Managing your investment portfolio in retirement can be tricky. Investors need to balance income generation with risk and capital preservation. Getting the balance wrong means you could run out of money.
When trying to make your money last in retirement, every penny counts. And you can lose a lot of those pennies in surprising places. That’s why all retired investors should ask themselves three questions to see if they are wasting precious retirement resources:
1. What interest rate am I getting on my cash allocation?
2. What fees am I paying on my investment funds?
3. Is my adviser a true fiduciary?
Focusing on these could be the difference between having a fully funded retirement and running out of money. Here’s what those questions matter and recommendations for the right answers:
No. 1: What Interest Rate Am I Getting on My Cash Allocation?
Many retirees allocate a significant portion of their portfolio to cash. Charles Schwab recommends that retirees keep between 5 and 30 percent in cash. And most traditional brokerages will put that cash in savings accounts or CDs that pay close to 0 percent. Check the interest rate you are receiving on that cash, but don’t be surprised to see a return close to 0.01 percent.
In S&P’s study, only 2 of 2,862 mutual funds were able to consistently beat the market over time. You end up paying a lot of money to underperform the index.
Unfortunately, savers should not wait for rising interest rates to make savings accounts at traditional banks more lucrative. After two rate increases most banks are still paying only 0.01 percent. If you want to get a better return, you will need to deposit with an online bank.
Your cash should be working harder for your portfolio, because there are much better returns in the market. Imagine a retirement portfolio with a total balance of $1 million and a 15 percent cash allocation. In a standard savings account paying 0.01 percent, you would only earn $15 of interest. In an online savings account paying 1.00 percent, you could earn $1,507 in one year. And if you build a CD ladder using the best CD rates available online, you could boost that return closer to 1.50 percent. (A CD ladder is investing equal amounts of money in short-term, medium-term and long-term CDs that mature at staggering intervals. When the short-term CD matures, you reinvest the proceeds in a long-term CD.)
Recommendation: Check the interest rate on your cash allocation. If you aren’t earning at least 1 percent, shop online for the best rates and move that cash. Ideally, you should create a CD ladder to increase your yield even further over time.
No. 2: What Fees Am I Paying on My Investment Funds?
It has never been less expensive to invest in the stock and bond markets with low-cost index funds. Vanguard’s Total Stock Market Index Admiral Fund has a management fee of only 0.05 percent, for example.
Most actively managed funds charge fees of 1 percent or more. The only reason you would pay that fee would be to “beat the market.” Unfortunately, decades of data show that trying to beat the market is a foolish waste of time. In S&P’s study, only 2 of 2,862 funds were able to consistently beat the market over time. You end up paying a lot of money to underperform the index.
If you don’t know how much you are paying in fees, the website FeeX makes it easy. Not only does the site show you what you are paying today, it finds the lowest cost options for the same investment strategy.
Recommendation: Stop trying to beat the market, and consider low-cost index funds instead.
No. 3: Is My Adviser a True Fiduciary?
Why would your investment adviser put you into CDs with 0.1 percent interest rates and mutual funds with big fees, even when it isn’t necessarily in your best interest? In short: many “financial advisers” do not have a fiduciary duty to their clients.
A fiduciary duty requires an adviser to put a client’s interest ahead of his or her own at all times. Most “financial advisers” at the large stock brokerage firms don’t have that duty. They can, and often do, steer customers to products that result in higher commissions for them. The Obama administration wrote retirement-savings rules which requires U.S. brokers managing retirement accounts to become fiduciaries. However, it is not clear if that reform will survive the election.
But you should ask your adviser if he or she is a fiduciary. And if you are not being advised by a fiduciary, consider switching to an adviser who will put your interests first. For example,
Vanguard Personal Advisor Services has a fiduciary duty, charges only 0.30 percent, and can provide you with personalized service if you do not feel comfortable managing your portfolio on your own.
Recommendation: Overpaying advisers who don’t have a fiduciary interest is not a good idea. If you don’t feel comfortable managing your money on your own, you can find fiduciaries at a reasonable cost.