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The Effect Investment Fees Have On Retirement Planning
Everyone is talking about investment fees these days. There are ads on the radio, television, and online… there are podcasts, websites, blogs dedicated to low-fee investing… there are also books, magazines and research studies… all focused on one thing… how much the average investor pays in fees while saving for retirement.
But very few people are talking about the effect investment fees have on retirement itself. Mostly they talk about how fees impact you as you save for retirement, but very few mentions what happens if you continue to pay high fees as you enter retirement.
Fees definitely have an enormous impact on how much you can save for retirement. The average mutual fund fee is 2.35% in Canada, and that’s the average, there are lots of situations where the fee is even higher. The effect of this fee on a lifetime of savings and investments is enormous!
But what if you’re close to retirement? What is the impact then? Arguably the effect of investment fees on retirement planning is even greater than any other period.
Why?
Fees have an enormous effect on retirement planning because by the time we’ve reached retirement we’ve already saved up a huge nest egg. Unlike the accumulation phase, where you have limited assets in the beginning, when it comes to retirement, you’re starting with a huge amount of investment assets. This makes the impact of fees enormous, especially in early retirement.
The problem for retirees is that investment fees are hard to spot, hard to find, they’re almost hidden by investment providers, whether that is intentional or not. I’ve seen this on countless investment statements I receive from clients. Based on the statement alone you would NEVER know how much they’re paying in investment fees each year.
This isn’t an isolated issue, it’s a problem that many, many retirees face. Low-fee investing is a relatively new option in Canada. If you were investing 10-20+ years ago there just weren’t as many options to reduce your investment fees.
Many retirees who have high-priced investments are shocked (and somewhat saddened) to learn exactly how much they’re paying each year. It’s not their fault, this information is hard to find and not readily available to investors.
To figure out how much an investor is paying each year usually requires some digging. Mutual fund codes vary by fund and fund class. Sometimes fees can vary by 1% or more for the same mutual fund depending on the class.
But once you know how much you’re truly paying you can start to see the impact it will have on your retirement plans. There are two main effects that high fees can have on retirement, and the impact can be substantial.
Retirement Rules Of Thumb
Rules of thumb can be great tools when quickly evaluating financial goals and objectives. But not all rules of thumb are good, especially when it comes to retirement.
Some retirement rules of thumb are excellent, while others are misleading. Rules of thumb are great when creating rough financial goals, but they can be too general, and in the worst-case scenario they can be misleading and out of date.
In this blog post we’re going to review three retirement rules of thumb and we’re going to give them a “thumb” rating from 1 to 5. One being complete garbage, never use. And five being just amazing, you can plan your life by this rule.
Does The Average Retirement Plan REALLY Need $1,700,000 To Retire?
In this blog post we’re going to look at an average retirement plan with $1,700,000 in financial assets. Why $1,700,000? Because that’s what a recent bank survey suggested that the average Canadian feels they need to retire.
Now, banks are in the business of selling financial products, so they may be somewhat biased when it comes to how much you should be saving for retirement. They’re probably happy for you save and invest more for retirement because it means more investment fees for them. But let’s give them the benefit of the doubt and let’s see if $1,700,000 is really the right retirement goal for the average Canadian household.
Having done many, many, advice-only retirement plans I suspect that this number is grossly overstated, and a much smaller amount is likely sufficient to have a comfortable retirement for the average household.
To test if this is true, we’re going to build an “average retirement plan” with $1,700,000 in financial assets.
Of course, no retirement plan is ever average. Some people have more CPP, some less. Some people have defined benefit pensions, others do not. Some people want to spend more in retirement while others are content with spending less. There is no such thing as an “average retirement plan” but we’re going to make some broad assumptions to test whether or not $1,700,000 is a reasonable goal for retirement assets or if it’s grossly overstated.