What’s Retirement Advice Really Worth? Part 1
What’s Retirement Advice Really Worth? More than you think—but not for the reasons you think.
Folks entering retirement with some savings face a choice—seek out professional advice on how to safeguard and grow their nest egg, or go it alone, aided by whatever free resources or cheap products they can find. It isn’t hard to find tips and strategies in books or on the Internet—you may be doing just that right now—and asking friends or family probably yields even more suggestions. Is this enough? Or is paying for expert guidance worth the cost? A recent survey of investor habits and beliefs found nearly two-thirds of investors say it is, and we agree: Individual circumstances always vary, but there are good reasons to take advantage of professional guidance as you invest in retirement. In the first of this two-part series, we’ll examine the more well-known costs of investment advice—and how complex calculations often mask their true impact.
No Such Thing as a Free Lunch
Managing your money isn’t free, even if you aren’t paying anyone to do it. Seem contradictory? It isn’t: There are always costs and risks, even if not all of them show up on a bill. Most investors focus on what they can see, like trading commissions or management fees, but other, less-visible costs can be much more important. For investors, opportunity costs loom large—potential returns left on the table as a result of poor planning or decision-making. When gauging the worth of professional financial advice, considering both sides of the equation is crucial.
MORE: Do you know how much your retirement will cost? Do you know how to generate the retirement income you’ll need? The Definitive Guide to Retirement Income will help you find answers to these and other important questions.
The Costs You See
These are often pretty obvious: any surcharges, flat fees or percentage of your assets subtracted in return for advice or other management services. They’re undeniably important, and you should always know what you’re paying. Look out for red flags like high sales commissions—which suggest the product is hard to sell and generates a tidy profit for the seller—and layered or complex fee structures, which may obscure additional charges and expensive limitations. Variable annuities, for example, combine complex, multilayered fees with severe penalties for withdrawing money early—a one-two punch that can cut a big hole in your savings. That’s why you should always demand total transparency on all rules and restrictions associated with your retirement accounts. Outsized fees crimp returns over time—$100,000 invested over 25 years and earning an 8% annual return will grow to about $685,000. Just a two-percentage-point reduction in yearly returns due to account costs (in whatever form) decreases the final total by 37%, to around $430,000. That’s a big chunk!
Oh, and be very careful to catch how some financial-product engineers camouflage fees. For example, equity-indexed annuities (or fixed-indexed annuities) frequently carry no expressly stated fees. But there isn’t any free lunch here, either: They employ complicated calculations to essentially scrape off and keep a substantial portion of returns earned. Since you never saw it due to the calculation method, there is technically no fee. But these calculation quirks (called participation rates and caps) can be just as costly as variable annuities’ high fees—if not more so.