Who is Stealing your Retirement?

During the writing of my book series, as I calculated the impact of financial advisor or mutual fund fees, it dawned on me that there are lots of ways our retirement can be "stolen" without us realizing it. Even the government does this and we accept it because it appears nothing can be done about it. For example, while working you and your employer each paid the 6.2% FICA tax for your Social Security benefit. You didn't pay income tax on that contribution when the wages were earned, but the government set the system up to have you pay* income tax on the benefit years later. And since the thresholds for determining what percentage of your benefit is subject to tax aren't indexed to inflation, more and more middle-class retirees are paying more income tax, maybe at a higher rate, because Social Security, when added to 401(k) distributions, is being taxed as one. Funny how they forgot to mention this on your Social Security statement that your $2,500 a month might only net $2,200 in your pocket.

Next, of course, are fees and expenses on investments. While 0.25% or 0.5% doesn't seem like much, it's the compounding impact that is significant. For example, a 0.5% difference in expense ratios for the same index fund on a retirement account could result in a 15% to 20% difference in the ending balance. And if you're only paying 0.5% on all of your investments, that's likely less than most folks so the impact might be much higher. It's not just the listed "expense ratio" but other fund expenses that aren't disclosed to you. For example, the fund must buy and sell stocks on behalf of its shareholders—the more trading or "turnover," the higher the fund expenses. But, the fund doesn't directly tell you your return was 0.3% less because of the higher turnover; they publish their returns and document fund expenses and leave it up to you to decide if the fund is run efficiently or not (which of course, we don't because we don't have the time or expertise to dig down that deep). Look at the annual reruns of a number of S&P 500 Index funds to see this because the funds own the same stocks in the same percentage as every other S&P 500 fund.

Then there are the financial planner and advisor fees. Again, while mosty disclosed to you, it's not presented in a way to you show you the impact on your ending retirement savings balance. (I provide more detail in Chapter 4 of What Would Dad Do? - Volume 2.) I also said "mostly disclosed" because they may still receive kickbacks in revenue sharing from the funds you're invested in, but it's likely in small print in the paperwork you signed. There could also be a fee in an income product you purchase, such as an annuity.

Finally, there is the value of the currency that steals from you, also known as inflation. For those saving for retirement with stock mutual funds, the balance is likely growing a few percent faster than inflation, so that the growing balance can indeed provide the needed income in retirement. But what if retirement savings are in a bank earning 0.5% interest? The amount saved while appearing to grow is actually going to provide less than what was put into the account, as 0.5% interest is no match for 3% inflation over the long term. Even using bonds at 3% to 4% may only keep pace with inflation. If you save 10% of your income for retirement in these low-yielding investments, after 10 years you'll have enough to pay for 2 years of retirement (assuming Social Security pays for the other half of it). Thus, inflation is going to steal from you.

The only way to stop the stealing is to identify who's doing the stealing and either put a stop to it or reduce its impact. When it comes to the government, understand the tax code as you save for retirement and plan how to allocate and use your savings. When investing, understand the fees and work to minimize them. For hired professionals, make sure you do the work to understand the total cost - fees and expenses - then, considering the compound value of those fees and expenses, decide if the value overcomes the cost to you. And finally, make sure to understand that retirement savings must achieve returns a few percent above inflation to ever be able to compound sufficiently to provide for a long retirement.

* You will pay income tax on up to 85% of your Social Security benefit when claimed. Since Social Security is generally 30% to 60% of someone's retirement income, it's likely that 85% will be subject to income tax unless steps are taken to lessen the impact. For those at lower income where Social Security is ~60% or more of their income, they may fall below the threshold and their Social Security will not be taxed.