I don’t know about you, but I am sick of hearing the arguments about the 4% withdrawal rule. I never saw Bill Bengen’s work as a “rule” but more of a guideline. Let’s face it, economies change, financial environments change. While we love them because they make it easy to explain our strategies to clients, rules of thumb are not built for change.

This got me thinking about how we communicate information to clients. I believe it is our job to synthesize complex material, making it easier for them to understand. As they say, “You don’t need to know how to make a watch, you just need to know how to tell time.”

Many years ago, I came up with a simplistic graph that helps clients grasp the relationship between reasonable withdrawals and sustaining growth. Although it makes the simplifying and obviously unrealistic assumption that they will receive the stated return every year like clockwork, because of its simplicity it helps control for many investors’ unrealistic expectations. I thought I would share it with you.


Here’s how this works. I tell the client that this little exercise is an illustration to help her understand how withdrawals affect her portfolio. I ask the client, “What do you think you should be able to withdraw from your portfolio on an annual basis?” She says 10%. “Now, what rate of return do you think you can expect on your portfolio? Bear in mind that if you had 100% in the S&P 500 over the past 10 years, your return would have been 8.1%. The client says 8%.

“With 3% inflation, your portfolio would then last 13 years. Do you think you will live longer than 13 years? Bear in mind, with your excellent health at your age (65) you will likely live past 90.” “Ah,” she says, “I guess I expect to make it to 90, at least.”

I continue, “If you still expect an 8% return over time, we could plan to take about 5% from your portfolio annually and not exhaust your money. In other words, on your $1 million portfolio, you could withdraw about $50,000. Also remember, this exercise does not account for taxes or the reality that you will not receive your expected return like clockwork.” At this stage, you might show the Bengen charts to highlight the risk of retiring at the wrong time.

While we advisors know this is overly simplistic, it doesn’t matter; the point is made and the client re-evaluates the withdrawal expectations and lowers her amount.

Over the years, we’ve devised other simple tools to illustrate concepts for clients. Perhaps our most popular one is the graph Harold Evensky created to help clients understand the relationship between risk and return.

In this chart, we first explain that many people believe their risk tolerance is low or moderate. In the first column is our interpretation of those descriptions in terms of differing portfolios.

The first adjective refers to their risk tolerance over a short period of time (i.e., less than five years) while the second refers to a longer period of time (i.e., greater than five years). The second column, “Projected Total Return,” is our estimate of the total return for each portfolio for the next 10 to 20 years, assuming that inflation is 3%. Since returns don’t come nice and even, the next column provides the range of returns we expect most of the time (our euphemism for one standard deviation.) Finally, the last column is an indication of how bad it might be if we have a really rotten year. We use quotes around the descriptor “worst case” (our user-friendly term for two standard deviations) because it only reflects 90% out of 100 years. There is a slim chance that it could be even worse than that.

I tell the clients that if they feel they are really “conservative,” we can design a portfolio with a 6% return where most of the time the portfolio would break even. In a really rotten year, perhaps the “worst case” would be minus 4%. On the other hand, if that return seems too low, we might design for a positive 8.6% total return for the year, but the “worst case” may be minus 20%. I make it clear that this is a one-year estimated loss, not the loss reflected on the day after a crash. Then to remind them that really bad times happen, I point out what happened to the portfolio during the grand recession. We then have a lively discussion about the relationship between risk and return, resulting in the client “selecting” a portfolio that best reflects his balance between risk and return.


When we actually design the portfolio, we are acutely aware that we must consider all three risks, tolerance, capacity and risk requirement. In fact, we often use a third graph to illustrate these risks and how the portfolio reflects the client’s unique needs and circumstances. In this case, I usually draw a simplified efficient frontier on a blank paper. I don’t call it “efficient frontier” because I did that once with a client and he asked, “Is that like the ‘final frontier’?” (Obviously a Star Trek fan from the ’60s.)

Harold Evensky is particularly facile at using the efficient frontier scenario. This approach is from his book Hello Harold (coming out later this year). He uses a simple graph to plot risk and return, one on each axis, and then demonstrates where cash, stock and bonds fall. We then use a graph to explain the efficient frontier. (We use different versions of the graph to illustrate our points, but only the one with the efficient frontier is shown in Figure 3.)
Using the graph, this is how we explain investing and the efficient frontier to clients.  

As you’d expect, cash would not be very risky, but it would not provide much in the way of return, whereas stock might provide a high return but at some risk. Bonds are somewhere in between. With just these three choices, we could still design thousands of portfolios; for example, 99% bonds and 1% stock or 99% stock and 1% bonds. If I put dots on my graph for the risk and return combinations of all of these combinations, I’d fill up the picture with dots. Then if I drew a line enclosing all of those dots, I would end up with a curved line that’s called the efficient frontier.

That means, at least theoretically, there is no best portfolio but rather an infinite number of best portfolios, depending on the risk one is willing to take. We know that everyone would like to have a portfolio with no risk and lots of return. Unfortunately, the real world of potential portfolios lies on or below the efficient frontier. So what does that mean for you?

Well, it means we have to do some planning, and then you’ll have a decision to make. First, as I said starting off, we need to make a best guess about what return your portfolio would need to earn over time to provide you with the money you need to accomplish all of your retirement goals. Then we need to make a best guess about your risk tolerance. If we just focused on your return needs, we might conclude it was possible to achieve your financial goals with a portfolio allocated 90% to stock, but that might not work out so well if we faced a major bear market in a few years. After you saw your nest egg lose 40%, you’d call us and say, “Harold, we can’t stand it. Please sell our stock and put our money in cash!”

That’s why we define risk tolerance as the point of pain and misery you can survive—with us holding onto your belt and suspenders—just before you make that call to tell us to sell out.


With those two anchors, we can now revisit our graph. We have two portfolios for you. Portfolio A is one that provides you the return you need to achieve your goals, and B is one in keeping with your risk tolerance, which is higher than what we used for Portfolio A. Which one is right? In fact, both are, but our recommendation is to plan on Portfolio A. Why? Even though we believe you can live with more risk and would end up with more money, determining risk tolerance well in advance of a terrible market is more art than science and the consequence if we’re wrong and you bail out of the market would be catastrophic. So why take that extra risk if you don’t need it to achieve your goals?

How about if we found a different outcome? Suppose we concluded that you needed Portfolio A to provide your needed return but had less of a risk tolerance that would allow for those returns?

That’s not so good, because now you have to decide between eating less well or sleeping less well. In this case, our recommendation would be to readjust your goals to meet the return expectations of Portfolio B. Why? Again, when markets seem OK, it’s all too easy to say, “I’ll take a bit more risk.” But later, when it seems the world is coming to an end, you’re not likely to remember your willingness to hang in there.”

Illustrative tools can make your conversations with clients so much more interesting and effective. You might think about various concepts that you have had difficulty conveying to clients in the past and draw or graph these in simpler terms. Then try them out on an older, non-professional relative. 

Deena Katz is an associate professor in the personal financial planning department at Texas Tech University, a partner in Evensky & Katz in Coral Gables, Fla., and the author of several books on planning and practice management.