The Real Returns in Retirement

Every financial product has some associated costs. Some are declared, others are not disclosed. The average mutual fund may have costs exceeding 4%, and an additional 1% adviser fee. And non-qualified funds have taxes, whether dividend, capital gains or ordinary income, that can really take a bite out of your dollar before you even spend it. And shockingly, you may even pay taxes on a loser fund. Inflation can also erode returns and reduce the purchasing power of your retirement dollar.

Don’t forget annuities. Like all financial products, some annuities are better than others. Many annuity products have expensive fees attached to them that cause fee drag and eat into your returns, but other annuities have no fee drag. Case in point: single premium immediate annuities and deferred income annuities. These types of annuities have already priced the “spread” into the payout rate, similar to bank CDs that do the same.

The Ibbotson “mountain” chart is a big picture with a timeline backdrop of decades. Sometimes it looks like the Rocky Mountains with sharp-ridged peaks and deep depressions in its valleys. What isn’t incorporated in the picture is bad investor behavior, buying at the highs and selling at the lows. Letting fear or greed dictate your money decisions in place of disciplined investing, can cost you dearly and change the course of your retirement. It’s so important to establish healthy money habits and develop a dispassionate view about money devoid of feeling and emotions. 

The value of understanding real returns versus nominal returns will keep your bravado in check around the office water cooler and combat the office genius who is always touting his returns.