How Much Impact Would Fee Have On A Retirement Portfolio? Part A

Q. How much a retirement portfolio could be impacted by high expenses?

A. We all know high expense hurts a portfolio's performance, especially when you compound that impact over time, but quantitatively how severe such impact could be?  Please see a hypothetical example below.

The Portfolio
Assume you are age 70 and have accumulated a portfolio of $1 million assets.  Furthermore, assume you could live to age 95, and between age 70 and 95, you will need to take out the required minimum distribution amount from your portfolio due to IRS requirement.

You could have two options to manage your assets -

a. Do It Yourself
You could create an index-based portfolio by using the 7 indexes funds -

• S&P 500
• Russell 2000 Index
• MSCI EAFE Index
• Dow Jones REIT Index
• S&P GSCI
• Barclays Aggregate Bond Index
• 90-day U.S. Treasury bills

You can allocate your $1 million evenly across these 7 funds.  You can do this by yourself or let a Robo Advisor do it for you.  Assume average expense ratio is 0.5%.

b. Hire an Advisor to Manage it
Assume you pay an advisor to manage your portfolio.  You will face two expenses:

1. Advisor's fee: it varies, typically Asset Under Management fee is 1%
2. Funds' fees: which varies, average could be 1% or even higher

So your total expense could be anywhere between 1.5% to even 3%.

How much these two options would get you through your retirement years?  You will be surprised when you read our next blog post.