Fees, Expenses and Limitations That Are Killing Your Retirement Ambitions

Fees, fees and more fees seem to be the norm when planning for your retirement.  Which leads one to ask, “Are there any specific restrictions on how many fees or how big the fees can be?”  And the direct answer is NO!  However, the Securities and Exchange Commission (SEC) does confine how large a fee can be charged when an investor sells their shares in a specific fund. That cap is 2% in most cases.

So here are some of the fees and expenses you should look for and understand if you invest in Mutual Funds[i] whether it be that with your 401(k), IRA, Roth, 403(b) or just inside your own portfolio.

  1. Sales charge (load) both when purchasing and selling a fund
  2. Redemption fees
  3. Purchase fees
  4. Exchange fees
  5. Account fees
  6. Management fees
  7. Distribution fees (12b-1)
  8. Shareholder service fees
  9. Custodial expenses
  10. Legal expenses
  11. Accounting expenses
  12. Agent transfer expenses
  13. Other administrative expenses

Most people who we talk with either don’t know what these fees are, or they don’t realize how these fees are crippling their retirement account.  “Over a typical person’s lifetime 80% of the compounding returns end up in the hands of the manager, not the investor!”[ii]

Compounding on these fees and expenses is the misunderstanding of RISK.  The common thought when the market corrects is to think that you can make it back up again when the market goes up.  But that may not be as simple as most people think.  If you lose 40% of your retirement investments, like happened to many in 2008, you’ll have to earn an extra 67% just to break even.  If you lose 30% like the Nasdaq did in 2002, or 22% like the S and P 500 in that same year, then you’ll need to earn 43%, or 25% respectively, to make it back up.[iii]  Making matters even more complicated for the average investor, a market correction typically occurs every 57 months and takes a minimum of 60 months to recover.[iv]

By the way, who is an average investor?  Well, according to Dalbar’s latest 2014 Quantitative Analysis of Investor Behavior (QAIB) Report, the average investor is, “The universe of all mutual fund investors whose actions and financial results are restated to represent a single investor. This universe would include small and large investors as well as professionally advised and self-advised investors.[v]  Difficult not to find yourself in that number and the depressing news is, “Net return on investment for the average investor is 2.6%, just 0.2% growth over inflation.”[vi]  No hope of retiring on those investment returns.

That is why all of us here at McFie Insurancerealize that gaming the market is not the place the average investor is going to be able to create the nest egg that they need for retirement.  The odds are simply too great to overcome for the average investor.  And that is why at McFie Insurancewe don’t recommend what is the average thing to do. Besides, Fidelity, the largest manager of retirement plans in the United States, reports that even though the average 401(k) balance is nearly double since 2008 (from $46,200 to $91,800,) 78% of that growth is based on the market upturn and NOT increased contributions.[vii][viii]  Shockingly, for pre-retirees 55 and older the retirement account balance is only $165,200!  If you want to live on less than $2,500 a month that might do you, but it becomes a horrible reality if you expect to live on anything more than that because you are most likely to run out of money.[ix]  Now if that 78% growth spurt is wiped out by the next market correction, what then?

Finally, there are limitations that prohibit you from contributing “too much” to your retirement account.  Of course, the idea of what is “too much” is as arbitrary as is it artificial.  Who sets the “too much” standard and even more importantly why has a “too much” limit been set?  But that is a discussion for another time.

The fact that there is a “too much” limit prohibits you to live the life you want to live in retirement because you haven’t been allowed to save enough money.[x]

The sharp investor realizes that both steady guaranteed growth and investments are necessary to build a secure and stable retirement.  And statistics prove beyond a shadow of a doubt that steady guaranteed growth is the most financially sound method to pursue, regardless of your age, because who wants to lose 10-40% either early or later in the game and be forced to assume higher risk attempting to make it back?  NOBODY is always the answer whether you are 18, 70 or any age in between.

That is why The Perpetual Wealth Code™ always begins with your savings, where your savings are earning guaranteed growth.  You want to be able to rely on those guarantees because hopes of  “making it back up” later isn’t a viable retirement plan regardless of your age.

[i] Mutual Fund Fees and Expenses-Fidelity, 8-15-2015)

[ii] MarketWatch, Retirement Investors Leave 80% On The Table, Mich Tuchman 2-6-2014

[iii] Forbes- Why The Average Investor’s Investment Return is So Low, 8-15-2015

[iv] http://rfsadvisors.com/Market_Corrections.html History Of Markets, Understanding the Bulls Versus The Bears

[v] ibid

[vi] ibid

[vii] http://www.financialsamurai.com/the-average-401k-balance-and-why-its-too-low/

[viii] Fidelity.com  Average 401(k)

[ix] http://money.cnn.com/calculator/retirement/retirement-need/

[x] ibid