Does Your Financial Advisor Take More
of Your Money Each Year Than the IRS?

This article was posted on September 1, 2003.

While many retirees complain about the fact that Social Security benefits are taxed if you earn more than $25,000 per year ($32,000 for a married couple filing jointly), or the ever-present complaints about the dreaded "death tax" (i.e., the Federal Estate tax that affects about 2% of the people who die each year), many ignore the fact that their financial advisor may be taking far more of their money than the IRS.

For example, let's take a married couple with no dependents and a $40,000/year withdrawal from a $1 million retirement portfolio. If we assume the whole $40,000 is ordinary income, and that they take the standard deduction of $6,900, they'd pay $3,365 in Federal taxes under current law. Generating some of that $40,000/year through capital gains might reduce that $3,365 annual tax bill even further.

The average mutual fund had an expense ratio of 1.34% in 2001 according to Lipper Financial Services. That would be $13,400 for a $1 million portfolio or about four times what our couple paid in Federal income taxes for the year. If our retired couple paid an investment advisor or had their retirement assets in a high-commission insurance product like a variable annuity, the fees could climb to 2.50% or more per year. Imagine that -- an astonishing $25,000/year or more than half of their $40,000/year in living expenses lost to excessive fees and commissions.

Avoiding paid financial advisors and investing in a low-fee index fund is one way to safeguard your retirement assets from financially devastating fees and commissions. For example, if a $1 million portfolio was invested in a low-fee mutual fund like the Vanguard Balanced Index Fund - Admiral Shares (VBIAX), the expense ratio would be 0.15% per annum or $1,500 per year. That's less than half of what the couple in our example above paid in Federal income taxes.

Related article: CBSMarketWatch (09/23/2003) - "Funds to retirees - Joke's on you"