In his April cover story, Harold Evensky listed the questions that clients want answered as they contemplate retirement. "How much can I spend? How much should I save? How long should I work? How much can I afford to give to my children? How much do I need?" When clients look to us for guidance on these critical issues, our prescriptions are unavoidably based on assumptions about future returns for stocks and bonds.

After more than a year of wrenching declines in popular stocks, Wall Street's wisdom seems to be that a "market bottom" is forming and before long the good times will be rolling again. Advisors who naively guide spending, saving and gifting decisions based on the investment returns of recent years could do irreparable harm, especially to retirees. A fresh reality check may be in order.

Remember When You Believed?

I was seven years old that year. I remember waking up early the morning after Christmas, still energized by the thrill of the big day. Mom and Dad and my three sisters were still sleeping upstairs. There were a few empty Coke bottles and coffee cups on tables in the living room, where my grown-up relatives had been chatting and laughing the night before. Toys and presents had been pushed more or less back under the Christmas tree with scraps of wrapping paper that had escaped the hurried cleanup.

I picked up my Humphrey Pennyworth wind-up toy and gave it a few spins around the carpet, but then I started feeling, I don't know, a little empty. I lay on my back on the couch with my hands clasped under my head and my little feet perched up on the arm, and I stared out the window at the gray winter sky. The sad realization came to me that on the day after Christmas the magic is gone, completely gone. And it would be 364 long, boring, normal days before it comes 'round again. After all these years, I still remember that sinking feeling the morning after Christmas, the letdown from euphoria to cold reality. But the worst was yet to come.

The next December, our cold Ohio weather and seasonal decorations in school began to stir in me the annual excitement about Christmas. I wanted real cowboy boots that year, and I was hoping against hope for a wristwatch. Was this a great time of year or what? One afternoon, I was walking home from school on Wilson Street, keeping a respectable distance behind my younger sister Molly and a few of her second-grade girlfriends. As long as I live, I will never forget hearing Molly say quite matter-of-factly to her companions, "Well, I know there is no Santa Claus. Last year I sneaked downstairs and saw Mommy and Daddy putting everything under the tree. Daddy was drinking the hot chocolate and eating the cookies we put out for the reindeer."

I didn't let the shock show on my face, and I purposely kept up a brisk gait the rest of the way home as I let this devastating news seep into my soul. Before, it was just a long wait between Santa's annual appearances; that was bad enough! Now I realized it was never going to happen again. This was easily the worst day of my life.

What Is Real?

Sometimes, there is a fine line between the real world and the world of our imagination. Other times, the delineation is ever so plain, but we prefer to blur the distinction because the imagined world is more pleasant than the earth-bound version.

The myth of Santa Claus is a good example. Generation after generation of parents perpetuates the story, even though they were personally devastated when reality snatched their dream from them as children. I suppose parents believe that the few years of innocent delight are worth the inevitable pain of disillusion.

In 1897, eight-year-old Virginia O'Hanlon was wrestling with personal doubts about the existence of the jolly man from the North Pole who whisks into town every Christmas to bring dolls and skates to good little girls and boys. She asked her father about it, but he was a little evasive on the subject. In her family, whenever any doubts came up as to how to pronounce a word, or some historical fact was in dispute, they would write to the question & answer column in the New York Sun. Virginia's father would always say, "If you see it in the Sun, it's so."

Armed with this confidence, young Virginia wrote to The Sun to find out the truth. Her letter found its way into the hands of veteran editor Frank P. Church. He felt burdened to reply publicly to Virginia's inquiry on this sensitive matter, and to do so truthfully. His carefully written editorial, "Yes, Virginia, there is a Santa Claus" is now a beloved classic. In it, he assured Virginia that, "Santa Claus exists as certainly as love and generosity and devotion exist. The world would be intolerably dreary without Santa Claus. The most real things in the world," he wrote, "are those that neither children nor men can see. No Santa Claus? Thank God he lives and lives forever. A thousand years from now, Virginia, nay, 10 times 10,000 years from now, he will continue to make glad the heart of Childhood."

Letting Go

Frank Church did a masterful job of answering Virginia's concerns about the icon of the Christmas spirit. I am not sure that I could be as gracious if a latter-day grown-up Virginia were to ask me whether the '90s bull market was a reality upon which she could count. As a matter of fact, "Virginia" does ask me regularly. She is that prospective retiree who doesn't want to work five more years just because John Bogle suggests that the market's P/E will decline and stock investors will collect just 3% a year. What can I say to her if I think Bogle may be right, or Peter Bernstein, who thinks Treasuries may earn as much as stocks, or Robert Schiller, who sees negative stock returns for the next five or even 10 years?

