Are Fees Killing Your IRA?    

 

If you own mutual funds or still have your IRA or 401(k) in mutual funds, finding and eliminating the hidden costs can help you keep more in your pocket.

An article in the Wall Street Journal (“The hidden costs of mutual funds”) pointed out the cost of owning mutual funds can be much higher than investors understand. The average expense ratio is 1.31 percent; however that is not the total cost for owning a mutual fund. Undisclosed fees can be as much or, in some cases, higher than the disclosed cost. Buying and selling of securities in a portfolio can add from 1 percent to as much as 3 percent of undisclosed fees to the fund owner. The SEC doesn’t   require fees to be factored into the expense ratio and the fund owner who thinks they’re paying 2 percent may actually be paying 3 percent or more.

According to the Investment Company Institute, at the end of the third quarter of 2009, 46 percent of retirement savings was invested in mutual funds and 36 percent in other securities.

Retirement savings in America is in the $14 trillion range and 82 percent (over $11.5 trillion) is in securities and mutual funds. Assuming an average of 2.5 percent combined fees and loads, Wall Street will take in about $350 billion annually from Americans retirement savings.

Fees and loads are not in the compounding formula

Assuming you are 50 years old and don’t expect to need to tap retirement savings until age 65. You’ll have 15 years of potential growth. Let’s assume you have $250,000 in your IRA or 401(k) and estimate you’ll earn an average rate of return of 6 percent. $250,000 times 6 percent for 15 years would compound to $613,523.39.What happen if the earned 6 percent in a mutual fund but was charged 2.5 percent in fees and loads.

The same $250,000 earning an average rate of 6 percent (minus the 2.5 percent load) would grow to $422,291.90. That’s a difference of $191,231.48. If the total cost of owning the fund was 3 percent to 4 percent, the cost of owning would be even more.

There’s still more!

Once you have reached age 65 and have already lost $191,231.48 of savings to fees, it’s time to start taking distributions from your IRA/401k. The plan is to create a reliable stream of retirement income. This is where the cost of fees really begins to show its ugly head.  As long as your IRA or 401(k) remains in mutual funds, the fees and loads will continue. If you need 5 percent annually, you’re still paying 2.5 percent in fund fees. This creates a drain of 7.5 percent when adding the fees to your withdrawals.

Mutual fund owner pay more when the fund makes more

If you own a fund with valued at $500,000 and the total cost of owning that fund is 3 percent, your cost is $15,000 annually. Just visualize someone reaching into your IRA or 401(k) and removing $15,000 or more each year. Now imagine that same person using your $15,000 to buy a Rolex watch or taking a Caribbean cruise. You might react by saying, “They can’t do that!” Unfortunately, that’s exactly what’s going on.

The Power of Next Gen Annuities

Next Gen Annuities are Fixed Index Annuities which have lifetime income riders. Fixed Index Annuities earn market linked fixed returns without market risk. In general the total fees of a Next Gen Annuity are 1 percent or less. The sale of a Next Gen Annuity, like the sale of mutual funds, generates a commission for the agent. Annuity commissions are paid by the insurance company and are not deducted from your account, thus 100 percent of your deposit is working for you day one.

Allocating a portion of your retirement funds into a properly structured a fixed index annuity can provide you with a guaranteed stream of income that you can’t outlive. Additionally your overall fees will be substantially reduced.

Assuming you have were paying 3% in fees in your mutual funds and your account balance is $500,000 and you moved $350,000 to a Next Gen annuity with total fees of 1%, your current mutual fund fees would be reduced from $15,000 annually to $8,000 ($150,000 X.03 = $4,500 + $350,000X.01=$3,500)

You could also sleep at night know you have guaranteed income for life and the risk to your total portfolio has been significantly reduced because 70% of your retirement funds are principal protected in the annuity and only 30% of your money is now at risk. Think about it, if the market lost 20% your portfolio would only lose 6% because you only have 30% at risk (20% loss of 30%).

 

Retirees and those about to retire need to make smart financial decisions. We’re making that education easier by providing you with an easy to understand, OnDemand Retirement Education Program. Learn how to maximize your retirement income benefits and how to increase your income during retirement. It’s free and you can watch it from the privacy and comfort of your home 24/7. Simply visit www.MyRrKit.com  for retirement planning and www.DenverSocialSecurity.com for webinar on maximizing your Social Security benefit.

 

 

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