If you don’t understand the math posted by manaboutime then you need to read it over and over again until you do. Or, ask someone to explain it. It is based on a 1% AUM fee. If you are charged 1.5% in AUM fees than the numbers are even more staggering.
“If my assets made 10% in a year they would get 10% of my return. If my assets earned 5% they could get 20% of my return. If my assets earned 1% in a year they would take 100% or more of my earnings. “
A common suggestion by advisors is to take 4% of your portfolio each year and adjust it for inflation. This “rule” was suggested by William Bengen, a financial advisor, in 1974 and was designed to allow a 30-year withdrawal period, covering your retirement years. Whether that is appropriate or not is a topic for another post. However, with a $1 million dollar portfolio, this equates to a $40,000 withdrawal the first year. Charging a 1% AUM fee would result in the advisor pocketing $10,000.
This means the advisor is taking a mind boggling 25% of the money you are allowed to withdraw and likely took you decades of hard work to accumulate. Actually, it’s even worse because now you have withdrawn 5% (your 4% + the 1% AUM fee). People underestimate the effect fees have on their portfolio. “Gee, it’s only 1-1.5%”. Imagine paying only 0.14%. It’s easily done when you invest with Vanguard and Fidelity (and others).
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