Monday, July 10, 2017

One woman's retirement savings advice: Ask questions, especially about fees

“The power of compound interest is the most powerful force in the universe,” - Albert Einstein.

We sat in the restaurant booth,  coffee at hand, while peering at her open lap top computer screen.

“I thought everything was going well, until I saw this,” she said, gesturing toward the computer. “I wasn’t sure what to do with this or where to start. This feels over my head.”
The “this” was a screen filled with a list of holdings inside her Individual Retirement Account. There were lots of mutual funds, more than 20. All with obscure names, each with several thousand dollars of value.

“The plan was to simplify my life but this feels much bigger, overwhelming,” she said with a laugh. “I am not sure where to start.”
For more than 25 years, my friend had focused her creative energy on owning and running a marketing business. It was a hectic enterprise with employees, lots of clients and an ever-changing list of challenging projects. Not much time to worry about retirement. Besides, she had someone taking care of that for her.

Over her years of self-employment, she stashed money when she could in an Individual Retirement Account managed by a local adviser representing a national brokerage firm.
Occasionally she met with her broker friend to get an update on her account, learn that it was “doing well” and growing in value. Little to ask about, right?

Now it was time to make some changes.

My friend, widowed seven years ago and in her mid-60s, has sold her business, downsized from a big house and has found a new rewarding relationship. Still working part-time, her life is full.
Meanwhile, her long-time financial adviser has retired to Palm Springs.

With the personal connection gone, she asked herself why not move her retirement money to an online self-managed account and take charge of her IRA portfolio?

It seemed like a simple plan. Step one, electronically transfer the account, which she did.

But what popped up on her new account screen with the online brokerage firm was a surprise. This was not what she thought she was invested in. The multitude of mutual funds would each need evaluation for their performance rating and management fees.

She also realized that yes, she had an IRA but some of her savings had been placed in a taxable account. That meant sorting out the cost basis and tax implications of the holdings there.

Fees matter

Not long before her broker retired, my friend had asked what the overall annual management fee was for her account. The answer: 2 percent on the total assets.
In talking this over with my friend, my guess is that the fee did not include separate transaction fees charged every time a new mutual fund was purchased or sold. That is a lot of churn over the past 25 years.

My friend listened with interest as I explained why fees are such a big deal when it comes to retirement savings.

While 2 percent may not sound like a lot, I said, over a life time of saving it can mean the difference of tens of thousands of dollars of fund value. That’s because a higher fee means less money is going back into fund reinvestment. According to a report in U.S. News & World Report, “the top determinant of (fund) performance is expenses,” not superior management skills.

For example: An investor, age 25, who contributed 10 percent of her salary a year to a 401(k) or IRA that earned 7 percent annually would have $730,000 at age 65, with a management fee of 1.5 percent.
By comparison, with expenses of just 1 percent, the end result at age 65 would be $830,000. And if expenses, according to U.S. News, were just 0.5 percent, her retirement savings nest egg at 65 would total $934,000, all other things being equal.

The shocking difference in end result between 1.5 percent and 0.5 percent in management fees over a lifetime of savings and reinvesting is $204,000!!!

While there is plenty of commentary out there on this issue, my guess is that most women such as my friend are uninformed and are not aware of how management fees can undermine long-term savings strategies.

Managed vs passive

In addition to management fees, there was a second issue for my friend: the performance of actively managed mutual funds versus passive index funds.

According to an annual Dow Jones report, actively managed (with higher fees) mutual funds DO NOT perform as well as the S&P 500 -- the 500 largest U.S.-based companies.
In the latest (2016) comparison, 84 percent of large-cap mutual funds generated lower returns than the “passive” S&P 500 index. In other words, you are paying more and getting less return.
My experience also proves the point. My portfolio that includes a mix of individual dividend-paying stocks and a couple of index funds is 7 percent behind the performance of the unvarnished S&P 500 in just the past 12 months. Sigh.

Nurturing the nest egg

So here my friend is at age 64, starting to take charge of her ongoing retirement nest egg that may need to last another 20 or 30 years.
She has a lot of work ahead of her. She will need to determine the cost basis (how much she paid) of each of the taxable funds in her individual portfolio, then determine the tax hit if she sells them and whether it makes sense.

Separately, she will need to sell some or all of the higher-fee mutual funds in her tax-deferred IRA and then decide how to reinvest her consolidated money. Why not a low-fee S&P 500 stock index fund?

Because of her business experience, my friend is far more capable of getting on top of this than many women I know. These are the married women who may have earned a full-time paycheck, who may have managed the ongoing household budget and paid the bills and who may have occasionally met with a financial adviser or broker.

But who also may have not been interested in the details because their spouses took the lead or they were too busy and trusted a financial adviser.

“Can you imagine coming at this, if you had no clue,” asked my friend.

In the past few months, she learned a lot: How complicated the financial industry makes it for individuals (women) to sort out their investment portfolios, how account management fees can have a long-term impact on saving, eroding a retirement account by tens of thousands, if not hundreds of thousands of dollars.

Her trust in the financial advisory industry is in serious jeopardy. She is frustrated at feeling over-her-head when trying to sort it all out.

Here’s her retirement savings advice to other women:
- Get the details of your investment portfolio and the fees you are paying on the holdings inside that account.

- Keep asking questions until you absolutely understand what is going on.

- If you don’t understand something, work with a fee-only adviser or trusted friend to simplify your portfolio or convert your plan to one that YOU can manage.

- Stop paying the brokerage firm and start paying yourself.

- Have a trusted friend or family member attend all meetings during the process of discovery and implementation. A second set of ears will help to reduce the stress of trying to understand all this involves.

- And keep learning!


  1. Yes I agree with you! We, especially women, should always ask and clarify things out. We should never be content and comfortable of what we currently know. There are lots of things in retirement that we should deeply explore such as Medicare, Medicare supplement plans, LTCi etc.
    On the other hand, since I can't seem to find your contact details, I would like to send my invitation here. I would like to include you as one of the experts that we will feature in our upcoming retirement expert round-up for the month of August. The round-up post will be publish on blog and will be shared on our social media accounts. If you would like to participate, please reply here or just shoot me a message at Looking forward to hearing from you!

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