum SS benefit, that expense 'nut' requires a nest egg of anywhere from $800,000-$1,200,000 on every retirement calculator I've ever used. Medical costs can chew up $800-1000/month (when you include dental, optical, insurance costs and prescriptions). And if you've got a big house in a high-tax neighborhood, property taxes would probably be your next biggest expense. I don't know how your mom does it--does she have a pension? Or a union health plan or its equivalent still in effect?

If not, she's probably existing on somewhere around $26,000/year, pre-tax. That's only $2200/mo. Once she's paid her income tax, utilities, health costs, car insurance, maintenance and gas, homeowner's insurance, property tax, groceries, and telephone, it doesn't leave much for clothing, haircuts and just having some plain old fun.

2old
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The real story is probably that his lost a million dollars gambling in the stock market during the bubble.

Even with the weirdness of stocks over the last seven years if he had been in a S&P index fund he would be up about 15% in addition to generating 1 to 2 percent a year in dividends. Any money in bonds would have done very well over that time frame.


I had my 401K invested in a tech fund. I lost 70% of my 401K. Even though I've been maxing my contributions, and using good allocation since then, it's still underwater. If he was invested in tech stocks, he easily could have lost $1M of that $1.5M--didn't he say his advisor kept him in the wrong assets?

2old
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The lesson has nothing to do with asset allocation. It has everything to do with knowing when to sell. And also to using independent analysis, as opposed to following some financial advisor.

Before you buy anything, you should understand the conditions under which you should sell. Follow a decent sell discipline and you should not have any problem.

The fact is that anybody who did not sell the Nasdaq and related things in mid-March of 2000 was an idiot. I certainly got out then - the sell was obvious.

The lack of an understanding of when to sell is the major flaw that most people have.
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The fact is that anybody who did not sell the Nasdaq and related things in mid-March of 2000 was an idiot. I certainly got out then - the sell was obvious.

Then there's a bunch of idiots out there! I haven't had time to read the article yet so I can't really comment on this guy's situation.

JLP

http://AllThingsFinancial.blogspot.com
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Of course there is a bunch of idiots out there. What else is new?

There is a sucker born every minute. But it does not have to be me.


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"By my calculations, to live 'comfortably' (not extravagantly) during retirement, costs anywhere from $3600-$4500/month, including taxes."

I would have to disagree with this. My father retired 20 years ago, gets somewhat less than $15,000 per year in SS and a small pension, owns his own home and lives very comfortably, and saves most of his income each year. When he retired he had about $20,000 in savings; he now has about $70,000 in savings - He wants for nothing and does what he wants, when he wants.

I'll be lucky to have half of the resources of the sob story guy when I retire - probably less than $150,000 in assets, no home, and SS & 401K of about $24,000 per year - but I expect to live comfortably as well - I have no idea how this guy ended up with such a loss, but he was probably not paying attention for seven years.

JimA
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JimA759s writes,

<<"By my calculations, to live 'comfortably' (not extravagantly) during retirement, costs anywhere from $3600-$4500/month, including taxes.">>

I would have to disagree with this. My father retired 20 years ago, gets somewhat less than $15,000 per year in SS and a small pension, owns his own home and lives very comfortably, and saves most of his income each year. When he retired he had about $20,000 in savings; he now has about $70,000 in savings - He wants for nothing and does what he wants, when he wants.

I'll be lucky to have half of the resources of the sob story guy when I retire - probably less than $150,000 in assets, no home, and SS & 401K of about $24,000 per year - but I expect to live comfortably as well - I have no idea how this guy ended up with such a loss, but he was probably not paying attention for seven years.


Here's an interesting quote from Paul Farrell's The Lazy Person's Guide to Investing

http://www.retireearlyhomepage.com/lazyinv.html

The sixth chapter "Frugal Savings Wins" demonstrates that managing your living expenses is as important as maximizing your investment returns. Farrell recounts an illustrative story from one of the attendees at Berkshire Hathaway's annual shareholder's meeting, perhaps the largest gathering of multi-millionaires in America.

Most people with money ain't talking. They don't drive flashy cars or live in big houses, but they're very comfortable. And they don't need a six-figure income to survive. They live very comfortably on $15,000 to $30,000 per year and still save lots of money. [even though they're already millionaires]

</snip>


intercst

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The fact is that anybody who did not sell the Nasdaq and related things in mid-March of 2000 was an idiot. I certainly got out then - the sell was obvious.

Unfortunately, it wasn't obvious to me. I was a beginner idiot in investing then.

Those were the old days though. I'm an advanced idiot now!

--SirTas
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<<<By my calculations, to live 'comfortably' (not extravagantly) during retirement, costs anywhere from $3600-$4500/month, including taxes.>>>

Whole lot of people living comfortably on less than that, especially if they had the house paid for when they retired. In fact, a lot of people still working live comfortably on less than that.

