Did you get a nice Christmas basket of fruit, nuts, or other goodies last year from your financial advisor?
The bigger the basket, the more likely it is you're paying your advisor far too much...
This is the one thing that you can absolutely control in your retirement.
In the infographic below, we've had some fun with this "signal." Here are the fruit baskets you might receive, and how much they "cost" you...
Case in point – take a whitepaper recently published in Financial Advisor Magazine that tried to myth-bust a financial rule of thumb.
The paper's authors wrote that using a 4% withdrawal rate, as suggested by the famous Trinity study, was wrong... and that you should only rely on drawing down about 2% of your retirement fund.
To put that into perspective... that requires a $2 million portfolio for anyone looking to replace about $40,000 in income via their retirement accounts. (A 4% withdrawal rate requires half that... A $1 million portfolio replaces $40,000 in income.)
Now, most finance rules of thumb are simple starting points. This one included.
A 4% withdrawal rate may not be appropriate for many people. There are good arguments for a lower withdrawal rate than 4%... or, better yet, for adjusting the amount you withdraw within a range depending on how your investments perform.
But here's the thing that proves this is just another "shock" headline meant to scare you...
The whitepaper masked the fact that this "new 2% rule" was accounting for fees. Big fees. Remember, Financial Advisor Magazine is written for financial advisors. Advisors who are interested in justifying their services... and their often far-too-high prices.
The whitepaper didn't disclose the fee assumptions it made until the appendix.
That's also where it disclosed that it used a super-low equity premium of 1.55% for the next 10 years instead of the historical average of 6.1%.
I'll leave that discussion for another day. (In short, the authors would have gotten entirely different numbers had they run it in 2002, 2006, or 2009. Does that seem like a good way to develop a spending rule?)
Way after all the shocking headlines, here's where the whitepaper's authors got to the nitty-gritty:
Regarding fees, we assume a typical financial planning client who pays their advisor 1% of assets under management for comprehensive financial planning services, and who invests in average expense mutual funds ... To operationalize these combined advisory and fund fees with the simulated annual market returns, we apply a total fee of 1.67% to stocks and a total fee of 1.6% to bonds at the end of each year before rebalancing. (emphasis added)
They assumed you'd pay fees of more than 1.6% on your investments. That's why your advisor just sent you a $2,000 fruit basket.
This is far too high. Sure, some people pay this much, but there's no reason to. In finance, you generally get more the less you pay.
So start paying less.
If you're paying more than 1% in fees, stop immediately. There are far better options for your hard-earned savings.
Take your retirement into your own hands. Remember... there's a lot about your retirement that you can't control. You can't control the market. You can't control the economy.
But you can control how much you pay to invest. Keep your fees low and your profits high.
What We're Reading...
- The full whitepaper we mentioned today can be found here as a PDF.
- Why low-cost mutual funds matter, from Vanguard.