How getting on the same page with your adviser can work wonders
News flash: You will probably run out of money during retirement. This realization is sad but true. According to the Federal Reserve’s Survey of Consumer Finances, the average working family on the cusp of retirement age (55- to 64-years-old) has only about $104,000 in savings for retirement.
Pair that with the complex model of calculations done by the Employee Benefit Research Institute, and 83 percent of baby boomers and Generation Xers in the bottom quarter of the income distribution are predicted to eventually come up short of money. Even more than a quarter of people in between the 50th and 75th percentiles in income distribution will likely fall short.
Currently, you may be going into panic mode: “I need to save more money,” you’re thinking, or “I should invest more.” But those thoughts do not take into consideration what Eduardo Porter, economic scene contributor for The New York Times, believes to be “a critical driver of unpreparedness.” That is, Wall Street is bleeding savers dry, he says.
Instead of simply saving more, put more accountability on the investors. Ensure the interests of investment advisers and their clients are thoroughly aligned.
To make a long story short, actively managed mutual funds are extremely costly. There are expense ratios, transaction costs, distribution costs and more that add up to a cost of 2.27 percent each year, states the Financial Analysts Journal. On the other hand, the total fees for a passive index fund like Vanguard’s Total Stock Market Index Fund are merely 0.06 percent a year. The difference for the family with $104,000 in savings is $236 additional just for that year, not even counting the savings for the 30-plus years leading up to that.
“If there is an industry [rife] with conflicts of interest, it is the financial conglomerates that advise Americans on investing these savings,” Porter summarizes. “Yet nobody was paying attention to the safeguards that might be needed when corporate retirement funds managed by sophisticated professionals were replaced by individual 401(k)s and Individual Retirement Accounts.”
Porter reports that actively managed IRAs are a huge source of profit for Wall Street. Workers roll more than $300 billion worth of 401(k) balances into IRAs each year.
The United States Department of Labor proposed imposing fiduciary responsibility on IRA advisers but was met by a “wall” of resistance. Whether or not a regulation is imposed by the government, investors/impending retirees can take control of their futures by taking active roles in their retirement funds. By not playing the investment “game” suggested by many advisers with vested interests, your finances will likely be in a much better place—literally and figuratively—when the time comes to retire.
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