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Saving enough to last until age 90 or longer may be the biggest financial challenge of our time. (Photos.com)
Saving enough to last until age 90 or longer may be the biggest financial challenge of our time. (Photos.com)

ROB CARRICK

Don't let investing fees ruin your retirement Add to ...

The killer argument for paying attention to investing fees: They could mean the difference between having enough for retirement and running out of money.

You have many times read arguments in this column for striving to pay lower investing fees and commissions, but none is as powerful as our increasing lifespans. Saving enough to last until age 90 or longer may be the biggest financial challenge of our time. Every dollar you pay for your investments in fees is money you won’t have to withdraw as retirement income.

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Jim Otar, a certified financial planner and author of Unveiling The Retirement Myth, has done a lot of research on all the various factors that determine how long your retirement savings will last. He figures that costs have a 20 per cent impact on a portfolio’s growth rate.

“The bottom line is any type of fee or commission is a direct or indirect withdrawal from your retirement savings,” Mr. Otar said.

A column earlier this week looked at five financial realities associated with living longer. Now, we need to start thinking about things we can do to help the money last. Cutting costs is a great start.

In a discussion paper he recently updated, Mr. Otar used an all-in fee of 1.5 per cent to analyze how costs impact the longevity of an investment portfolio. That’s low for investors using mutual funds, but never mind. He then looked at how a portfolio based 40 per cent on U.S. stocks and 60 per cent on bonds (remember, this is a retiree’s portfolio) would fare using various withdrawal rates.

Taking out 4 per cent of your retirement savings annually is a default withdrawal rate for some financial planners. Mr. Otar’s paper shows the extent to which various factors would affect how long your money lasts, including cost. Among those factors, cost accounts almost 22 per cent of the outcome.

Put another way, if you made a pie chart of all the factors influencing how long the money lasts, costs would have a 22 per cent slice. He said this number could rise to 30 per cent if you factored in the kind of fees that Canadian investors pay on both equity and bond mutual funds.

“Portfolio expenses can significantly reduce portfolio longevity or impede its growth over the long term,” Mr. Otar’s discussion paper says. “Like inflation, its effect is not readily apparent in a short period of time, but it adds up over the long term.”

The biggest factor in how long your retirement savings last is a risk called sequence of returns. Basically, it refers to the chance that your portfolio will be hammered in the first few years after you retire. Because you are withdrawing funds from your savings year by year, there will be less money left to benefit when markets turn around. Mr. Otar’s suggestion for addressing the sequence of return risk is to look at guaranteed income products like annuities.

Inflation is the next biggest factor in determining how long your money lasts, Mr. Otar’s research shows. Cost of living increases have been subdued in recent years, but he sees a resurgence of inflation coming.

Other important factors are the mix of investments you use and their cost, which includes a wide range of fees and commissions:

  • Mutual fund fees: Taken off the top of fund returns, which are always published on an after-fee basis.
  • Advisory fees: Some advisers are paid by fund companies out of the fees they charge, while others bill clients directly.
  • Trading costs: Stock-trading commissions and purchase or redemption fees charged on mutual funds.
  • Miscellaneous costs: Includes annual administration fees, costs for moving an account.

The militant view on fees is to regard them all as your enemy. The pragmatic approach is to accept that you must pay at least some fees, and to ensure you get your money’s worth.

“I don’t want to give the impression that paying fees is not a good thing,” Mr. Otar said. “If you get value from an adviser, you have to pay for it.”

Some of the things we’ll all have to do to financially prepare for longer lifespans involve big life changes, like saving more and working longer. Cutting your investing costs is an easy one. Think about exchange-traded funds or low-cost mutual funds if you’re a DIY investor. If you have an adviser, explain that you’re willing to pay for good advice but want to keep the cost of investing down.

Maybe there was something too abstract about all the advocacy done to date on the benefits of low-cost investing. Now, let’s get personal. It’s about your retirement.

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).

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