How Investment Fees Ruin Retirement

I’ve said it before and I’ll say it again, INVESTMENT FEES DESTROY YOUR RETIREMENT PLAN!

Don’t believe me?  Read on.

This chart shows someone taking 5% initially from their portfolio and increasing with inflation over hundreds of 25 year rolling retirement periods.

Notice only a few times does the bottom fall out, where the portfolio runs out of money. In fact, the MEDIAN withdrawal percentage was 7.1%!  That means 50% of the time a retiree could have withdrawn MORE than 7.1% and had money left over when he went to his Greater Reward.

But even with a supposed high percentage withdrawal rate that retiree still achieved success, i.e. had money left over when he died, 80% of the time.

What the chart above shows is the historical success rate. At year 20, over 90% of the time he still had money in his portfolio, even after taking 5% out initially and adjusting for inflation.

Now, remember, I’m only using 25 year time frames here instead of the standard 30 year. I’m doing this for two reasons.

First, the longer the retirement the worse the results will be for the retiree who pays investment management fees.  So, I’m trying to be a little less brutal to the investment/advisor industry here.

Secondly, while many will live 30-plus years in retirement, the vast majority of us will not.

Above is Vanguard using the life expectancy tables from the Society of Actuaries(SOA). Note this is the 2000 tables, so it’s safe to say life expectancy has increased since then.  Even if we DOUBLE the life expectancy, a 65 year old man would have only a 12% chance of surviving until 95.

A woman has a 26% chance.

So, to use a 30 year life expectancy for retirement planning is VERY cautious.  Nothing wrong with that, mind you, but for what I’m trying to do in this writing, a 25 year time frame works just fine.

Lastly, the above chart shows how much is left in the portfolio at death. Other than the brief time when he retired during the onset of the Depression and that HORRIBLE time of the 1960s, this retiree left a lot of money to beneficiaries.

The 1% Management Fee Conundrum

So, let’s add a 1% management fee on top of the .5% investment fees we’re already paying. This gives us  an “all-in” fee of 1.5%. How do things look now?

First thing we notice is this:

What the increase in fees has done is DROP our retirement success rate by 11.25%, from 80% to 71%.

Oh but it gets worse…

Now our median withdrawal rate drops from 7.1% to 6.5%.  Maybe not a huge deal, BUT, look at how many more times we’re under water now as compared to before.  Basically EVERY 25 year time frame starting in the late 1950s through 1974 you ran out of money.

If you retired at any time from 1927 to 1931 you also ran out of money.  And the same from 1935-1937.

Lastly, let’s take a look at how much you actually leave to your heirs too.

Just look at the chart with the .5% fee and compare it to this one above with the 1.5% fee.  We’re talking high 6 figures and even into the 7 figures that you are NOT leaving to your beneficiaries due to nothing more than paying the high fees.

Is it worth it? Of course not.

Investment Industry Sales Pitch

The investment industry has smartened up and no longer argues they can outperform.   So, what their sales proposition is now is to keep you from making a mistake.  Essentially, they’re saying without their hand-holding you’re going to blow yourself up.

Maybe.  But isn’t that occurring WITH their hand holding???  I mean just look at the numbers above.

Now, the investment industry folks will say they add value in other ways. Asset location, tax planning, estate planning, tax loss harvesting, etc.  I COMPLETELY and UNEQUIVOCALLY agree with that, IF it’s truly happening!

If an advisor is reviewing 1040s to see where opportunity lay, life insurance contracts, having discussions regarding a client’s estate planning, making sure there are NO BONDS in Roth accounts, optimizing Social Security benefits, etc., the advisor could indeed be worth the fee.

I’d rather the fee be completely separate from the assets though. Getting fees for assets under management is a sure-fire way to allow advisors to be L-A-Z-Y.  After all, when they’re getting paid regardless of any work they’re doing it doesn’t take a rocket scientist to conclude that given the same pay for A. lot of work, or B.  less work, most people will choose B.

An annual fee, though, invoiced as most businesses do, keeps everyone honest. The client can determine if the fee is worth as she is writing the check.  The advisor also knows he needs to provide value in order to continue to receive the annual fee.  It’s a win/win.

Garrett Planning Network

This is why I’m a fan of the folks over at the Garrett Financial Network.   Let me give you an example of how this works over at Garrett.   Go to their FAQ page and you’ll find this:

What’s so different about Garrett advisors?

Members of the Garrett Planning Network provide their advisory services on an hourly, Fee-Only basis. Members do not accept sales commissions or any compensation other than directly from their clients. Clients pay only for the time an advisor works with or for them. Some Garrett advisors also may offer their services on a retainer basis.


Don’t I have to have lots of money to need or get a good advisor?

No. Garrett advisors have no income or investment account minimums for hourly engagements.



But what I like best about the folks at Garrett is they state their fees UP FRONT!

Let’s go to their SEARCH FOR AN ADVISOR page.  I’m going to check my native state of Maine to see who is out there.  First person to show up is someone named Abby Turner Morton with Goldman Financial Planning.

Let’s click her website and see how they charge.  And just like that we find this:

Pretty cut and dried, no? You KNOW exactly what you’ll pay.

Now I can’t speak to this person’s level of competence, but AT LEAST, for starters, I know her fees!  That’s better than 90% of the rest of the advisory business.

In fact, I did a “study” with some of the folks on my Youtube channel to look up advisors who are affiliated with NAPFA, the National Association of Personal Financial Advisors.  NAPFA holds themselves out to be as pure as there is in the financial advisory industry because they are fee-only.

Yet, when we scoured through dozens of websites we could only find a few, less than 10%, who actually stated their fees.  That’s the wrong answer!

If the advisory business is so valuable to consumers why on earth would we hide our fees???  For instance, on my own website I PROUDLY say I charge $2500 for a full financial plan if you have over $500k in Liquid Net Worth.  If you have less than $500k I charge $950.

Is it worth it? Of course it is or I wouldn’t charge it.  But can I convince YOU it’s worth it? No and why would I even try.  You, and only YOU, can make that determination. If you don’t see the value, I am not going to try to convince you because, well for one, I can’t, and two, I don’t want to.

In fact, at some point I’ll probably even raise my fees because of the value I bring. Is that arrogant? Maybe. But if you are confident in your value proposition then state it outloud for all to see and hear and let them make up their own mind as to whether or not you’re just talking smack or are actually worth it.

The public has a right to know. And until this happens in the industry I’ve devoted my career to, I will continue to call out how paying investment fees destroys retirement plans.

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