High Fees in Retirement Accounts
Most workers have access to a retirement plan at work. Unfortunately many plans are larded with high cost funds. A study by the Center for American Progress found that US workers,already struggling to save enough for retirement, are being further held back by fund costs.“The corrosive effect of high fees in many of these retirement accounts forces many Americans to work years longer than necessary or planned.”1 If you contribute $17,500/year for 30 years with an average annual return of 7%, you will end up with $1,779,000. If fund feeseat away 1% of this return to give you an average return of 6%, you end up with $1,465,000, or$314,000 (18%) less! What can you do about the problem of high cost fees in your retirement plan:
- Choose low cost index funds if they are offered
- Lobby your company’s human resources department to get better investment options. If your coworkers join in the effort, you will have more leverage.
- If there is no way around high company retirement plan expenses, then contribute just enough to get the maximum employer match, and then fund other tax sheltered accounts like a low-cost IRA or your spouses’ lower cost plan.
What we don’t know about Retirement
People spend years planning for retirement, but there are some areas where we don’t know as much as we think we do:
Retire Earlier than Expected. The Employee Benefit Research Institute2 found many retirees retire earlier than planned due to health problems (theirs or a family member), disability and job loss. As a result of early retirement they claim reduced Social Security benefits which gives them lower benefits for the rest of their lives.
Part-Time Work Tough to Find. 66% of retirees plan to work after retiring, but only 27% actually find work (According to EBRI). They find it difficult to compete with younger socially and technically savvy job seekers and health issues discussed above make it difficult to work.
Unrealistic Budgets. People assume they will spend less when retired. Admittedly, lowertaxes and no retirement savings reduce income needs. However, spending on travel, shopping and hobbies generally go up (more time to spend on these activities!). Later in life allowances must also be made for higher medical expenses.
Medicare doesn’t cover all Health Costs. Many people wrongly assume that once they reach 65, Medicare will cover all health costs. Unfortunately this is not the case. The Kaiser Family Foundation found that Medicare covers just 48% of an enrollee’s health costs.Medicare does not cover eyeglasses, hearing aids, dental care, deductibles and long-term care expenses. Many retirees purchase a Medigap insurance policy and have to budget for the Medicare premium and Medicare Part D premiums for the drug benefit.
That Second Home will Cost You. A dream of many retirees is to buy a second home, to enjoy it pre-retirement and then sell their primary residence. In general second homes are expensive and a lot of trouble. Problems include frozen pipes, animal damage, neighbor disputes and volatile housing values. Overhead costs like property taxes, insurance, utilities, maintenance and improvements will add up over time. Consider staying at the Hilton for a couple of weeks every year instead and save a lot of money and trouble!
A House is Not a Good Investment
There are a lot of good reasons to own your own home like not having to pay someone else rent, no one can cancel your lease and force you to move, and in the early years Uncle Sam allows you to deduct mortgage interest paid on your taxes. In general housing is not a good investment. Over the last 30 years single-family homes have increased invalue by 3.6%/year3 compared to 11.1%/year of the S&P 500. Over the same 30 years the official inflation rate was 2.87%/year. Add 0.04% for insurance, 1.0% for property taxes and another 1.0% for maintenance and repairs to bring the annual cost of ownership to about 2.04% per year! These figures do not take into account the interest on a mortgage. Buy a home to live in, you have to live somewhere, but do not consider it an investment!
Inherited IRA’s Not Protected in Bankruptcy
In June the US Supreme court ruled IRA’s inherited by a non-spouse are not protected inbankruptcy under Federal Law. At this stage it is unclear whether this new ruling alsoapplies to spouses inheriting an IRA. If you have an IRA beneficiary who is in financialdifficulty, please discuss your options with me or your Estate Planning attorney. There areother options, but their consequences need to be considered.
The spring tennis season is over. Roberta won the Future Tennis Stars Singles FlexLeague.My USTA 18 & Over 4.0 team came 2nd in the regular season, but unless there is a sparewildcard lying around, we probably won’t be going to Phoenix for Sectionals to getroasted in the AZ sun!
In May we drove to Salt Lake City for the annual NAPFA conference, which was excellentas usual. On the way back we spent time hiking in the spectacularly beautiful BryceCanyon National Park.
We have been hitting the roads on the bikes to get fit for the Tour de Acoma inSeptember. A change in pace from the strains of the hard courts, is a welcome relief.
Contact me for a review meeting if needed. Please plan early for setting up anappointment. Feel free to pass this newsletter on to whoever may be interested.
1http://www.americanprogress.org/issues/economy/report/2014/04/11/87503/fixing-the-drain-on-retirement-savings/ 2www.ebri.org 3Freddie Mac