To me, all this “fuss” over fees, particularly in retirement plans, is about the same thing. Fees, of course, have an impact on performance results. But an emphasis on fixation on chasing performance misses the big picture. Taxes can be 20 to 30% higher in range than fees.
Let’s step back from these tax-postponed/tax-timing plans and ask ourselves bigger questions.
Have you ever looked at the potential taxes imbedded in your 401k, cash balance, SEP, IRA or other tax-postponed plans? Based upon current taxes and mandatory, required minimum distribution (RMD) rules, what will be your total paid over your lifetime if tax rates remain the same? What happens if rates go up in the future? How does that future tax cost impact you?
We recently modeled this impact for a married couple who have been good savers over their lifetime. They wanted to be assured that based upon reasonable expectations, their existing savings will sustain them beyond their life expectancy in a style to which they have become accustomed.
Like the majority, they have maximized their deferral election – even beyond the match. Doing the calculations for the total tax they may pay at today’s rates shocked them.
Over the remainder of their lifetime – without any increase in rates – the IRS will potentially collect more than two thirds ($2 out of every $3) of their total current savings over their projected lifetime. This “fee” was many multiples of the internal cost they paid annually for investment choices.
Fees matter. They should be competitive. The marketplace largely dictates what is reasonable for the value added. The IRS stacks the deck against you as you are more economically blessed. They take more of the increasing income that may come from RMDs.
So, the next time you read about or think about fees, call us to calculate “what’s your number”: the total potential taxes over your lifetime. We may be able to develop tax-aware strategies that can help reduce or eliminate some of that tax fee bite – especially if taxes are higher in the future.
Securities and investment advisory services offered through World Equity Group, Inc. Member FINRA and SIPC, a Registered Investment Adviser.
SMART Group Houston is not owned or controlled by World Equity Group, Inc. Neither SMART Group Houston nor World Equity Group, Inc. provide tax or legal advice.