Maybe I could write: "Yes, Virginia, bull markets do exist, just as surely as our collective hopes for a better life. They are a piece of the American Dream. The world would be intolerably dreary without bull markets. The one you have come to know and love may take a little rest, because even bulls need their beauty sleep. But he will be back. And what if it takes a few years? That is nothing in the grand scheme of life. Over the next thousand years, there will be bull markets aplenty. You will tell your children and your grandchildren about the generosity of the bull market and they, too, will come to believe and enjoy in their day."

Maybe that would help Virginia cope with the shock of discovering that the 1982-2000 bull market has run its course, and it might help her keep the faith that one day the world will know again the sheer joy of 25% annual returns from an unmanaged index fund. But will it make her retirement more secure? As her advisor, I think I owe her a little more information. I think my letter to her would be more direct than Mr. Church's, but maybe a little more helpful as Virginia tries to cope with her new reality.

Tell It Like It Is

The gentle approach has some appeal, but Virginia needs some practical help if she is ever going to retire in comfort. If we use sober assumptions about investment returns, it is just possible she may decide to work a little longer than she planned. Helping her make that decision may, in the long run, be a better service than patting her on the hand and telling her that the good old days are right around the corner. I would rather have my clients go out and earn their Christmas presents than sit by the chimney for the next 10 years staring at cookies and milk!

I would write something like this:

"I hate to tell you this, Virginia, but you are not going to see a bull market like this again in your lifetime. Get a grip, girl! It's not the end of the world. I know it's upsetting to realize that we can't always count on 25% annual stock price gains in a world of 3% GDP growth. But there it is! Worse yet, it's payback time, Virginia. You know that 23x P/E ratio on the S&P 500? Well it's going to come down; maybe to 14x, maybe less.

But we can deal with this, Virginia. Life is still good. I know, it takes money to retire, but there are things you can do to assure your financial security. Practical things that people have done over the years, like saving a little more, working a little longer, spending a little more prudently and building a creative, diversified portfolio. There, there, Virginia. That's not so bad, is it?"

Not so bad? Hey, are we forgetting? This is America, land of opportunity, home of the free and the brave! Isn't this still the most prosperous and most resilient economy the world has ever known? Of course it is! But let's not confuse opportunity with a free lunch.

I realize that part of why I wanted to believe in Santa Claus, as a kid, was simple greed. New skates, cowboy boots; who wouldn't want to believe? In much the same way, investors today want to believe that the heady days of the New Economy are a permanent reality. Who wouldn't? They like retirement models that assume consistent double-digit equity returns. They like to hear their advisor assure them that "over long periods of time, stocks will always return more than bonds." But as advisors, we should be aware that at age 60, five or 10 years can seem a very "long period of time," and subnormal returns in an index fund can shatter retirement dreams.

Even when my eight-year-old self was confronted with the evidence, I didn't immediately embrace the Santa-free reality. I tried to keep my selfish faith intact for one more season. Investors who rode the fantastic 18-year wave of stock-price gains came to believe that constantly flowing, abundant returns were reality. Today, many clients are finding it hard to accept the past year's evidence and the quantitative ponderings of respected investment thinkers that this was a once-in-a-lifetime experience. So pleasant was that era that even some seasoned advisors don't want to admit that the last few amazing years were "real" only in the imaginations of millions of players. As Harold Evensky puts it, "The recent stock-price performance is neither a result of real asset pricing or a new paradigm economy. The explanation is behavioral." I think it is a retirement advisor's responsibility to help clients re-examine their belief systems.

The late, great bull market lasted much longer than most children's belief in Santa Claus. But that doesn't make it a permanent reality. Eventually, we learned that not only is Santa not going to come down our chimney, but more sobering yet, we are the Santa our children expect. We went to work to earn money to buy their Barbies and in-line skates, which were made not in the North Pole, but in China! Similarly, our clients have to provide their own retirement security. If they are fortunate, they will have the help of an advisor who understands that the stock market is not Santa Claus. It is part of a complex adaptive system for allocating capital to its most profitable uses.

As advisors, we owe our clients a sober appraisal of the risks and opportunities inherent in capital markets. We need to build realistic return assumptions into our retirement projections. And we owe them a thoughtfully diversified investment portfolio. We must again consider active management of equity portfolios and, yes, Virginia, even bonds.

In the long run, reality will serve us better than myths. If you don't believe me, ask my sister!

J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.