Over the years there has been a shift of burden in retirement savings from the employer to the employee. The era of company pension plans is fading, leaving Americans on their own to save for retirement; primarily through company-sponsored 401(k) plans.
Frontline recently aired The Retirement Gamble, where it highlights some of the downfalls of company 401(k) plans and how they are keeping many investors from ever reaching a successful retirement.
Have you ever looked at one of your 401(k) statements and asked yourself “Why does it seem like this thing never goes up in value?” The market has been good and you are making regular contributions to it, so why does it seem like something is eating away all your return? It’s because there is: FEES!
So how can you control or minimize your fees? The easiest way to do so is to cut your mutual fund costs. The average actively managed mutual fund costs 1.3% annually to own, when you can purchase a passively managed mutual fund for a fraction of that price. Very few actively managed mutual funds outperform their benchmark index, and picking which ones will do so ahead of time is yet another challenge. Jack Bogle, founder of Vanguard, states in the documentary “that to maximize your retirement outcome you must minimize Wall Street’s take”!
Jack Bogle goes on to say that if you expect to get a 7% gross return each year and give 2% of that up to fees, then you are ultimately sacrificing almost two-thirds of your potential return!
Assumptions: Start with $100,000 earning 7% annually for 50 years. Red line
shows 5% annual return (7% return reduced by 2% of annual fees)
Jack continues by saying that “if you want to gamble with your retirement, be my guest. Yet be aware of the mathematical reality that you may have a 1% chance of beating the market. This has been proven true year after year, because it can’t be proven wrong”!
Jason Zweig, an investing columnist for The Wall Street Journal, added that “one of the ultimate dirty secrets of Wall Street is that a great deal of fund managers own index funds in their own retirement portfolios. This is something they don’t like to talk about unless you put a couple beers in them!” So if these highly paid fund managers don’t even believe in their ability to outperform index fund returns, then why should we?
Remember, that as investors, we have to control the controllable, and mutual fund costs is one cost we can control. We can’t know what direction the market will be heading in or what our annual return might be, but we can maximize the percentage of that return that goes into our pockets and stays out of Wall Street!
Other articles filed under Family Finances
October 24, 2016
Stock Markets It was a pretty good quarter for stocks, with the riskier small-cap and emerging market stocks leading the way. REIT’s gave back some of their robust returns of prior periods. The year-to-date numbers for stocks are solid as...
October 21, 2016
Managing clients’ financial assets is at the heart of what we do here at Rockbridge. However, having a well thought out investment portfolio will only get you so far if every facet of your financial life is not addressed correctly...
October 19, 2016
Once Upon a Time... When we started an investment advisory firm in 1991, it seemed obvious to Bob Ryan and me that structuring portfolios by focusing on asset allocation was superior to the stock picking culture of the day. The...
October 17, 2016
With less than a month to go before the Presidential election, many clients and friends have asked me how the markets will respond to the voters’ choice. While there will be no shortage of prognostications in the media, investors would...
October 6, 2016
October is National Cyber Security Awareness Month. With more and more financial transactions happening online, we wanted to share a very helpful infographic (shown below). Please be mindful of the personal information you provide online! Infographic by Digital Guardian