Ken Moraif: Hello. My name is Ken Moraif, and I am a Certified Financial Planner. I've been practicing here in the Dallas area since 1988. And for the last 14 or so years, I've been on the radio, some of you may have heard my show, "Money Matters with Ken Moraif." And during that time, I have spoken emphatically about the importance of having an exit strategy in your investment portfolio. And I want to illustrate to you now, why it is so important, especially for someone who is retired, to have an exit strategy. And what I want to do is, I want to go back here and look at the years from 2000 through 2010. OK? So, it's recent, somebody retired, we have our retiree here, who retired with a nice amount of money, he retired with a million dollars in 2000.
Now, as you may recall, during that time, we had some volatility in the market, and I'm going to get to that in just a moment. But, this retiree, he wants to, now, take four percent out of his portfolio, which is the prescribed amount. So, he's going to take four percent out. Therefore, that would be $40,000.
Now, what we're going to assume here is that he also is going to experience inflation. And this 40,000 is going to go up by three percent each year. So, in year number two, it's up to 41,200, in year number three, it's up to 42,000, and it keeps going from there all the way down, so that by 2010, he's taken out $53,700. All right, so that's the effect of inflation.
So, what I want to do now is go through this with you and show you what would have happened to this retiree if he had done what everybody tells him to do, which is to buy and hold. All right?
So, he has a million dollars. He takes $40,000 of that out. Now, he's not the only one that wants to take or add money to his account. There's also what he's invested in. And here, we're assuming it's the S&P 500 Index. Now, this says total return, because we are going to include reinvested dividends. Also, we are not including fees and taxes, because I don't know what your fees or taxes would be. But certainly, it would make this picture worse if we added fees and taxes to it.
Also, you can't invest in an index, you have to go buy a mutual fund or something like that. OK? Just disclosures there.
But, let's see what the market did, the S&P 500 did, in the year 2000. It lost nine percent. So, nine percent of a million dollars is $91,000. So, what happened here is, our retiree took out 40,000, the market took out 91,000. Combined, that leaves him with $869,000. Not a very good start to our retirement.
Now, that 869 becomes our starting value. Now, he's going to take 41,000 out, that's the inflated value of that 40,000. But, again, he's not the only one. The market took out 11.89 that year, and that is $119,000. So now, 41 plus 119 came out, he's left with 700,000.
Now, 2002 was the really bad year when the tech bubble burst, the market went down. So now, keep in mind, here, this 41,000 now, is five percent of the 869. You see what happened here? He started taking out 4, he's taking out 5. That's very important, because as I go down here, you're going to see what happens at the bottom. It gets very dramatic.
Now, this 700,000 becomes his beginning value. He takes out 42,000. Now, for those of you who remember 2002, that was the worst year of the tech bubble. The market went down 22 percent, which is $165,000. So, between the 42 that our retiree took out and the 165,000 the market took, he is now left with $500,000.
So, in three years, he's already lost half his money. Now, tell me how he is enjoying his retirement, how happy he is with buy and hold. And if this was you, how happy would you be? OK.
I contend it's not a good idea. But, the buy and holders, they're such rabid, they're so dogged in their determination, that they convinced our retiree to stay in the whole time. And so, now what happens is, again, we have six percent here, so you see the progression there.
But now what happens is, he's got 500,000. Now, the bull market does start, they tell you it's going to be there. So what happened is, the market did very well, you can see, over those five years.
So, he started with 500, he's taken his 43, 45, et cetera, and now, at the end of that time, he's got 555,000. So, that is more than the 500 he started with. Buy and hold works, doesn't it? It's beautiful. See, you increased your return, your value of your money, even though you were taking out all that money.
Well, yes, but 555 is way less than that million, isn't it? But here's where it gets so dangerous.
2008 comes along. Anybody remember 2008? Well, what happened there was the market took out 37 percent, right? The market went down 37 percent that year. That would be $206,000. And in addition to that, our retiree took out 50. So, that's $260,000 that was taken out that year. He's now down to $298,000. He has a third of his money left.
Now, what happens is, the next year, he's got 298, he's taken out 52,000, he's taking out 18 percent of his money. Folks, what this says is, he now has to make 17, 18 percent every single year from now on so as not to run out of money. Because if he keeps drawing and it keeps increasing, then this money's going go down. And if he gets hit by another 37 or 22 percenter, guess what? He's going to have to go back to work if he isn't already.
Now, I ask you, does this look good to you? If this is, what your retirement, in 10 years, you have a third of your money left? I don't think that's a good idea. If you're 65 here, you're now 75 and you're running out of money, you've got to go back to work. You've got to change your lifestyle. Or better yet, you move back in with the kids and you change diapers at three O'clock in the morning. That would be fun, wouldn't it? You want to do that, don't you? I don't think so.
That's why I believe that buy hold is a recipe for disaster. I think it is financial insanity. What I think is a better idea is, you should have a buy, hold and sell strategy. And when I say sell, I mean that when this red comes, you want to have a strategy that you can rely upon that will help you to not experience those things.
Now, no strategy is perfect. I have another video on our website that you can go to and see it, where our strategy gave us a false alarm. But you can also see the strategy where it would have helped you in this situation and very nicely. So, I want you to view those videos if you can.
Now, the other thing that I want to tell you about is that we have seminars that are designed for people who are over the age of 50, who are retired or who are retiring soon. And if this is you, and you want to retire and you want to get an income, then you need to come to our seminar. You can sign up for the seminar on our website, its moneymatters.net.
Now, on the website, you can sign up. We talk about, at the seminars, when to take your Social Security benefits, what to do with your retirement plans at work and your IRAs. We talk about how to get an income. We talk about how to invest to beat inflation, we talk about how to reduce your income taxes, all things that should be very important to you.
So again, sign up for the seminar, and I'll look forward to meeting you in person.
Now, this is the end of this video, but let me tell you, there are some very, very important disclosures that are going to scroll up on your screen right now. I want you to watch and read every single word, OK? Please do, because they're very important.
Thank you very much.