By David Deacon
If you were shopping for a new flat screen television, would you buy one without comparing prices at a few different stores?
For most people, the answer is no. Getting good value is an important part of smart money management. How many of us know how much we are paying in annual management fees on our investment portfolios? From my experience with meeting new clients, the answer is very few. Yet, investment fees have a significant impact on returns, which have a significant impact on retirement income.
Consider a hypothetical investment portfolio of $200,000 for an individual who is 50 years old, who intends to contribute $5,000 per year to her portfolio, retire at age 60 and withdraw just enough each year to deplete the portfolio by age 90. In scenario A, she is charged a management fee of one per cent each year. In scenario B, she is charged two per cent. The total annual return, before fees, is six per cent for both portfolios. In scenario A, her portfolio would grow to $394,103 by age 60. In scenario B, it would grow to $359,520. The one per cent difference in the fee resulted in a $34,582 difference in her portfolio value at age 60.
Assuming the two portfolios continue to grow at six per cent during retirement from ages 60-90, the monthly income from Scenario A would be $1,929.98, at which time the portfolio would be depleted. In scenario B, the monthly income drops to $1,716.40. That $213.58 drop in monthly income may appear to be insignificant, but it actually adds up to a total difference in retirement income of $76,887.55 over those 30 years. How many flat screen televisions could you buy with that extra money?
I am a strong believer in the adage, “we get what we pay for.” so I am not suggesting that investors should just shop around for the lowest priced provider of investment advice, nor should they attempt it on their own. Rather, I am suggesting that investors should be aware of how much they are paying and what, exactly, they are receiving in the way of services for that fee. If you think you are not paying a fee for portfolio management, you are mistaken. Some financial institutions display their fees and discuss them with their clients during their annual or semi-annual reviews. Others do not. This is information you should know.