Do you know when you want to retire? Are you confident that your retirement planning will help you achieve this? Many business owners may find that their planned retirement is delayed unless they take action. The crunch issue is the need to review the fees being charged on your retirement and investment plans. Let me explain why and give you an example to demonstrate what can be achieved.
The Financial Services Industry charges fees on all investment products – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. There is nothing wrong with that – but most people, even business people, have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
Why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle? Even if you love your business if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
Regardless of age or how much money you have, high industry fees can delay you reaching your desired date to sell your business, or hand it on to the next generation; the day you start your retirement. With the changes implemented following the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on the 3rd January 2018, investors have never had so much information available to them. Investors now have the power to take back control of their money from the Financial Services Industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund manager’s. Yet very few investors understand the fees they are paying and the impact of those fees.
And that’s the problem; without knowing the total Financial Services Industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example:
Sara is aged 45 and has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on her money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until she is aged 73.
Remember, £300,000 of this fund value was Sara’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. You may be surprised to find out that the total Financial Services Industry charges have totalled £345,512 over this time.
This means it has cost Sara £345,512 to make £467,000 and she’s lost eight years of her desired retirement lifestyle.
Adnan, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. He decided to review the industry costs. Adnan realised that he could get the same returns and same consumer protection for 1.1% per annum. He also achieved an average 6% return per annum on his money meaning that he achieved a target fund value of £773,000 by age 65 – eight years earlier than Sara.
By shopping around to get the best fees he has achieved his target retirement fund value at his projected retirement date.
As £300,000 was Adnan’s money anyway he has made a profit of £473,000 in 20 years not 28 and it has cost him only £102,000 (not £345,512) to make £473,000 and achieve his lifestyle objective. If at the time he decided to delay retirement to age 73, like Sara, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.
The question: is which of these two investors does your retirement planning mirror?
Running your business maybe your passion yet the day will come when you want to retire. Make sure you take control so that you can retire on the date you want to with the income you need to enjoy the lifestyle you want to have.
About the Author
Hannah Goldsmith is founder of Goldsmiths Financial Solutions and author of ‘Retire Faster’. Hannah specialises in Low Fee Investing and is challenging the way financial services are delivered to consumers in the UK, by enabling each client to understand the nature of investment costs and the impact these costs have on their future lifestyle.
Goldsmiths complimentary ‘Second Opinion Service’ reviews investors’ existing portfolios and makes recommendations on Risk, Diversification, Performance, Cost and Tax efficiency, making investors’ money grow in a more transparent and financially efficient way.