BTW, if they raise the SS retirement age to 70, where do they think all those 65 year old people are going to get jobs? Just try finding a descent job if you're over 60. Why do you think companies have early retirement incentives? They don't want old employees.
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>> BTW, if they raise the SS retirement age to 70, where do they think all those 65 year old people are going to get jobs? Just try finding a descent job if you're over 60. Why do you think companies have early retirement incentives? They don't want old employees. <<

One interesting thing about the baby boom retiring... There's going to be more jobs than people to fill them. Course, some of the baby boom WON'T retire (because they can't afford to), but those of us who are 30-40 shouldn't have any problems finding jobs when we're 50-70.

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but those of us who are 30-40 shouldn't have any problems finding jobs when we're 50-70.

Dream on!

Hedge
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A nest egg of $1,500,000, and an annual withdrawal of $28,800 is only a 1.92%/yr withdrawal rate.

Last summer I met with a CPA (the boss of my tax preparer). He had similar stories of clients who had $1,000,000 in early 2000 but now have $500,000, or worst case was turning that $1,000,000 into $100,000 after making a $100,000 withdrawal. Yes, 100% equities and, worse, 100% in high tech, and then selling low.

Unfortunately, I didn't notice specifically what Phil Horstman did wrong, but he would be typical of what the CPA told me last summer.

Concepts like asset allocation, diversification among different asset types (mine: domestic stocks, international stocks, bonds, real estate investment trusts) and rebalancing were foreign to those clients the CPA talked about (the CPA didn't name names, of course), and the concepts seemed foreign to the CPA. Those concepts are probably foreign to the majority of individual investors, as the Dalbar study of funds flow seem to support.

So when I handed my paperwork to my tax preparer last Friday, she told me that my Schedule D is pretty simple. "[The CPA] is really worried and is pulling out his hair about some of his clients--they have pages and pages of trades." "You mean like turning $1,000,000 into $500,000?" "Worse--one had quit his job to day trade, turned $1,500,000 into $50,000, and since he had quit, he doesn't have any other income coming in." "I bet that I, practicing asset allocation and diversification, with relatively little sell activity, and usually having minimal losses, fly under [the CPA's] radar." "Yes."

(Reminds me of Sigmund Freud trying to figure out what a healthy person is by studying the mentally ill.)
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Mark0Young,

This is going to sound cold and heartless, but some people are just plain stupid!

The guy in the article from the first post in this thread obviously did NOT have an asset allocation plan. My guess is that he was too tech-heavy, trying to make the "big kill." It is sad, but the REALLY SAD part is that there are MANY, MANY more like this guy.

JLP

http://AllThingsFinancial.blogspot.com
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My guess is that he was too tech-heavy, trying to make the "big kill." It is sad, but the REALLY SAD part is that there are MANY, MANY more like this guy.

Well, there is something to keep in mind about the Tech boom and how "stupid" people invested in tech stocks. We can say (with that perfect hindsight) that it makes no sense for people to think that these tech companies could rule the world so completely as it seemed in 98-99ish. We say that so few of these companies had business plans, how could we dream of investing in them?

Us as a computer college students in 98ish:

Some had webpages setup to track where on campus they were at any point in time. Some e-mail addresses were setup to respond with contact information (IE, head over to room 403, I'm in chemistry class right now). People had their loft steps automatically descend when it was time for them to head to class. There were online libraries of CD's that students had, so you knew who to go mooch from. When I would log onto any computer in the school, my list of settings would pop up, it would automatically warn me when it was time to head to class, would let me know where in the school all my friends were, etc.

I can't begin to list the amazing things that people were doing with their computers, and it was hard for tech people to separate reality from their "tech" lives. For instance, my family was surprised to learn that my wife and I keep our computers in our kitchen on the kitchen table. I explained that we're on the computers while we cook and eat, so we may as well keep them there.

We tech / young people live in different worlds than a lot of the country.

So I would hate to call people idiots for being excited about the tech revolution. I'd just say we come from very different backgrounds.
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That's a nice story but it really doesn't have anything to do with investing. As with all bubbles, people got greedy. They were buying companies run by college kids who had no management experience at all. Most of those companies had no earnings and no hope of earnings, but people kept buying them anyway. Then, the commentators on CNBC started talking about Price-to-Sales ratios instead of Price-to-Earnings ratios. Why? Because you can't have a P/E ratio when you have NO EARNINGS.

The point of all this is: no, it wasn't wrong to invest in tech. But, BUT, it was wrong to sink a significant portion of your retirement into the tech sector. Those who did are now paying the price.

JLP

http://AllThingsFinancial.blogspot.com
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This is going to sound cold and heartless, but some people are just plain stupid!

If we substitute "ignorant about investing" for "stupid", and add hubris, greed and unfamiliarity with bubbles, I would agree 100%.

The guy in the article from the first post in this thread obviously did NOT have an asset allocation plan. My guess is that he was too tech-heavy, trying to make the "big kill."

Tech heavy would fill the bill.

