In last weeks post I explained how a 7% tax-free rate of return might be better than a 10% taxable rate of return. This week I want to show another way that a 7% tax-free rate to return may be better than the 10% rate return that the financial “experts” say you can achieve in the stock market.
Do all of the experts on Wall Street work for free? Does YOUR financial advisor work for free? So where are they making their money?
Let’s look at a typical 401(k) for example. There was probably a financial advisor that came into your company and convinced the owner that his big Wall Street firm should manage The owner’s retirement plans. You can rest assured that that financial advisor is making some percentage of every dollar that is managed.
That financial advisor works for a company that is also taking a small percentage of every dollar that is managed. And more than likely, the company is simply farming out the money to a group of closely held mutual funds where they may have a financial interest. These mutual funds also charge management fees that are assessed as a percentage of the dollars managed. And usually the bigger the name, the bigger the fees.
So let’s say that the S&P 500 index returned 10% in a given year. And just to be clear, many mutual funds use S&P 500 as a benchmark to judge their own performance. So if the S&P 500 returns 10% and your financial advisor is taking out a 0.75% fee and his company is taking out another 0.75% fee and the mutual fund management company charges 1.5%, you are only netting 7% return even though the market returned 10%.
Just to be fair, fees in the industry are all over the board. There are index funds that offer no professional management-they simply buy the funds that make up the index-and their fees are very low. But every professionally-managed mutual fund charges fees. The industry average is over 3%.
These fees are charged whether the market goes up or down. In years were the market goes down you are taking your loss while your advisor, his company, and the mutual fund managers are all still making money.
We all need to make money. But there are better ways to fund your retirement savings that assure that you don’t get kicked when you’re down and don’t hinder the rate of return to the extent that traditional Wall Street investment do,
By simply picking investment and savings vehicles with low expenses, you can outperform traditional Wall Street investments by as much as 2 1/2%, Year after Year based on industry averages. When you compound that out over a lifetime of saving, it makes a significant difference in your retirement nest egg.