Ouch! Here's a Reason You Need to Be Very Conservative in Retirement Planning

CNN Money brings us this story of retirement planning gone wrong. Robert Bertrand had retirement all figured out. Here's where he stood:

• Retired in early 2006 at age 58 to live out his dream of playing on the Senior Professional Golf Tour.

• Had $425,000 socked away, plus another $500,000 or so in stock options.

• Wife earned $140,000 a year as a mortgage company executive.

Not bad, huh? $1 million saved and $140k income per year in income, plus whatever he earned on the tour. Should be safe, right?

Then the market went to pot. Here's the result:

• The savings tanked with the stock market.

• The stock options dried up because the issuing company went down.

• His wife lost her job -- she worked at the same place he had his stock options.

Ugh. And, as a result, things aren't looking very rosy:

They have monthly expenses of $8,000 but only $1,700 in income (from Susan's unemployment and Bob's annuity; having worked in Canada most of his career, he'll soon qualify for an additional $800 a month in pension benefits) and $13,000 in the bank. Making matters worse, they have little equity in their house.

Now they've gone through all their savings and he's looking for a new job. Some retirement, huh?

Ok, let's do a little review here. This isn't meant to criticize this family or kick them when they're down, but we all can learn something from this situation. Of course the (hopefully) once-in-a-lifetime market/real estate meltdown is something that very few avoided completely, but there are still things they could have done to set themselves up for a more solid retirement. Some thoughts:

1. They could have reduced their spending. $8,000 a month in expenses is HUGE! No, it's not bad if he's making $150k (his pre-retirement income) and she's making $140k, but once he quit that $8,000 was a good amount of cash flowing out based on their income. So when his wife lost her job, it was a crushing amount. But it sounds as if they've done a lot of spending throughout their lives. Yes, they saved a good amount (though not much for a family with $290k in annual income) but they also borrowed BIG (or at least big enough that when their home's value dropped they had zero equity left.)

2. Speaking of their home, why didn't they have it paid off? I think this should be a pre-retirement goal for everyone -- no mortgage. If they owned their home free and clear, I'm sure that $8,000 in monthly expenses would be much lower.

3. Too much risk in one company -- over half their savings (options) and her salary. This is why it's not a good idea to own too much stock in one company, especially one you or a spouse works for. Because if it goes down, you go down with it big-time. Now maybe he couldn't sell the options for some time. If so, his retirement never was that secure (he retired with $425k in savings and that's all.) He needed to wait until he saved more to leave his job.

4. Leaving a career is a huge, huge decision, and once you step off the train, it's hard to get back on again. He's now  62 and out looking for work. he's got a lot of good experience, but in an economy where jobs are hard to find, he'll be competing with much younger (and maybe as experienced) executives. It's going to be tough for him. Couldn't he have awaited a few years, bagged his salary in savings , and then gone off to pursue his dream? Of course, he worked for the company that tanked (again, see point #3), so this probably wouldn't have worked either.

5. Why was his $425k in savings in stocks that went down with the market? A 30-year-old should probably be mostly in stocks since he has time to recover if the market tanks. But a 60-year-old is being very risky with savings in such potentially volatile investments.

So, what's the answer? You have to be VERY CONSERVATIVE when planning your retirement. If you think you need a certain amount, add 20% to it. If you think your expenses are going to be a certain amount, add 20% to them. Don't count on Social Security. Assume you can never work again. Make all the conservative assumptions possible (within reason, of course, if you go too wild, you'll never retire) and if you can retire given their results, you should be fine. And be sure you protect your income/savings. If you're counting on it, you have to be sure it will be there and you have access to it. Don't count options you can't cash, don't put too many eggs in one basket, and don't take needless risks with your nest egg.

Here's what I'm doing along these lines:

• Assuming I get nothing from Social Security. It's likely I'll get something, but assuming I'm not will encourage me to save more as well as provide a measure of safety in case I miscalculate in other areas.

• We're keeping our expenses low. House is paid off, on-going bills are way below our income, and we're keeping things as tight as possible while also enjoying life.

• I plan to work as long as needed, then transition to a decent part-time gig in retirement (still TBD). I don't plan to quit altogether or join the senior's golf tour.

For details on my retirement plans, see How Long Before I Can Retire? and What I Plan to Do During Retirement.

