Page 14 - The Great 401k Rip-Off

The line shows the impact of employing the 4% Rule, taking just 4% of the initial amount in annual
income from this account and adjusting it for 3% inflation each year. The reason the 4% rule is so
flawed is that income needed in both good and bad years. In the bad years, more of the account
must be liquidated to meet basic income demands. Those shares are then gone forever, unavailable
for later periods of recovery.
All of this is exacerbated if this is a fully taxed or qualified account, not to mention those pesky fees!
In that case, the retiree would have to either adjust income up if they needed the full $4,000 per year
to live; or settle for less money. Usually, we estimate about 15% in taxes for ballpark generalizations.
The impact of taxes and fees are shown here:

Wall Street’s Zero Sum Game

The main problem with Wall Street’s approach, and by inference, your 401(k), is there is no risk
mitigation built in. It doesn’t even really try, other than to pass off certain securities, like bonds, or
bond funds as relatively safe. Instead, Wall Street always focuses on and promotes pursuing rates of
return, which in most cases, are meaningless when discussing income planning.
The problem is there is rate of return high enough to insulate yourself from a major market crash.
You have to change the game entirely and eliminate the crash.
Often missed is the longevity risk borne by the retiree in retirement scenarios. This risk leaves people
with few good choices, and it turns out, is much more severe than market risk. It also provides the
greatest opportunity to maximize retirement plans. In fact, the one choice that is appropriate turns
out to be perfect. Following are the key Wall Street choices that must be confronted and overcome.
Wall Street Solution 1: Less Now, More Later
We call this first one “Less Now, More Later.” In this scenario, the employee is concerned about a
long retirement. They choose to plan for a long lifespan, and divide their money by that number. The
problem is it’s just a guess, and the vast majority of the time (over 80%) people guess wrong. The
downside, of course, is if you guess wrong you could either outlive your money, or more likely, die
with too much, having cheated yourself out of the best possible retirement. The following illustration
assumes a potential 30‐year life span. To be safe, we will use a payout factor of 3%, rather than 4%.

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