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Is it Christian if you give more of your money to a financial advisor than to the Church?

Is it Christian if you give more of your money to a financial advisor than to the Church?

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This article was posted January 1, 2009.

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Invest with DFA Funds, 12-Step Program

With several stock market indices down 40% or more from their peak, many retirees are cutting their expenses where they can. If you are invested in anything like the "average" mutual fund, the fees you are paying to your fund manager and financial advisor may well dwarf any of your other annual expenses.

Back in 2003, Retire Early noted that the average retiree with a $1 million portfolio taking a 4% or $40,000 annual withdrawal is paying a lot more to his financial advisor than the IRS. (A married couple taking the standard deduction would pay less than $3,400 in Federal income taxes.) While "Caesar's" take doesn't quite equal 10% in this case, if you're an American of faith who tithes to his or her Church, you may well be more generous with your financial advisor than the Lord -- and that's not Christian.

A few readers commented on the October 2008 article on retirement withdrawals and were surprised to learn that most studies don't include the effect of investment expenses and advisor fees. With a "safe" retirement withdrawal rate of about 4% of your portfolio's value, that's only $40,000 per year from a $1 million nest egg. A tithe or 10% share of that $40,000/year is only $4,000 annually. Yet, many retirees lose much more than that in fees to their financial advisors. A 2006 Yale School of Management study calculated the total shareholder expenses of the median US equity mutual fund at 1.99% of assets. That's right -- astonishingly, half of all US equity mutual funds are taking 2% per year or more from their customers in fees. Even the median US bond mutual fund skimmed 1.41% as its fee. The combined mutual fund fee for a 60% equity/40% bond portfolio is 1.76% or $17,600 on a $1 million portfolio. That's almost half of your $40,000 annual withdrawal. Adding a financial advisor to the mix might cost up to another 1% of assets or $10,000 on top of the mutual fund fees. That would leave our hapless retiree with only $12,400 of his $40,000 annual withdrawal. It's very hard to retire if your mutual fund manager and financial advisor are taking nearly three-fourths of your retirement income.

Cutting fees and expenses to the bone

While Retire Early's 2002 safe withdrawal study included a 0.20% annual expense ratio for an S&P 500 index fund, management fees for the lowest-cost index funds have declined quite a bit since 2002. You could easily assemble a diversifed portfolio of low-cost index funds (such as the one below) for a lot less than 0.20% of assets today. Here's a sample portfolio you can put togther using Vanguard and Bridgeway funds. The portfolio includes foreign and domestic exposure; large-cap, small-cap and micro-cap stocks as well as REITs. The fixed income portion of the portfolio is split between short-term bonds and TIPS.

$1 Million Retiree Portfolio Using Low-cost Index Funds
Fund Name Expense
$200,000 VFSUX Vanguard Short-Term Bond Admiral Shares 0.10% $200
$200,000 VAIPX Vanguard Inflation-Protected Securities Fund-Admiral Shares 0.11% $220
$250,000 VTI Vanguard Total Stock Market ETF 0.07% $175
$50,000 BRSIX Bridgeway Ultra-Small Company Market Fund 0.66% $333
$50,000 VBR Vanguard Small-Cap Value ETF 0.11% $55
$150,000 VEU Vanguard FTSE All-World ex-US ETF 0.25% $375
$50,000 VWO Vanguard Emerging Markets ETF 0.25% $125
$50,000 VNQ Vanguard REIT ETF 0.10% $50
------- . ------- -------
$1,000,000 = Total Portfolio Total Portfolio Expense = 0.15% $1,533

What to conclude from this analysis?

The stock market doesn't care how you spend the annual retirement withdrawal from your portfolio. Whether you spend it on a new car, a luxury cruise, or an outsized fee to a financial advisor or fund manager, it's all the same -- what matters is the total amount withdrawn. Your retirement certainly isn't any safer if you're invested in high-fee mutual funds and you have a financial advisor taking a cut beyond that. That's why financial talk show host Dave Ramsey's advice to hire one of his "Endorsed Local Providers" and invest in mutual funds with much higher fees and commissions than a portfolio of low-cost index funds doesn't make sense.

Index Funds vs. "Average" Mutual Fund & Financial Advisor
Spendable Annual Income after Taxes and Investment Expenses
(assumes $40,000 annual withdrawal from a $1 Million Retirement Portfolio
. Low-cost Index Funds "Average" Mutual Fund
Annual Retirement Withdrawal $40,000 $40,000
Federal Income Taxes -$3,400 -$3,400
Mutual Fund Fees & Expenses -$1,500 -$17,600
Financial Advisor None -$10,000
. ------ ------
Spendable Annual Income $35,100 $9,000

Indeed, if you're withdrawing 4% for your living expenses and letting your mutual fund manager and investment advisor take another 3% for a total of 7% of assets annually, historically there is less than a 50/50 chance your money will last 30 years. Limiting the investment costs to 0.25% of assets or less allowed a 4% retirement withdrawal to survive for 30 years in every payout period examined from 1871 to 2006. As Warren Buffett once observed, "The average investment manager adds nothing,' Buffett said. `He subtracts something from your investment performance. It's almost unique among professions that I can think of.'

Jesus himself said "Render to Caesar the things that are Caesar's, and to God the things that are God's." [Mark 12:13-17]. Just make sure that what your financial advisor and the mutual fund industry skims off the top doesn't exceed either God's or Caesar's take.

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Copyright 2009 John P. Greaney, All rights reserved.

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