So, what's your take on this issue? Anything I missed or got wrong?

Comments

[Eugene Krabs]

Ouch! I hope that people will take away from this the importance of diversification and asset allocation.

I think they actually could have been fine with #1, 2, and 4 if it wasn't for #3, and to a lesser extent, #5

I don't think a retiree should never hold that much stock, and nobody in their right mind should hold that much stake in ONE company.

[Jim]

He really should have cashed in the options when he retired. Its bad enough to have that much in the stock market but options are at much worse risk of losing ALL their value. A 25% drop in my company stock caused my options to go from about $130k to $0 in the matter of just 1 month.

Personally I'd have 100% of my investments in cash, bonds or fixed income at retirement.

[Jim]

Ooops, I meant $13k rather than $130k. Still the point is the same. The value of options can vanish very quickly and it doesn't take a total disaster.

[bob]

I read this article in Money Magazine.

They both were executives at some mortgage company that imploded (he had just retired)in 2007.

They had everything tied to the mortgage market. Stocks, income, home equity, etc.

Their company goes out of business, housing tanks (along with their equity), his options become worthless, she looses her job. All at once.

Classic case of all your eggs in one basket.

AND...the 425K savings wasn't all stocks either. They blew through it for 2 YEARS before the light finally came on that they were sinking. For 2 YEARS they kept living their previous lifestyle, though neither of them had a job. Living the lie, they were.

I don't feel sorry for them.

[JimL]

Spending is obviously a problem as well. Notice that he still wouldn't give up the golf membership costing $700 month with the lame excuse of "getting contacts".

[Eugene Krabs]

Jim, I agree with you, although I suspect the article meant "stock options" not "futures options".

[S. B.]

Well obviously it is a story about a botched retirement plan, but as others have already alluded to in passing, the story is really about bad finances in general. Look at it this way: suppose the man had never retired early at age 58, or suppose perhaps he had never even considered the idea of retiring. What would have happened?

Most of story would still be the same. If he had continued to work at age 58, then a year later they both would still have lost their jobs anyway and the $500K in stock options would have evaporated. Two years later, the $425K in stocks would most likely be cut in half anyway and they still would have had no jobs. Additionally, it would appear that they wouldn't have cut their expenses either, as they've lived that way for the last two years without income, regardless of whether the income loss for one of them was planned or not.

So I think the moral of the story is that they were completely financially unprepared for most anything, not just early retirement. They were almost equally unprepared for a dual job loss, which would in fact have happened to them shortly one way or another.

I echo all the comments about lack of diversification, improper asset allocation, and perhaps most importantly, the inability to cut expenses immediately upon recognition of major problems.

[Strick]

I like the idea of the chance he took at the age he was, but there was no reason I can see it had to be such a risk. He could have greatly reduced this risk by doing some serious saving at some point before 58. A $290K/year couple only had saved $425K and home was fully leveraged at his age?

The other approach would have been to slash expenses. Even if his wife had kept her job, I can't imagine her after tax income was much more than the $8K in expenses, so further savings would have required a lot of 20 foot putts from Robert (and their nest egg needed a boost to fund their lifestyle even without the crash). But given the fact they continued spending $8k/month on unemployment for 2 years, slashing expenses is something they must not be capable of doing.

[Foobarista]

Did the guy actually think he'd win money on the Senior Tour and survive that way? Even if everything went swimmingly, he'd still be doing a serious financial high-wire act and would need everything to go perfectly to survive.

[Mike Hunt]

Agree with many of the above. They were in a train-wreck-waiting-to-happen moment before considering retirement.

And even if he didn't retire he'd be in the same world of hurt now.

-Mike

[trevor]

It is a good idea to plan for your future, without knowing exactly what is going to happen in the future (which lets face it you aren't going to know), you should have a back up plan/money to secure your future. At certain points you will have to spend more than you would like but have a back up plan with a genuine jobs from home to secure a passive income.

[MC]

Ouch!

But I have to cry foul on the easy criticism here allowed by the benefit of hindsight.

Their position might have seemed reasonable when he actually retired a few years ago---anyone remember that? The economy & stocks were going up up up and real estate was a gold mine. And anyone with $425K in cash was considered a chump. No one was expecting the worst recession since WWII!

