Your retired clients have a handle on their expenses and are spending according to plan. They are withdrawing at a rate that seems reasonable. The myriad of studies about safe withdrawal rates support this thinking. You have shared this information with clients and all is well.

Then the markets drop and the world seems focused on how far down the bottom may be. Everybody did the right things. The exposure to different asset classes aligned with their goals, they are diversified, and they controlled their spending. Yet, through no fault of theirs, the client's "safe" withdrawal rate seems less safe. They are disturbed. What will we all do?

This isn't a hypothetical. It is a brief description of something that just happened. So what did you do in the fall of 2008 and early 2009? Did you rebalance? I hope so. According to most of the studies on which you found comfort, you were supposed to rebalance at some point.

We did, but I can't say clients were thrilled about it at the time. In late February 2009, I got this question, "You are naïve to think we are not headed into the next Great Depression. I know that no one can predict what will happen, but since the market is going down, shouldn't we get out of its way?"

Classic. No one can predict, but it is going down (emphasis added). This person also sent me this quote from a March 5, 2009, Business Week article a couple of weeks later: "...could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn't seem so bad now."

To me, the quote was a bit puzzling. A quick calculation on a handheld calculator told me that with the Dow closing at 6594 on March 5 getting to 14,000 in eight years meant an annualized return of just under of 10%, excluding dividends. That's "unimaginably bleak"? The sentiment then was so bad, even a good result could seem awful.

Almost all of our clients stuck with their plans through the turmoil of '08/'09 and we rebalanced as we said we would. Those clients' portfolios recovered well, many reaching all-time highs even though the markets have yet to do so. A similar result came after the bear market that followed the bursting of the tech bubble.

I attribute some of our clients' ability to do what so few wished to do to our coaching and our behavior prior to the crisis. It is not a matter of if the market will experience a decline, it is a matter of what they will do when that happens so how we prepare them matters. Citing the behavior of U.S. markets, I often show clients that someone planning for 30 years of retirement should expect at least six bear markets averaging a decline of 30%. Every year, they should expect that at some point the market will drop at least 5%, and in half their remaining years, they should expect to see at least a 10% pull back. Further they should expect that - on average - five of their monthly statements each year will show losses on their equities.

To help them see the probable behavior of their portfolio, I apply these parameters to what proportion I think they should have in equities. I also discuss with them things they can consider changing to reduce the exposure to the drama of the equity markets.

I want clients to understand that uncertainty and change are inevitable and that what they will likely want to do during bad market environments is not what we will be looking to do. We will want to rebalance (buy), but they will probably want us to sell or hold tight "until things look better." We reinforce our messages about volatility and what should be done every chance we get. Rebalancing helps take some emotion out of decision-making. The reason so many of our clients allowed us to do what we said we would do was because doing so was not a surprise to them.