I remember hearing phrases like "Old ways of evaluating stocks don't matter. We need new ways of evaluating stocks," and "This time it is different." Does that remind you of the Internet craze where many high-flying companies didn't even have a hint on how they would eventually earn money, yet their share price went right out the roof? Those of us who have longer memories remember the same things being said about PCs, consumer electronics, aerospace. Unfortunately I was not an investor back in the electronics and aerospace bubbles (my father was), but the Internet craze reminded me of what I read in The Wall Street Journal back when I was a kid, reading my father's magazines. But when I was finally an investor, those memories made me cautious of the Internet bubble, even though I felt like I was missing out--after all, one of the funds had just recently had a 400% growth in just one year. I heard of "worstification" as a put down on diversification.

But I stuck to my asset allocation plan and kept on adding to my investments as per my asset allocation, and came out OK.

Those who were pulled into the Internet bubble or the tech bubble, and then bailed out a couple years ago, did poorly. An Internet fund that was started by one of the managers of the fund that had gained 400% growth in one year had a subscription price of $10, a bunch of people jumped in, and a year after it actually opened the NAV was hovering around $1. I did look at that fund once it was publicly trading, and of the top ten companies it invested in, eight had multi-year losses, most of those didn't even have an identifiable way that they would make money, and the two companies that actually had profits were health care companies.

It seems that just enough memory has to pass before the next group of investors come along and pump up prices of yet another sector. I don't know if that will be health care stocks (drugs, hospitals, prostheses), flat screen manufacturers, water purifiers, energy producers or something else, but I am confident that something will be the next bubble and again people will be saying, "This time it is different. The old ways of evaluating stocks don't apply anymore, we need new ways of evaluating stocks" and calling those who diversify and have part of our investments in bonds as "old fashioned."

It is sad, but the REALLY SAD part is that there are MANY, MANY more like this guy.

The majority of individual investors practice one or more of these types of behavior:

- Invest too little

- Invest too conservatively

- Invest in too risky of an investment

- Chase performance (getting into each investment after it reaches its peak)

- Let greed and fear drive buying high and selling low

- Are too concentrated in employer's stock

- Fail to diversify beyond one asset type, or even beyond one sector

And that is ignoring issues like Asset Allocation, expenses or managing the tax impact of one's investments.

The Dalbar Study of Fund Flows may be controversial, but I have seen a couple fund families report that people get worse results than what they invest in, specifically because they chase performance, time the market (and time it incorrectly), or allow greed and fear to drive their investment decisions, so many individual investors are getting into and out of the various funds at just the wrong time.

There is disagreement here on Fool.com and also over at Morningstar.com on how one should invest, but there is pretty much a consensus that one needs to be disciplined in one's approach, and one needs a way to get the emotions out of the investment decisions.

Step away from the self-selecting sample of those who know something about investing or at least curious, and you will find that the majority of people are pretty much clueless, not knowing how they will react when it is their own money in investments that lose 20% or 30%, or believing that investing is no better than Las Vegas, or falling prey to the advertisements of day trader seminars or other trading strategy seminars.

Unfortunately, it isn't in line with the compensation methods for investment advisers, brokers, or seminar leaders to help potential investors in a way that is best for the investors' best interests. And employers? They don't give any investment materials either, beyond the prospectuses and plan summaries for their 401(k) plans, because they are afraid of lawsuits, leaving their employees by and large ignorant about investing.
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I remember hearing phrases like "Old ways of evaluating stocks don't matter. We need new ways of evaluating stocks," and "This time it is different."

I seem to remember FNN (remember them?) talking about an IPO that didn't have a real underlying business, and furthermore hadn't even decided on what sort of product they would produce. If memory serves, the IPO went well, but I don't have a clue what it was.

Hedge
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Mark,

That was an EXCELLENT, well thought-out post!

I agree that I was harsh in my criticism of people like the guy in the article.

I graduated with a finance degree in December of 1996 (I'm actually older than that, I just took a long time working my way through school). Anyway, all through college we were taught how to value companies. Well, I graduated from college right when the bubble started heating up. It was tough to be in the brokerage business back then because EVERYBODY was an investing expert.

All through the bubble I was telling people that it wouldn't last and couldn't last. They just thought I was nuts. I guess people just forgot about what is important: EARNINGS. You can have the greatest idea ever, but if it doesn't have earnings eventually it will die.

About employees: Congress was supposedly working on something to allow people in employer-sponsored retirement plans to get advice from third parties. I haven't heard too much as to how well that is going. That would be a cool job. Just going around and teaching people about asset allocation and the importance of rebalancing.

JLP

http://AllThingsFinancial.blogspot.com
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Hedge,

There were also stories of some internet companies that went bust that had trailers filled with brand new unused servers. Guess who bought them at liquidation prices? That's right, brick and mortar companies who made it through the bubble.

Oh, what a mess it was!

JLP

http://AllThingsFinancial.blogspot.com
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