[Neil]

Hi

I sort of agree with the comment above. He was taking a massive risk, but one based on his experience of the market to date. His strategy may have netted him a lot of benefits over the years, and may have worked for his retirement in a different time.

All the same, it was a massive concentration of risks so I will have to go with the overall critical tone!

[Andrew Richardson]

I believe that an retirement plans is a very good option for you, because an annuities insurance is a way of to have your future sure, and the future of your family, so, you'd receive an amount monthly for a long period in your retirement plans.

[Old Limey]

Unfortunately he retired at the top of the real estate market and close to the start of the Great Recession, the worst since to thirties. Sure he gambled and lost and that happens to people all the time.
What to do now is the big question. Jobs being almost impossible to find and with expenses greatly exceeding income they are in big trouble.
Maybe they would be better off going back to Canada, at least they would have affordable healthcare and a better chance of surviving.

It sounds to me is if the word "Frugality" was not in their lexicon and they like the country club life of being elitists. At 58 he should at least have a good sized IRA but there was no mention of that.
Welcome to the real world Robert, maybe your golfing buddies can help you out, though from what I know of life they probably will steer clear of you now that you are down and out and can't keep up with them.

[ctreit]

I think the title and the tone of this post are a little misguided for three main reasons. (1) One incident (or even a few) gone wrong does not proof a point. (2) By the sounds of it, this couple's retirement plan was poorly constructed since the couple had too many of their eggs in one basket. This was not a case that they were not "very conservative in retirement planning". I would rather say that they were reckless. (3) Being conservative is a general character trait that should not be adjusted on a whim or that should apply to all people. When you set up a retirement plan, you can design it with an aggressive or a conservative asset allocation according to your personal preferences. Sure, being conservative has its advantages, but it also entails disadvantages. You just need to be aware about the implications of your choices whether you make aggressive or conservative choices.

[LotharBot]

Don't get caught up in the fact that the numbers are big -- $500k, $425k, $140k, etc. Compare them to each other.

The guy decided to retire, but his wife kept working, putting them at half of their previous income. He and his wife had total savings equal to 2 years of prior income, and stock options estimated to be worth another 2 years of prior income. Their house wasn't paid off. I think we can all see that this plan isn't going to work, whether yearly income is $250k or $25k.

The common rule of thumb is that you should have 20 times your AGI saved when you retire, not 2-4 years. If one of you keeps working for a few more years at half of previous income, you should still have perhaps 18 times your AGI saved up. And you DEFINITELY shouldn't have a lot of it in stocks, let alone stock options (stock options become worthless if the stock drops to the option price.)

This couple simply didn't have anywhere close to enough saved up, and what they did have saved wasn't in retirement-appropriate formats. It's no wonder that it all got eaten up or vaporized in the down market.

(For MC's benefit: I didn't have $425k in cash, but I did save about a year's worth of AGI in cash-equivalents for the last few years. There were a few of us who saw the bubble coming and didn't get intimidated by being called "chumps". There's a reason retirement rules-of-thumb say you should move assets into bonds; stocks and real-estate were a "gold mine", but the mine gave out. If you saw it coming, you'd be in great shape right now to gobble up assets at a discount.)

[LotharBot]

(Followup on my previous point)

Their problem wasn't merely that all their eggs were in one basket. It was that they had too few eggs (2-4x income instead of 20x income), and they were careless with them (too few bonds, too many risky stock options, house not paid off.)

What kind of shape would they be in if they'd had closer to the recommended 20x AGI and (100-age) percent in bonds? $3 million in stocks plus $500k in options, $3 million in bonds, a paid off house. When they lost their stock options, their last job, and half the value of their stocks, they might have had to cut back a little, but not nearly as much.

[Bret]

I know a lot of people in the RE and Mortgage businesses and some of them have pretty wild finances. I don't know if it's related to the huge amount of money they can make when the market is hot or if it's because they are in an image business. But, they all seem to carry very high expenses and they never seem to expect the innevitable downturns in their industry.

One exception is my cousin. She retired as a mortgage executive two years ago at age 50. Before she gave up her income, she bought an appartment complex for cash flow. And, I'm pretty sure she doesn't carry $8K in monthly expenses. She is definitely my hero.