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Retirement Success and Fees do NOT Mix!

A “true” retirement income-planner understands the importance of considering all of components that influence a client’s retirement goals. One component that adds or subtracts from retirement income success rates is the "all-in cost" retirees pay on their investments. “All-in costs” are a big mystery to many investors, as well as many financial advisors. Unfortunately, most financial advisors are not required to disclose all of their costs. A study conducted by Bob Veres’s creator of the “Inside information” blog revealed that the true all-in cost for financial advisors averages 1.65%. 
 
 
Is 1.65% an acceptable amount to pay for your investments? Keep reading and decide for yourself.
 
 
A popular rule of thumb regarding how much retirees can withdraw from their investment accounts in retirement is known as the 4% rule. The rule was created using data from 1926 to 1976 when many found a much higher amount to be an acceptable withdrawal rate. However, William Bengen, a financial advisor, conducted a study in 1994 and discovered that withdrawing 4% from a balanced portfolio, adjusted for inflation,  has been a successful strategy over every 30 years period starting in 1926.  This period even covers very challenging market conditions such as the great depression. Due to this study, many financial experts use this rule as a guide for retirement planning.
 
 
The 4% rule is a good guide, but it is important to note that the study does not include the underlying investment expenses investors’ pay for advice. Unfortunately, many financial professionals do not consider their fees when applying this rule. It is easy to see why, when the average fee is over 1.5%. High fees are difficult to justify when considering the 4% rule. If a retirement plan has a 1% expense ratio, you can technically take out 3% to spend for yourself; 1% plus 3% equals 4%. At a 2% all-in fee, you and your advisor get to split the withdrawals evenly. Sound fair?
 
 
Let's look at it another way: Withdrawing 4% to spend for yourself and paying the average investment fee of 1.6%:  Because this totals more than 4%, this violates the 4% rule. In year 1, 5.6% is withdrawn from the portfolio which is putting your retirement income plan in jeopardy.
 
 
What kind of impact does a 1.6% fee make when withdrawing 4% for income?  Where a 4% withdrawal rate has a 100% historical success rate, a plan with a 1.6% fee takes the success rate down to around 77%: a drop of 23%! 
 
Safe Harbor Retirement Planners understands this relationship, and this is the biggest reason why we were strategic about our fee schedule.  Our “all-in” cost on a $500,000 account is around .75%, making our fee over 50% lower than the average.
 
While we are presenting you with a lower than average fee, some of you may be thinking, if I pay more for expensive investment advice, then the excess returns will justify the costs. This thought process is reasonable but is simply not true, and in fact, it can't be further from the truth.
 
A study conducted by Morningstar.com concluded that the most accurate predictor of which funds will perform better in the future is the expense ratio. The lower the cost of the fund, the better chance of it outperforming higher-cost funds. Hence, the transition to index funds since actively managed funds are much higher cost, according to Zerohedge.com.
 
 
For this reason, our “all-in fee" is considerably less than the average. Our low fee is not an accident but intentional. Click here to see a full breakdown of our fees.
 
Our fee structure allows middle-class retirees access to planning for a reasonable cost. In fact, less than 9% of investment accounts with $1million to $2 million pay less than 1% of “all-in” fees, according to Bob Veres.  Our low fee is one way in which we provide you with more income than our competitors. The more you don't pay in fees, the more you get to spend in retirement. So, what do you get when working with Safe Harbor retirement Group? A much lower expense ratio is a good start!
 
 
Please note that the 4% rule holds true for the history of the U.S. stock market. Other markets around the world have safe withdrawal rates starting much lower. In fact, in some foreign countries, such as the Japanese market, the safe withdrawal rate is as low as .3%. That’s not a typo; there is a period in front of the 3. Be cautious when implementing this rule, and fully understand all of the risks associated with your plan. 
 
 
Wishing you a blissful and prosperous retirement!
 
 
Eric Bowser

 

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Retirees Most Significant Risk!

Retirees Most Significant Risk!
The largest risk to a long term retirement income plan is suffering substantial portfolio losses during the first ten years of retirement.  This risk is known as sequence of returns risk.  Unfortunately, and contrary to popular belief, it is impossible to forecast how the stock market will perform this week or next month.  Nobel winning research shows there are correlating factors to gauge how the stock market may perform over the next eight to ten years.  This research is based on the stock markets valuation using the cyclically adjusted price earnings (CAPE) ratio. When the CAPE ratio is elevated then the stock market is considered expensive and can be expected to have an increased probability of adverse market conditions.  The current CAPE ratio has only been this high two other times in the history of the stock market.   Each time the U.S. stock market has hit this level the next ten years contained undesirable market conditions.   Retirees face a big problem if history repeats itself.  
 
 Avoiding losses in the first ten years is the highest priority to maintaining an income stream for 30+ years.  Due to past struggles in the economy, interest rates continue to stay very low.  Low-interest rates make it challenging to find viable solutions for safe investment vehicles to combat the sequence of returns risk.  Understanding where to find the highest potential return on safe investment options is imperative.  Safe Harbor Retirement Planners strategically allocates retirement portfolios to provide the optimal amount of safety paired with the highest potential returns.  Research paper such as Fixed Index Annuities: Consider the Alternative conducted by Roger Ibbotson helps with our analysis.   When you combine our strategically allocated portfolio along with our low fee structure, is what sets Safe Harbor Retirement Planners apart from the competition! 
 
 
Wishing you a Blissful and Prosperous Retirement!
 
-Eric Bowser
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Fiduciary

Fiduciary

The Financial world is littered with conflicts of interest.  Every week there is a new story where a financial advisor performs unethical acts to benefit himself and take advantage of the client. This is the unfortunate reality in the world we live in today.  The biggest reason clients choose a financial advisor is based on trust.  Safe Harbor Asset Management Services abides by the highest form of ethical standard required by law.  This is known as the Fiduciary standard. The Fiduciary standard simply states putting the client's interest before their own.  

Believe it or not but financial advisors are not created equal regarding the "ethical" standard they are required to follow.  This may be a surprise to you but is very true.  In fact, the majority of financial advisors are not required to act in the best interest of the client. You may be asking how can this be?  Most Advisors follow the Suitability standard.  If the investment is suitable for you than it's not against the law to sell.  Suitability relies on whether the investment fits your risk tolerance, diversification, and liquidity needs.  This may sound good but under the suitability standard advisors are not required to be transparent regarding fees and compensation methods.  Due to the lack of transparency advisors are more susceptible of choosing high-cost investments that will benefit himself and the firm he represents. Let's move on and find out how to tell if your advisor is a fiduciary. 

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