When I ask my clients what kind of returns they have received since they’ve been investing in their 401(k)’s and IRA’s, almost without fail they answer, “7%-8%.” “And how much have you been saving?”, I ask. This answer varies greatly, but most of my clients have been diligent savers. They just have been storing their money in inefficient vehicles and investments.
Let’s take a client who has been saving on average $10,000 per year between their contributions and any matches they may have received from their employers. With a 7% annual return, this person should have over $1 million after 30 years.
If that’s the case, why aren’t more people millionaires? What happened?! They’ve been doing all of the right things. Their statements say they’ve been averaging 7%. Everyone has been telling them to stuff money into their IRA’s and just “let-it-ride.” I’m here to tell you, it’s not your What the hell happened?
Well, first, fees. Fees are not calculated in your returns, yet they can drain massive amounts of your retirement funds. According to a 2012 study done by the thinktank, Demos, high 401(k) fees can drain $155,000 from an average household over a lifetime. Higher earning households can lose even more — up to $278,000. We will address the 16 different fees that can be found in managed money, and how to discover them, in another newsletter.
Second, your contributions are most likely being calculated in your returns. Meaning, every time you add money to your account, that is being shown as a gain.
Third, you’re looking at the ‘average’ return vs. paying attention to the ‘actual’ return. Confused yet? I’m going to teach something called, “Wall Street Math.” And I want you to remember this for the rest of your life. This is extremely important so you can never be fooled again.
What if I told you, I could get you an “average return” of 25%? You may be skeptical, but I would probably have your attention. Let’s take a look at how people get fooled on a daily basis by looking at their statement returns.
Well, I upheld my end of the bargain. I got you an “average return” of 25%. And yet, you know there’s something not right because you have the exact same amount of money that you started with. But, what if you were so impressed with my genius of doubling your money that first year (it’s not genius, it’s luck) that you decided to start adding more to the fund? Say, an additional $10,000 for the next 3 years.
Now I bet you’re really confused. You actually lost money, but your statement still shows you had a 25% return. But guess what? We haven’t even factored in fees. What would a 1% management fee and a 1% fund fee do your return?
Once the fees are factored in you can see that you lost almost $13,000 just in expenses, but it did not affect your “average return”. Can you imagine having to try and decipher decades of these types of statements to figure out what your “actual returns” have been? It’s next to impossible.
My point in this article is not to make people feel dumb for the investments they have. Most people have been practicing the right disciplines throughout their working years but were just thrown into a game that is rigged against them. My point is not even to bash the advisors that manage money in this rigged system. I believe most of them are good people with good intentions but are limited on what they can offer to their clients.
My point is, however, to bring a sense of clarity and address that gut feeling you have that something is not right. There are options available that will cut the confusion out of your financial situation by giving you a straightforward understanding of what your returns are, and they can be guaranteed if that’s what you’re looking for.
If you have been saving and investing for decades and are nearing retirement, or you are retired already, let’s talk. Let’s talk about what you can “actually” get. Not what I think you’ll “average” during your retirement. Let’s talk about mitigating useless fees that eat away at your wealth. Let’s talk about taking control over your retirement. And, let’s talk about a strategy possibly using a Fixed Indexed Annuity to make sure you never run out of income no matter what happens in the market, and no matter how long you and your spouse live.