Have you ever considered how much damage investment costs are doing to your retirement savings? Or what the effect is of the apparently insignificant cost percentages quoted by your financial adviser? Research has shown that advisers, product providers and asset managers are the ones who are getting the cake while the investors get the crumbs.
It has been calculated that over a 40 year period real returns, that is the return you earn after taking off the effect of inflation, on your retirement savings are being reduced by costs by on average about 75%!
It has been calculated that over a 40 year period real returns, that is the return you earn after taking off the effect of inflation, on your retirement savings are being reduced by costs by on average about 75%!
In many cases any returns that one would have made are wiped out by these costs.
In a study in 2004 it was established that the average costs incurred in a retirement fund are about 3% of the asset value every year. These costs cover the total administration of the fund, including asset management and advice. Over a period of 40 years each 1% in cost reduces the final value of your investment by about 30%.
For example, if you save $1 000 a month for 40 years and earn an average real return of 5% you will have about $1.5 million. This is made up of $480 000 of contributions and $1.1m of investment returns. With costs of only 1% the $1.5m will be reduced to $1.1m - a loss of $400 000! With costs of 3% the $1.5 million will be reduced to a paltry $750 000. Your investment will be halved by a 3% cost.
The cost of 3% is probably a reasonable average. Many retirement funds will have higher costs. As a result there are thousands of retirement fund members who receive little or no real investment return. This impact being felt most by individuals who invest in high-cost retirement annuities.
To fool you, the costs are normally reflected in terms of some number which makes them appear to be quite small. It may be a percentage based on the total assets or as a percentage of your pay. This way they are made to appear low when in fact they are punitive.
If there was fully disclosure it could be explained more honestly in terms like this. "Assume that over the life of this investment you will receive a real return of 5%. With a cost of 1% your investment return will be reduced by 20%. A cost of 3% will drain 60% of your real return, and with 5% costs your real return will be zero." Wouldn't this make you think more about that "little" number?
The other interesting point is that the more investment choices you're given the worse off you probably are. This is as a result of the wrong investment choices being made at the wrong time. These wrong investment choices providing a fantastic excuse for product providers because they can, with hindsight, point out that you made the wrong choice, as other funds offered would have provided far better performance.
Another problem is that you're paying high costs for active management and active asset managers who have a dismal track record. A very low percentage of them even manage to outperform benchmark indexes. It is almost impossible to identify the few percent who will outperform. As every investment manager will warn you "past performance is no guarantee of future performance."
Bottom line is that you're being ripped off. Paying high management and performance fees for active managers who outperform and receiving nothing back from the vast majority of active managers who under-perform.
To increase the delusion these funds have been structured in so many ways that makes it virtually impossible to do any comparisons. The information provided to you regarding the true performance is optimistically biased.
So be warned. When evaluating your retirement investment options ensure you include all the costs as this "little number" may eventually exceed the real return you receive. In fact the damage it causes can make the difference between a comfortable and an impossible retirement.
