Hi everyone! And welcome to another Wealthy and Wise Wednesday. We’re halfway through the week, just a couple more days until the weekend. Although if you’re like me, I don’t get much of a weekend. Seems like always something going on and it’s a time for me to catch up on some of the books and videos that I like to watch to keep up with what’s going on in the financial world. Anyway, hope you’re having a good week.
I had kind of an interesting experiences last few weeks. I was asked to go on a radio show. It’s a financial radio show and talk about some of the things that we do, and one of the things they want to talk about were annuities. And I guess he had seen my video on annuities. Now, just like with any other investment out there, there’s no really such thing as the absolute perfect investment. And so, annuities have to fit certain situations to make sense just like any investment, right?
Well, this particular talk show host was of a fee-based financial advisor who doesn’t use annuities. And so, he asked me if I’d come on and talk about annuities. And I said, “Sure! I’d be happy too.” And a few days later, I get this email saying, “I’m not sure you kind of know what’s going on, but I’m not a fan of annuities, high commissions, and long-term investment products that they are,” and yada, yada, yada goes on and on about what he doesn’t like about annuities.
And I said, “Hey! That is perfectly fine. I think it’s really good for the public to understand different investments and how they work and as I just mentioned, annuities are not for everyone. If you’re trying to go around and making annuity fit for every situation, you’re probably not going to be a very good financial advisor. But for many, it fits perfectly.
I mean, some of the most famous annuities that you know of are pensions. Pensions are basically annuities. Another one that’s very famous that you might heard off, it’s called social security. Yes, social security is basically an annuity. And annuity was originally designed to build up a capital base and then when it was time to retire, you would start an income stream that you could never outlive. Live to be a 120, live to be a 150. They still have to pay you. So, for many, that makes a lot of sense.
The other thing about annuities is because they’re safe, they can’t go down in value of at least, well, there’s actually one annuity that can, it’s called a variable annuity and I stay a million miles away from those. I don’t think those fit in hardly any situations, but another topic. Indexed annuities, fixed annuities, safe guaranteed, can’t lose money. So again, for some that want to just have some of their money protected, know it’s going to be there, know it’s going to give them an income stream they can outlive. It can make sense.
For others, it’s a horrible investment because it doesn’t fit what they’re trying to do. And so, I’m perfectly happy to talk about the pros and cons of annuities. That’s what I told him. I said, “Hey! That’s okay. Throw up the different things that you think are bad about him and let’s discuss them and try to figure this thing out and hopefully your audience will learn something. And so, that’s how we kind of ended it and I had the date scheduled to do the radio show. And it’s actually scheduled for tonight.
But just a few days ago, I got an email from him and evidently, he had looked over some of the other videos and podcasts that we have and how I talk about a lot of different things. And one thing that I talk about quite often is fees and he said, “You know what? I’m not sure we’ll do this show because I just don’t know if what you’re gonna talk about, what I want to talk about.” And I said, “Hey! Look, again, if your show is about educating the public, we can come up with some really good things to talk about.” And I said, “I’m not, as you know, you probably have seen some of my stuff out there. I’m not a big fan of fees because I think fees are just an annual commission.”
And although this whole push in Wall Street is fee-based planning, and you might heard this term, fiduciary. It’s just about to drive me crazy because these guys think that if they’re a fiduciary, they put this halo on and they can never make a mistake. The idea with the fiduciary is they’re supposed to do it’s in your best interest. Well, my feeling is if advisors aren’t doing what’s in your best interest to start, then they shouldn’t be in the business and certainly, it should be someone that you should work with. It’s beyond me why we had to make a rule. Well, I get it. There are a lot of unscrupulous people out there. So I understand the rule but it’s sad, maybe I should say that we had to actually make a rule to say that you have to do what’s best for your client. I mean, that just seems so natural and it just seems what you should be doing.
Anyway, this fee-based planning is just killing people. And I want you to think about this for just a second but let’s really dissect and get right down to the nitty-gritty of what a fee is. A fee is nothing more than an annual commission, and that commission gets taken off the top of your account every year. Of course, most of them are charged quarterly but you’re gonna get charged and it’s going to come right out of your account every year. And again, it’s an annual commission. We can tie a bow around it. We can put lipstick on it. We can do whatever we want. But a fee is nothing more than an annual commission that’s paid right out of your account value.
Now, there’s only one way in my opinion that the fee can be worthwhile. One is they’re either making substantially more than you would if you just bought the index because they have some amazing approach to investing or they save you big bucks when the markets crash as somehow they miraculously get out of the markets a perfect time so that you don’t ever suffer losses. So if they’re making up their fee by getting you either a greater rate of return or less loss on the downside, might be worth it. But let me tell you after 30 plus years of doing this, there’s just not many of them out there. And no one will tell you they can do that anyway, and if they do, you probably should run.
