"We have clients with $7 million to $8 million who have a potential problem," he says. "Those people generally don't have a current or new source of earned income available to them, and they have a relatively long life expectancy."
Berg says his firm's planners talk about retirement at every client meeting, update lifetime cash-flow projections at least yearly, and sometimes have "difficult conversations" about lifestyle changes. "We'll talk about how much risk they want to take on the investment side, but with tepid expectations about future returns, it's kind of a bitter pill to swallow to take on additional risk," he notes.
Berg says his firm lost three clients during the past two years, two of them because they essentially ran out of money. He says one existing client is hanging on by a thread and is basically a lost cause. The client is a healthy 70-year-old woman whose husband, the breadwinner, left $2.5 million when he died about six years ago. The woman depleted her retirement kitty not only by living beyond her means, Berg explains, but because she also chose to support her adult daughter.
"It's imminent that she'll run out of money," Berg says. "It's disheartening." He says they'll work with this woman to the end. "But it's too late in this particular case because a lifestyle change will only delay the inevitable."
So what happens to her after she runs out of money? "I don't know the answer," he says, adding that her children or other relatives might have to step up.
"We're confident most of our clients will be OK," Berg continues. "But it's worrisome and frustrating when clients are unable to implement the lifestyle recommendations we offer."
Withdrawal Rates
Roger Gibson, chief investment officer at Gibson Capital LLC in Wexford, Pa., says his firm's clients range in assets held from a couple of million dollars to more than $100 million under advisement. He notes the vast majority of them are OK when it comes to retirement.
"The key to being OK is having a very reasonable withdrawal rate relative to a portfolio's growth rate," Gibson says, adding that his firm doesn't have a ballpark withdrawal rate for its clients. "We have a fairly time- and energy-intensive portfolio design process for each client, so we don't have a fixed answer."
Going forward, Gibson anticipates lower-than-normal returns for equities and a lousy environment for bonds due to low returns and the prospects for rising interest rates that could compress the principal value of bonds. Plus, he frets about the increasingly volatile state of the world and the likelihood of global risks that can shock the system--the types of events that are hard to plan for. "As Paul Volcker said in the early '80s, 'You can't hedge the world,'" Gibson says.
Throw all of that together with a requirement that a portfolio generate an inflation-adjusted income over a potential multi-decade timeline, and he says it can result in a rather small withdrawal rate. "Even for a client with $1 million, that sounds like a lot of money, but in terms of sustainable withdrawal rate from that, it's not as big as most people would imagine."