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Thayer Partners Blog

These 3 Things Could Kill Your Retirement

[fa icon="calendar"] Jul 11, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

These_3_Things_Could_Kill_Your_Retirement.jpgYou work hard for your money, so when you choose to put funds into a retirement plan, you expect that money to work hard for you. You scrimp and you save, hoping that one day, you’ll have enough to retire comfortably. If you’re smart about how you plan, you can do just that—but, like most things in life, it’s not as simple as just saving. You need to save strategically and grow your funds—otherwise, you might find yourself falling short when you finally decide to retire. Watch out for these 3 silent assassins; they could kill your retirement before you even get started.

3. Inflation

Inflation is sort of the boogey-man of the financial world, causing prices to rise and generally eroding people’s buying power. What that means is that today’s dollar is probably going to be worth more than tomorrow’s dollar in terms of how much you can buy with it. Think about your parents or grandparents; chances are they remember the days when bread cost something like 5 cents. Nowadays, bread will cost you somewhere in the range of a few dollar or more—25 times plus what it cost in that previous era. That’s inflation at work.

So how does that affect your savings? Quite simply, it means that no matter what you save, it will likely be worth less in the future. While you may not notice a day-to-day change, you will notice a year-to-year change and, if your retirement is long enough, your buying power could seriously dwindle. If you’re basing your savings around what it costs you to live today, you’ll find that your dollar doesn’t stretch nearly as far 10 or 15 years in the future—and that the cost of living has far outstripped your savings. What seems like an ample budget today could become a razor-thin one in the future, so you need to plan accordingly.

2. Fees

Fees are another silent killer of retirement plans, partially because people don’t even realize what fees they’re paying or how much they’re paying out in fees. Generally speaking, your financial advisor is probably charging something in the 1% range; anything more and they’re charging too much. The fund will also have a fee attached to it, which could mean you’re paying something like 1.25% to 1.50% per annum in fees. You might also be paying additional fees, like an administration fee or a one-time account set-up fee.

That money is going into someone else’s pocket when some of it could be (and should be) in yours. Even just 1% of a $1 million portfolio is a large amount of money to pay out on a yearly basis so make sure you are getting good value from your financial advisor. Keep in mind that just as inflation erodes your portfolio’s rate of growth, high fees also eat away at the real growth of your account.

1. Underperforming Mutual Funds

As we know, the mutual fund industry has been telling us for years that we must enlist the help of professional portfolio managers to achieve superior results. However, because of the fact that you have to pay for the high salaries of these managers, trading costs, and taxes, mutual funds fail to outperform the S&P 500 anywhere from 50% to 90% of the time.

There are many reasons for why your mutual funds could be underperforming. However, whether diversification, taxes, or phantom income play a role in underperforming mutual funds, consider dropping your portfolio manager to see growth.

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Topics: Retirement Planning

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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