Oct 17

Don’t Sweat the Small Stuff . . . Well Maybe Sometimes

by Patrick Rohe, CFP®

In the world we live in today, we are constantly reminded not to sweat the small stuff.  We are told to not let the little things get in the way of living our lives and pursuing our dreams!  That is so true and why we shouldn’t worry about the gossip being spread around at work, what our neighbor might think if we can’t get to mowing our lawn today, those stubborn few pounds we just can’t seem to lose, and what outfit we should wear to the company’s holiday party this year.  All of these things clutter our mind on a daily basis and keep us from focusing on what’s truly important.  What about the costs associated with your investment portfolio?  Your advisor may try to categorize these as “small stuff” as well, but should they?

Rockbridge Investment Management is a firm that prides itself on controlling the controllable when it comes to investing, thus addressing the issue of investment costs is something we don’t take lightly.  The average cost to invest in mutual funds with the typical brokerage firm is 1.5%, while here at Rockbridge the typical client pays around 0.25%.  Are we just sweating the small stuff? Let’s find out!

Let’s take a look at an American family with a combined income of $75,000 who is saving 10% a year for forty years and is getting a fixed rate of return.  Can an extra 1.25% in expenses make that much difference in their standard of living during retirement?  The graph below shows the impact that fees can have on a portfolio – the results are staggering!  The family with the low cost portfolio retired with over $2,000,000, which should allow them to comfortably draw around $100,000 from their portfolio each year during retirement!  On the other hand, the couple who had higher portfolio expenses only accumulated $1,500,000 at retirement, giving them only a $55,000 draw from their account on an annual basis, after taking into account the lower balance and the higher continuing expenses.

(Assumptions:  A couple saving $7,500 annually for 40 years with an 8% fixed rate of return.  To make withdrawal rates equal in retirement, I used a 5% withdrawal rate for the low cost portfolio and reduced the other portfolio’s rate by the difference in fees.)

The notion of not sweating the small stuff is very important; it helps cancel out the everyday noise in our lives, allowing us to focus on living and pursuing our dreams.  However, most of our dreams include a comfortable and fulfilling retirement, and a nearly fifty percent reduction in retirement spending may be a factor in that dream being reached.  But I will let you be the judge of that!