Page 11 - The Great 401k Rip-Off

One of the significant challenges to holding your money in the market is you don’t own it until you
sell it. In other words, as long as your money is in the market, you really do not know how much you
have because it could crash today, tomorrow, or next week. A prime advantage of the above strategy
is it locks in every year. If you get a 6% growth on $100,000 this year, next year you begin with
$106,000, and you can never go below that. Imagine if you were to deploy this strategy now, and the
market crash everyone is predicting actually happens. Would you rather have your balances locked
in, or be subject to significant losses just as you are getting ready to retire? Here is what those two
different scenarios look like:

On which line would you rather be? The orange line depicts riding out the market from year 2000 to
today, while the green line simply yields ½ the market upside with no downside. Electing the latter
yields about 40% more, in spite of the longest and perhaps most aggressive bull market in history.
Eliminating risk with just half the upside is a much more powerful strategy than accepting 100% of all
gains plus all losses.
Moreover, hen distributing income from an account it can mean the difference between a lifetime of
peaceful prosperity and abject poverty. Here’s why.
The problems with the “4% Rule,” and how it can lead to your financial ruin:
During the bull market run up of the past century, many Wall Street‐based retirement planners
adopted what is known as the “4% rule,” which was first posited by a San Diego‐base financial
planner named William Bengin. Mr. Bengin had been providing 401(k)s for his clients for several
years, during which time several had lost their pensions. Bengin needed an answer to how much his
clients could afford to spend in retirement without a high risk of depleting their savings while alive.
After much analysis, Bengin came up with 4%, plus an adjustment for inflation each year. This
became known as the “Four Percent Rule”. [16]
The 4% Rule held that if a retiree invests in a “moderately risky” portfolio of 60% stocks and 40%
bonds, they can initially withdraw 4%‐4.5% annually to provide income, increasing that amount in

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