Page 22 - Exposed Final

We stress test the plan with real world, life-changing events, such as

increased taxes, disability, death, inflation, etc. A plan that does not endure

under all circumstances is no plan at all.

Now let's pretend you have a crystal ball and a time machine, and you

discover that the average rate of return of the stock market from 1973-2002

was 12.09%. Not bad, so with your time machine, you retire back in 1973

with $1,000,000. You plan to withdraw 7%, or $70,000, and increase the

$70,000 each year by 3% to keep up with inflation. That should work. You

are earning 12% and pulling out 7%. You can live off the interest and never

touch the principal. Congratulations!

Let's see how the plan worked out. What? You ran out of money in 17

years? What happened? Well, what might work during the accumulation

phase (growing the money) can fail miserably during the

distribution/retirement phase (creating income). In this example, the stock

market dropped significantly right after retirement, and you never

recovered. This is where you needed the crystal ball to see these first two

years coming. Due to the early stock market losses, you burn through your

money in 17 years even though the market average rate of return during

the 30-year period (1973-2002) was 12.09%.