Fees, taxes and other unforeseen expenses creep up on investors, cutting deep into their retirement nest eggs.
Just how much of your savings are you losing? Find out in this week’s Two-Minute Retirement Solution.
TRANSCRIPT
Unanticipated costs can cut deep into your retirement, and most people never consider any of them when planning for their golden years.
Investment costs, the government and inflation are the culprits, and they cut a whole lot deeper than you think.
The investment industry is always standing in line for a big part of what you earn on your money.
Let’s suppose you expect to earn 7% on your nest egg. Between advisory fees, 12b-1 fees, a trustee, annuity costs, tax preparers, front- and back-end loaded funds…
The list is endless.
The average investor’s annual cost is above 2%.
Your nest egg just dropped to an annual return of 5%. The chart below shows how, over 20 years, the financial industry got 31% of your growth.
Then Big Brother in D.C. gets his share. Many believe they are living tax-free in retirement because their Social Security is tax-free.
No way, José!
There are hidden taxes based on your investment return that can increase the part of your Social Security that is taxed and Medicare Part B and D deductions.
And don’t forget phaseout deductions. I lost part of my interest deduction for my home last year because I made enough money to kick me into what I call the “secret” taxes.
Between federal, state and local taxes, you can literally lose another 2% of your investment return to our friends in Washington.
Your 7% just became 3%.
That’s a total of 53% from 20 years of growth of your investments gone, before you pay one bill.
And then Father Time shows up in the form of inflation. It’s been pretty tame for a long time, so most don’t even think about it. But it too takes its bite and, over a 20- to 25-year retirement, even at current levels, it will hurt.
The only solutions I know of are to be vigilant about what your investments are really costing, work the tax-free, tax-deferred options available, and make sure that after you pay your bills, you have something left to pay inflation, too.
Breaking even each month is a long-term inflation trap that will impact all of us.
Sorry for the negative slant this week, but we all need to hear this.
Good investing,
Steve
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