Edit by Moderator: Thank you for your participation. Please note that there is also discussion about a similar topic Here.

Note: Financial advisors are very upset that I am disclosing this very important information!! That means everyone using a financial advisor, or thinking of using one, should read this post carefully and consider the impact top their retirement.

Ahhhh...retirement. Those fun-filled golden years. Dennis Hopper telling us to live like we are 16 again with the help of Ameriprise financial advisors.

But something isn't quite right here. Leaving aside that while you are working and saving investment fees will be busy delaying your retirement, what happens when you are IN retirement?

Let's find out!

The most agreed upon 'safe withdrawal rate' in retirement is 4%. This is what studies indicate you can take out of your investments without fear off going broke before you die. The mother of them all is called the Trinity Study which looked at the "success rate" of various portfolios from 1926 to 1995.

There are issues with a 4% withdrawal because if you retire just before the market dumps and are taking out 4% while the market is down for several years, you could be in trouble. But that's for another time. For now we'll stick with the 4%. Please note that the Trinity Study also took inflation into account and adjusted the withdrawal rates upward each year accordingly.

Let's say you have retired with your nestegg of $1 million. You can take out 4% and live well on $40,000 (well, that is before taxes).

But wait! There's more!

The Trinity Study (and other studies) did not take into account the fees you pay for investing. Let's assume that you, like many other people, are paying 2% in total fees. So, if you have an additional 2% coming out of your investments you really should not be taking out 4%.

At first I thought the investing fees of 2% would cut your safe withdrawal rate in half, but there's a more interesting way to look at it. Plus we get to play with a cool tool!

This tool will help you figure out the impact your investing fees have on your safe withdrawal rate's success:

http://fireseeker.com/firecalc.php

Let's try it.

I want $40,000 a year and want my nest egg to last 35 years. I have $1 million in my nest egg at retirement. I'm entering 2% as my expense ratio - but it includes an expense ratio of 1% and a wrap fee of 1%. And I have 40% of my portfolio in equities (stocks). Let's discover my success rate:

"Your plan is to spend $40,000 a year, or 4.00% of your starting portfolio.

FIRECalc looked at the 102 possible 35 year periods in the available data, starting with a portfolio of $1,000,000 and taking out $40,000 the first year of your retirement, and the same amount after adjustments for inflation each year thereafter.

(FIRECalc assumed your retirement portfolio is in investments that perform about like the US stock market as a whole. Mutual funds report each year how well they have performed relative to the stock market as a whole. Such information can help you see how relevant this information might be to your situation.)

The key result: a 30.4% Success Rate

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 71 cycles failed, for a success rate of 30.4%."

Yikes! I'm having a heart attack!

OK, let's try that again with investment costs of .2%.

"FIRECalc Results
Your plan is to spend $40,000 a year, or 4.00% of your starting portfolio.

FIRECalc looked at the 102 possible 35 year periods in the available data, starting with a portfolio of $1,000,000 and taking out $40,000 the first year of your retirement, and the same amount after adjustments for inflation each year thereafter.

(FIRECalc assumed your retirement portfolio is in investments that perform about like the US stock market as a whole. Mutual funds report each year how well they have performed relative to the stock market as a whole. Such information can help you see how relevant this information might be to your situation.)

The key result: a 76.5% Success Rate

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 24 cycles failed, for a success rate of 76.5%."

MUCH better. I think I'll fire that advisor, get myself into some low-cost index funds and cut my spending needs to $36,000. Let's see....

The key result: a 97.1% Success Rate

Hooray!!!!

Now if I could just control the future of the stock market.....

Folks, this is serious. Please use this tool and show it to others. Talk to your 'financial advisor' if you have one and please don't let him doubletalk you. If he promises you higher returns, get it in writing. (If you do, contact the SEC.)I do not want to see anyone trading work stress for money stress.

I'm betting that no one has a 'financial advisor' that showed them this tool and the impact that fees have on your nest egg.

More about the safe withdrawal rate in retirement:

http://www.retireearlyhomepage.com/safewith.html

Quote for the day:
"This message (that attempting to beat the market is futile) can never be sold on Wall Street because it is in effect telling stock analysts to drop dead."
Paul Samuelson, Ph.D., Nobel Prize laureate

Thanks. I totally forgot every single fund out there returns the exact same amount so that .09% expense ratio will always outperform the one with a .2% ratio.

mikef07 said:Thanks. I totally forgot every single fund out there returns the exact same amount so that .09% expense ratio will always outperform the one with a .2% ratio.

Except that's not at all what it's saying. It's comparing 2% to .2%, and yes, almost all .2% funds can do just as well as the 2% funds.

nobrokers said:Do you have anything helpful to add? I was really hoping for productive comments.I find the title of thread strangely erotic.

richfish13 said:mikef07 said:Thanks. I totally forgot every single fund out there returns the exact same amount so that .09% expense ratio will always outperform the one with a .2% ratio.

Except that's not at all what it's saying. It's comparing 2% to .2%, and yes, almost all .2% funds can do just as well as the 2% funds.

I guess that is true. Are people really paying 2% as an expense ratio each year? I would look for under 1% as an expense ratio at the very least.

nobrokers said:Do you have anything helpful to add? I was really hoping for productive comments.Yeah. You already have a thread on this topic. Don't make another one.

mikef07 said:richfish13 said:mikef07 said:Thanks. I totally forgot every single fund out there returns the exact same amount so that .09% expense ratio will always outperform the one with a .2% ratio.

Except that's not at all what it's saying. It's comparing 2% to .2%, and yes, almost all .2% funds can do just as well as the 2% funds.

I guess that is true. Are people really paying 2% as an expense ratio each year? I would look for under 1% as an expense ratio at the very least.

Link There are countless ones just like it. Hartford, Oppenheimer, Edward Jones, etc. are all mostly in the 1.5-2% range.

"Are people really paying 2% as an expense ratio each year?"

Not usually, but remember that they also pay a load or a wrap fee and the expense ratio doesn't cover all the fund expenses.
http://www.zeroalphagroup.com/news/mufucost012404.cfm

Probably my 2% is on the low side.

Hey Buddy, you already have a blog that you post all this information on. There is no need to repost it on FWF every time you make a new blog post.

If people are interested, they'll go to your blog or add the RSS feed. Don't use FWF as another medium to propagate your blog.

http://nobrokers.savingadvice.com/

BobtheCFP said:nobrokers said:
http://www.zeroalphagroup.com/news/mufucost012404.cfm

According to that website:
The inexpensive index funds were the Vanguard Total Stock Index Fund (23.4 basis points)

nobrokers said:
"So I would love to know what your index fund (your .098 Expense ratio fund) return is."
Vanguard Total Stock Market Index - VTSAX


Wow look at that you fund's fees have increased 138%, maybe you should use FireCALC more carefully

Too funny! You don't even have a clue what 'basis point' means!

http://www.investorwords.com/434/basis_point.html

"basis point
Definition

One hundredth of a percentage point (0.01%). Basis points are often used to measure changes in or differences between yields on fixed income securities, since these often change by very small amounts."

A CFP that doesn't know that a front-end load isn't part of the expense ratio and has no clue what a basis point is.