The reality though is that those fees are going to eat into your ultimate profit, your ultimate nest egg that you’re going to take of income in the future. And you might have seen this. So I’ll give you just a quick little run down because this is kind of interesting. But if you take three guys and I think actually, Tony Robbins came up with this example. Now, Tony Robbins isn’t a financial guy but a few years ago, he wrote a book on managing money and that kind of stuff, and this kind of came up in that book. And what it does is, it depicts three friends who each have a hundred thousand dollars. They each grow at the same rate, 35 years old, $100,000, grown at 8%, and the difference is in the fees.
So what they did is, the worst scenario was, the guy was paying 3% in fees. And I know some of you think, “Well, 3%. That’s pretty high. My advisor isn’t charging me 3%.” But hold on just a second, there’s a lot of things about fees you might be missing. There’s usually a management fee within the mutual funds that they sell you, then the advisor tax on a fee and then there’s about 17 different fees and costs and expenses that you may not see, especially in your mutual funds. So it’s really not uncommon and especially, if it’s a 401(k). You might have seen some specials on 401(k)s and what’s going on there. But it’s really not uncommon to be up in in that 3, even 4% range in fees when it’s all said and done.
Anyway, so the first friend is paying 3% in fees. At the end that period of time, he’s 65, he’s going to retire. He has $432,000 left. Okay? And that’s what it’s grown to. His friend paid 2% in fees instead of 3% and he ends up with $574,000 and some change. Well, that’s a difference between those two friends of $142,000. Where did that $142,000 go? Yeah, to the fiduciary, to the guy who’s supposed to be doing what’s in your best interest. Alright. The guy with the halo on, who’s just a fee-based planner and he doesn’t take commissions. And this is what’s happening out there. They have another friend who only paid 1% in fees. So we got 1%, 2%, 3%. And this guy ends up with $761,000 because he only paid 1% in fees.
Now, don’t get me wrong. I don’t think 1% is really a good fee. There are so many places out there where you can get down to a quarter of a point or .15% so you can even reduce fees off 1%. Don’t think just because this scenario turns out best for the guy who pays 1% that that’s actually a good fee to be paying. Most of the time especially for guys just buying mutual funds for you, you can do that. You can buy mutual funds for yourself. You can buy indexes, which typically beat the active managers anyway.
So again, just because this guy only paid 1% and he came out better than his two buddies doesn’t mean it’s the best scenario of all. But he does have $761,000. He has $187,000 more than his second friend who only paid 2% in fees but he has $329,000 more than the first guy who is paying 3% in fees, almost double. But here’s where it really gets kind of interesting, because someday, you’re gonna want to take income off of your investments, 401(k), other investments, mutual funds, all that good stuff. And I get asked all the time, what’s a good rule of thumb? How much should you be taken off your investments each year?
Well, little bit varies, depending on what you’re doing but with the Wall Street Journal after a lot of tests and I won’t go and tell the details, say that there’s what’s called a bullet-proof withdrawal rate and that’s 3%. Okay? Now, the idea is if you take 3% of your money every year, you’re probably gonna live the rest of your life and have plenty of money. If you take more than that, you run the risk of running out of money before you run out a life. So let’s just use 3%.
Alright, so we got the first guy who has paid 3% every year in fees and now he’s going to start taking the income off of his $432,000. Well at 3%, that means he’s gonna get $12,960 a year in income. Now, if it’s been deferred all these years, he’s going to have tax come off of that. Okay? Remember, this is getting 8% every year, year in, year out, without fail. This isn’t an average. This is an actual return that’s a big concept to really understand and grasp as well.
Well, the second guy who’s paying 2% in fees and he has $574,000, well, he’s going to take $17,220 a year. So he gets about 5, 6,000 dollars more than his first friend. The last guy who is paying 1% in fees who has $761,000, he’s going to get an income stream at 3% of $22,830, nearly double what the first guy received.
So keep your fees as low as you possibly can because as you can see, it can make a huge difference in your retirement. But it’s my job so to speak to educate and empower you no matter what the product or what the investment is so that you understand it. And as we talk about these concepts over the months and months coming up, I hope you get a lot out of it.
Any questions you have, shoot them to my email at firstname.lastname@example.org. And always want to answer those just as quick as we can. Make sure you subscribe to the videos and the podcasts so that you’re always informed and up-to-date and all that stuff that’s really going to help you out. So stay tuned for those. And in the meantime, you have a great week and until next week.