Personal Finance Topic #264 – Job Loss and Retirement – Part 6

Filed in Gather Money Essential by on March 1, 2012 0 Comments

Job Loss and Retirement – Part 6

You’ve been paying for adviser’s BMW with your retirement fund

An eye opening example

Most investors use financial advisers to help invest their hard earned dollars to reach a retirement goal.  Unemployed people are vulnerable to making a quick buck to compensate for the loss of income, so they like temptation of investing their money by hoping that an adviser can grow their money.  Some investors believe that they are being helped by advises for which they pay an annual fee of 1% to 2%.  While the fees look innocuous, fees are taking a huge bite out of your portfolio over a long term.  I listed three scenarios with 0%, 1%, and 2% adviser fees.  The fees do not include investment fees like front-end load and expense ratio.

You, a 22 year old young professional with a good salary, or a couple with combined income of $51K a year, start saving 10% of gross income toward retirement. You hire a financial adviser to help you reach your retirement goal of more than $2 million by age 67, when you start collecting Social Security benefits

  • You make 10% contribution to your tax-free Roth IRA contribution which is invested in very conservative funds that rises at 6% a year (normal funds earn 12% on average). Pay increase is 3% a year, and contribution is made from age 22 through 67.
  • If you invest in a no-load, low expense index mutual fund, you can expect the retirement fund to exceed $2.4 million at age 67
  • Fee Total at 67 Total fees Net loss
    • 0%   $2,451,544      minimal       negligible
    • 1%   $1,829,668    $  621,876 25% of total
    • 2%   $1,384,344    $1,067,200 44% of total

Can you afford to lose 44% of your investment?  But wait, I haven’t started discussing other expenses and costs like income tax and investment fund/ management fees.

The moral of this story is that you must take extra fees into consideration when you want to invest your hard earned money with commissioned adviser or products. A million dollars in fees will buy several BMWs for the financial adviser.

Next post: Retirement Math Analysis - Spending

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