Unfortunately, what can sometimes compound this problem further, is that many people are unknowingly working with a current advisor or broker whose specialty is focused more towards growth and accumulation, than towards income and preservation.

How do we know this? Well, if you are a 60-year old person who has been working with the same advisor for the past 10 or 20 years (during your working career), chances are you are working with an Accumulation Phase advisor, since the majority of your relationship with them took place during that specific phase of your life.

The second test is that if you are currently experiencing any concerns about: losing money, running out of money, or getting your portfolio to generate enough sufficient income safely, that is compelling evidence that you likely have not been exposed to effective income-producing portfolio concepts that are capable of solving these types of concerns.

Just like some doctors are heart specialists and others are brain specialists, the financial services industry typically has many different kinds of advisors who specialize in different areas of expertise.

If someone is concerned about moving on from the services of a trusted advisor they have worked with for many years, they can certainly continue to respect and appreciate the relationship and good work that the advisor has done for them.

However, one of the most important decisions they can make for themselves is to transition their portfolio into the service and care of an advisor who is better trained and equipped to help them navigate the unique challenges of the Income and Preservation Phase of their life.

So now that we have discussed some general financial planning rules, let’s look at exactly what can go wrong when someone is depending on a non-guaranteed portfolio to provide growth and income during retirement.

Problem #1 – Drawing Consistent Income During A Declining Economy

A favorite selling point of stockbrokers is to talk about “average” rates of return. “Some years you’re up 20 percent, some years you’re down 20 percent, but on average, Mrs. Client, your portfolio should get about an 8% rate of return over the years,” they like to say.

Well, that can work to a certain extent during the Accumulation Phase of life. You can almost afford to “play the averages” because you’re NOT taking any income out. But you can imagine what happens mathematically when you start pulling consistent income out of your portfolio every single year whether the portfolio is up or down.

Withdrawing income out every year during retirement makes the “bad” years much worse, and can make the “good” years not nearly as good. Why? Think about what happens to your $500,000 portfolio balance if you’re losing 30% of your account value in a down economy at the same time you are withdrawing $30,000 as income.

Your portfolio balance would go from $500,000 to $320,000 in ONE YEAR!

Now again, this is typically when the stockbrokers start jumping up and down trying to convince you to “hang on”, telling you that the market will come back and “average” out with the next big rebound year.

Will it really? Let’s see. Usually even in the best rebound years we rarely see the market rise more than 25-35%. So in our scenario, let’s say your new portfolio balance of $320,000 has a 30% rebound return the very next year. Are you really back up to where you started at $500,000? Did the “averages” really work out like the brokers insisted?

Hardly! Why? Because remember, you’re retired now! You don’t have a paycheck from your employer anymore. You are dependent on your portfolio to provide your means for buying health insurance, food, and paying your mortgage and electric bills each year - so you still have to withdraw income out of your portfolio this year, and the next year, and the next year.

How many retirees do you know that have the luxury of shutting off their monthly income for a couple of years to allow things to rebound all the way first?

Not many.

So again, assuming our $320,000 participates in a 30% rebound the following year, let’s see if the stock brokers are correct in saying that everything will “average out.” $320,000 receiving a 30% gain would temporarily bring our balance back up to $416,000, but once we subtract our income of $30,000 to pay our bills and living expenses for the year, we are back down to $386,000.

That is still a 22% reduction of someone’s life savings in only the first 24 months of their retirement! Does that really create peace of mind for a 62 year old with a 25-30 year life expectancy?

There are two extremely important points to understand about this type of strategy:

FIRST: Losses can be twice as powerful as the gains. If you have $100,000 and you lose 50% the first year, but then have a 50% gain the second year, you’re at least back to where you started right? Wrong! $100,000 minus 50% equals $50,000, but $50,000 plus a 50% gain only brings you back up to $75,000! Notice how it takes a 100% gain in order to offset a 50% loss? And that is assuming you are not taking any withdrawals for income.

SECOND: Withdrawing income from your portfolio each year can skew your averages. There are few things that can destroy a portfolio faster than drawing income in the same year that your underlying investments are losing value.