We thought it would be neat to grab examples of real life questions asked on Reddit and see how we can break it down the Hut Yee Way. There will be some information that will be redacted for privacy reasons.
Story:
My dad invested with **redacted** for 15 years and his rate of return is 4.5% (annually) and was told his portfolio was doing “great.”
A few years ago, I asked my dad how much his retirement nest egg was. He said around $600K. Tonight I asked him the same question. He said around $600K. Confused, I asked to see my dad’s statements. I just found out that my dad’s return over the past 15 years is around 4.5% (annually).
He’s mostly invested in various bonds with high expense ratios (like BBCPX?). He’s also being charged 1.4% “Program Fees and Commission Costs.”
My dad said he meets with the broker once a year and is always told his portfolio is doing great. The reports his broker gives him are nothing but random bar charts and graphs and don’t even identify his investments. We had to go to his account online to see what he’s invested in.
My dad is 68 and will retire when he’s 70 so is the broker just being super conservative with my dad’s age? The return rate seems low considering what the past decade has been for returns.
I’m pretty good with investing (just sticking it in S&P index funds) and am thinking about taking over my dad’s portfolio. However I don’t even know what someone at that age should be invested in.
Last question…my dad has $620K in retirement investments and plans to receive $3K/month in social security. Will he be ok?
What Would You Do?
Curious about what you would do in that situation based on your experiences or, hopefully, based on what you’ve learned from this site? Have a think and select “show more” below to see what we would suggest.
We believe there are a couple of items in play here. The first item is having a portfolio managed by a financial advisor that charges a percentage fee annually. The second item is the annual rate of return for a person who is either about to retire or in retirement. The final item is to self-manage a portfolio. We’ll break those down individually.
Financial Advisor that Charges a Percentage Fee Annually
We have written about this in the past and fully agree with Ramit Sethi’s view about Financial Advisors who charge a percentage fee annually. Typically, it is based on the size of the portfolio and typically charges about 1% annually. While 1% sounds minimal and doesn’t feel impactful, it can ultimately mean tens of thousands of dollars.
The example above shows that the “Program Fees and Commission Costs” is 1.4%! So, for the 600k portfolio, over $8400 is pulled out from the account annually, whether they made money or not. Think about it: that’s $700 a month you’re being charged for someone to “manage” your money.
The worst part about this is that you can’t fully capitalize on the power of compound interests. Say the Dad above paid the broker $8,000/yr for ten years. The principal he paid was $80,000. The lost interest, however, with a conservative rate of return of 6% (which is actually what he should have received), would be over $26k.
The $106k money lost to the broker is significant, especially if the Dad remains retired for 10-20 years.
Rate of Return
The rate of return for a portfolio is a tricky topic. It depends on your risk tolerance, especially for those about to retire or in retirement. It also depends if there are other sources of income (ie, pension, inheritance, passive income, etc.). But generally, a popular strategy is to have a certain percentage of your portfolio in stocks (ie, the S&P500 Index) and a certain percentage in Bonds.
You might ask, “How much should be allocated to bonds?” A popular method to calculate that percentage is the rule of 110, however, we prefer the rule of 120. Rule of 120 means you minus 120 from your age and that’s the percentage that should be allocated for Stocks. With the example above, the Dad is 70, and minus from 120 equals 50. Meaning 50% of the portfolio should be allocated to Stocks, and the other 50% should be allocated to Bonds.
Looking at a 50% VOO 50% BND portfolio for the past 12 years, we see an annual return of over 7% annually.
If we look at the example where the Dad was getting a return of 4.5%, don’t forget he was also being charged 1.4%. With the two combined, he was actually getting a return of 6%. Depending on the timing for Dad, the return allocations might not be that off (remember, 2022 was a down year).
Self-Managed Portfolio
This topic could be somewhat sensitive. If someone took an interest in learning about investing and wants to manage their own portfolios, by all means, we applaud this. However, managing someone else’s money could be quite challenging, especially if expectations aren’t properly set. This gets exponentially magnified with a portfolio that is in or near retirement.
Our suggestion would be to get Dad to learn more about investments and have him make the decisions on what to do with his money.
As for managing your own portfolio, we suggest reading our article on popular ETF strategies. As stated above, a simple VOO (Vanguard S&P500 ETF) and BND (Total Bond ETF) with the Rule of 120 should be sufficient.
For those who really want to set it and forget it, purchasing a Target Date Fund could be your answer. You can read more about those funds here.
show lessWe would like to emphasize that we are not financial advisors. The information provided on this website and in our YouTube videos is strictly for educational purposes and represents our personal opinions. To ensure the most appropriate financial decision for your specific needs, it is essential to conduct thorough research and, if necessary, consult with a licensed financial advisor. It is important to acknowledge that all investments involve inherent risks, and there is no guarantee of success in generating, saving, or investing money. Additionally, there is a possibility of experiencing losses when investing. Exercising prudence, making informed choices, and independently verifying information is crucial.
