Everyone loves VALUE! For this reason, Amazon, Apple, and Google have exploded in popularity. It's easy to see the value when purchasing items from these companies. It's not as easy deciphering value when it comes to financial planning. In many cases, people end up paying significantly more for less VALUE!
You wouldn't purchase a used Hyundai for more money than a new Mercedes, would you?
Or purchase a 2005 Nokia cell phone over the new iPhone?
Believe it or not, this is happening in the financial planning industry.
You might think these comparisons are extreme. It would be crazy to think anyone would make the above choices.
Actually, the difference is even more significant!
The quality of your life is on the line. Yes, the two examples above impact the quality of your life but not nearly as much as running out of money in retirement.
Consider an example of two lifelong friends who retire together at the young age of 65 with $1,000,000 of savings on January 1st, 2000. Both retirees need $50,000 a year from their savings (not including social security).
Each retiree chooses to work with a different financial advisor to help structure their retirement income plan.
Retiree 1 has benefited from being aggressive with their investments and insists on an all-stock retirement plan. The financial advisor takes the easy road and agrees to place 100% of the retiree's savings in actively managed mutual funds that track the S&P 500. The advisor charges 1%, plus another 1% for trading and fund costs bringing the total all-in fee of 2% a year (approx. $20,000 in yr. 1)
Retiree 2 sees a different financial advisor. He has also benefited from being aggressive and insists on an all-stock retirement plan. This financial advisor takes the time to educate the prospect on how risk is much different in retirement while withdrawing funds from the portfolio. After a couple of extended meetings, retiree 2 agrees to a diversified portfolio with 50% of their savings in a multiple asset-class portfolio using low-cost index funds combined with a 50% allocation to a Fixed Index Annuity. This particular Fixed Index Annuity contains principal protection and captures 50% of the S&P 500 price index locking in any gains on an annual basis. The Investment advisor charges a fee of .5% and the funds and platform cost are another .25%, with a combined total of .75%. The 50% portion of the funds placed in the index annuity is not part of the expense ratio due to the underlying structure of the annuity with an insurance company. The total expense ratio on the portfolio is .375% (approx. $3,750 in yr. 1)
January 1st, 2017
Retiree 1: Account balance - $0
Retiree 2: Account Balance - $665,933!
Retiree 1 is out of savings and is now required to rely on Social Security, Medicaid, and family.
Retiree 2 still has many more years left to enjoy their independence.
AND… Retiree 1 paid considerably more!!!
Pay less for more value!
If a properly structured financial plan can help decrease the chance of running out of money in retirement, then it's hard to imagine what is more VALUABLE!
Wishing you a blissful and prosperous retirement!
Eric Bowser CRPC®
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