Killing Sacred Cows Blog

With my "Fire Your Financial Adviser" seminar and our Producer Power Hour podcast this week, I wanted to address a topic that I feel is grossly misunderstood.  When I was a traditional financial adviser, I would rattle off some assumed 2000 Bureau of Labor Statistics that came out with a longitudinal report that studied where 25 yr olds in 1960 were in 2000.  It showed 29% of 65 year olds deceased, 66% totally dependent on others or still working, 4% financially independent, and 1% wealthy.  By the way, I have never seen any government source confirm these numbers, but I have seen many financial institutions and network marketing companies quote it.  In fact, in my presentation, I would have a tagline that said "People don't plan to fail, they only fail to plan."  This was what I used to convince others to take action and do business with me.  However, even if those numbers were accurate, hadn't more than 5% of Americans implemented some sort of retirement products during their life, like 401(k) and IRA's, some with financial advisers?  Weren't many of these "Prime lifers" born in 1935 strict savers because of the influence of the Great Depression?

 

The Tragic Truth

The reality is much worse.  According to the National Centre for Health Statistics, a 25-year old only has a 16% chance of death before age 65, not 29%.  Of the surviving, the 2000 Bureau of Labor Statistics says that 24.4% of 65-69 year olds were still working and 66% of them depend on Social Security to provide at least 50% of  their income (22% are totally dependent).  The median household income for those 65 and older was only $33,802 in 2002.  In addition, the 2000 U.S. Census said that this aging population had a net worth of $108,885.  However, $85,516 was home equity leaving a measly $23,369 for retirement.  If you read my blog on hidden 401(k) fees (August 8^th), you would also notice that the average balance in a 401(k) for 65 year olds is only about $60,000.  Could you live like that for one year?  Two years?  Ten years?  How about 25 more years? 

 

The Cause

There are many factors contributing to this, but let's address some of the most overlooked. First, most financial planners will quote some "average" return in the markets that someone can likely count on for the long haul.  However, the "actual" return often is different.  See diagram below.

 

This is a pretty drastic example, but it proves the point that the number an adviser or planner puts in the calculator will never match up to reality.  From 1965 to 2004, the S&P 500's (stock market) performance was an 11.74% "average" rate of return but the "actual" return was 10.4% per year.  You may think that 1.34% makes little difference; however, after 40 years, your money is less by about 38%!  This doesn't even include fees that they never factor into your rate of return.  If your fees totaled about 1.25% per year, you would see that number cut by another 36%!  This would mean that you would actually only have about 39% compared to what a financial calculator would tell you based on the average rate of return!  Therefore, in this S&P 500 example, if you were expecting $1 million when you retire, even if it performs how it is supposed to, you would only have about $390,000.  Would you be disappointed?  How would that affect the income you were hoping for?  What if you had to pay taxes on that disappointing figure as well?  How much would $390,000 really be worth in 40 years given the actual inflation rates, including health care, as well as keeping up with certain technological changes and so forth?  To see what other factors do to your money, I would suggest listening to our August 27^th podcast on http://www.producerpowerhour.com/ or registering to attend Part 2 of my seminar/webinar at http://www.fireyourfinancialadviser.com/.  I will further illustrate how a positive ACTUAL rate of return of 12% could become a negative return in reality.

 

The Solution

It's simple.  Get further educated on leveraging the assets you have.  One cannot expect to get different results by believing the same things about investing as everyone else.  Misunderstood concepts, like some that were previously mentioned, are contributing to the dilemmas and drain on Social Security.  To hear more on this subject, check out http://www.fireyourfinancialadviser.com/ or http://www.freedomfasttrack.com/.   

By Chris Miles

I have often heard many well-intentioned Americans tell me that they feel they are on track to their retirement goals merely because they have been saving a good amount in their 401(k)'s or similar qualified plans. Many believe this is their only option.

My purpose is to shed light on a critical factor that is one of the causes for dramatic disappointment to our 76 million Baby Boomers now entering retirement. This covert killer can leave one with LESS THAN HALF of the money when you retire than the financial calculators will show you. Worst of all, no one would never know why because the 401(k) providers are not required to disclose it. This lurking enemy is commonly referred to as "fees."

Hidden fees are one of the most misunderstood components of a 401(k). According to 2007 AARP survey, 83% of respondents said they did not know what fees they were charged, many of whom believed that there were no fees. The reason there is so much confusion is because the disclosure of fees are not required by law. In fact, if they are disclosed, they are often buried several pages in a document called "Statement of Additional Information." At times, it is nearly impossible to even get the information from the 401(k) providers.

According to the US Dept. of Labor, 17 different types of fees can be applied to any 401(k) plan. Many of these fees are 12b-1 fees, soft dollar fees, brokerage fees, redemption fees, shelf space fees, etc. that are sometimes combined into a single fee called a "wrap fee." The combination of these fees can be over 2% per year! This could cut someone's retirement balances by more than half of the expected balance even if they get a certain projected rate of return and make the employer match obsolete. This occurs because fees are not factored in the fund's historical performance charts that many view in the prospectus.

Some fees are so excessive that there are class action lawsuits against the 401(k) providers. One lawsuit in Washington State has a fund that charges 12.17% in fees each year!

Fees are not inherently bad but ignorance is not bliss when time is no longer on one's side. How are these fees affecting your retirement? What could happen if these fees are charged as your balance is declining? Do you realize that an annual fee as small as 1.35% can cut your end balance in half after 40 years of accumulation?

I invite you to watch this video to learn more about this critical issue.

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