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The Shocking Retirement Numbers That Will Blow You Away

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Last weekend, my dad told my mom that their "retirement guy" had called and told them to transfer their assets from one mutual fund to another. Upon hearing this, I asked who "their guy" was and what the fees and performance were for these funds. They didn't know either.

According to Teresa Ghilarducci, a professor of economics and retirement specialist, this is fairly commonplace: "I repeatedly hear about the 'guy.' When I ask how much the 'guy' costs ... or if their investments do better than a standard low-fee benchmark, they inevitably don't know."

Though I actually think my parents will be just fine in retirement, this uninformed approach to retirement planning will be a major crisis in coming years. According to recent estimates, there are 58 million Americans between the ages of 50 and 64. The median retirement savings for this group is only $26,000 per person.

To give you an idea of how scant that $26,000 will be when combined with Social Security and spread out over the rest of one's life, consider this: Almost half of these middle-class workers will be living on a food budget of $5 per day.

According to Ghilarducci, a safe rule of thumb is that you must have 20 times your annual salary saved up by the time you retire. If you earn $75,000 per year, you need $1.5 million saved up to retire with a similar lifestyle.

Even those who are saving are getting screwed
But even if you are doing a great job saving for retirement, there's an insidious, almost undetectable culprit eating away at your savings: mutual fund fees. Whether we are forced into certain plans by our employers or choose them based on our "guy's" suggestions, mutual funds are still a popular vehicle for retirement savings.

A casual glance at a mutual fund's expense ratio might show a seemingly low percentage that you're charged each year. My parents, for instance, had been locked into a mutual fund with an expense ratio of 1% for decades. It seems low, but those fees can really add up over time.

Let's take a relatively simple example and assume my parents' mutual fund earned 9.8% per year -- the S&P 500 average between 1970 and 2011 -- and that they've been putting away $5,000 per year for 40 years. At this point in time, their savings would total about $1.7 million.

Source: Author's calculations.

Of course, these kinds of returns aren't too bad. The problem is that a group of Wall Street "pros" have been getting rich off folks like my parents for years, and not enough people realize it. You see, the 1% charged every year is what the mutual fund's managers charge for their "expertise" in picking winning stocks and sectors.

These days, anyone could just as easily invest in the Vanguard S&P 500 ETF (NYSE: VOO  ) to get the same returns. The difference is that at Vanguard, stocks are simply bought to mimic the composition of the S&P 500; there's no professional stock-picker trading in and out of stocks on a daily basis. The expense ratio for this fund is just 0.05%--far below my parents' mutual fund.

The effects of this difference, compounded over 40 years, are truly startling. In fact, I had to chart it out to convince them this was the case.

Source: Author's calculations.

After 40 years, my parents would have 33% more retirement money if they used a product similar to Vanguard's. In real dollars, that's a whopping $575,000 difference. With the current retirement picture in the United States, no one can afford to be subsidizing Wall Street at the expense of his or her golden years.

But what if the mutual funds do better?
Of course, if the mutual fund you choose does consistently better than the Vanguard equivalent, then it's obviously worth the money you're paying.

The problem, however, is that the numbers consistently show that actively managed (read: high-fee) mutual funds underperform their stated benchmarks. Standard & Poor's reports that roughly two-thirds of actively managed stock funds underperform the S&P 500 over three-, 10-, 15-, and 20-year time frames.

Some of this is due to the fees themselves eating away at returns. But mutual fund managers are also restricted by both allocation limits and the fact that quarterly statements are sent out every three months. Whether they want to admit it or not, those statements force them to take a more shortsighted outlook on the market than they should.

This leaves you with three options for making the most out of your retirement dollars, each requiring different amounts of time and effort:

  1. The easiest would be to find a Vanguard (or other low-fee) fund that you're comfortable with.
  2. If you're willing to put more time in and still want a mutual fund, investigate who the best portfolio managers are and invest with them.
  3. For the truly Foolish, take your investment dollars into your own hands and start making decisions for yourself.

No matter which of the three categories you fall into, the Motley Fool has a special free report for you: "3 Stocks That Will Help You Retire Rich" will introduce you to three companies every investor should hold. Even if you invest with a mutual fund, you can check to see that these three are included. To find out what three companies we're talking about, get your copy of the report today -- absolutely free!

Fool contributor Brian Stoffel has constructed his own retirement portfolio that has returned 24% over the past year. You can view it here. You can also follow him on Twitter, where he goes by TMFStoffel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (32) | Recommend This Article (87)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2012, at 5:57 PM, prginww wrote:

    Teresa Ghilarducci is the "expert" that wants to establish government-managed retirement plans as a substitute for 401(k) accounts and other pre-tax retirement plans because we're just not smart enough to manage our own money. That sounds like a scheme to make sure we all buy lots and lots of Treasuries yielding 1 or 2 percent.

    And I guess Motley Fool won't be needed in her future vision for the country...

  • Report this Comment On July 23, 2012, at 6:02 PM, prginww wrote:

    This is the "real" killer of retirement savings:

  • Report this Comment On July 23, 2012, at 6:03 PM, prginww wrote:

    The similarity between this article and a NY Times article over the weekend is an uncanny likeness and one probably deserving of credit due the NYT

    Whatta ya think Brian ?

  • Report this Comment On July 23, 2012, at 6:27 PM, prginww wrote:


    It's true that she supports such a plan. I used the quote and some of her data, but don't support her plan. Regardless of her views, facts are facts.


    Could you provide a link? I haven't seen the article.

    Brian Stoffel

  • Report this Comment On July 23, 2012, at 6:29 PM, prginww wrote:


    Just realized the article you were talking about. That's why I gave the credit to Ghilarducci. She was the author of the NYT article.

    Brian Stoffel

  • Report this Comment On July 23, 2012, at 6:42 PM, prginww wrote:

    Concerning using mutual funds with higher front end fees: I have become aware of just such a fund and am watching it with a relatively small investment. If it pans out, and it appears very good so far, it meets the criteria for being worth the switch and investment. I've invested long enough in all arenas to know the "rules". As always, diversification is definitely in order. I am a "senior".

  • Report this Comment On July 23, 2012, at 7:01 PM, prginww wrote:

    The fund fees have always been a concern which is why open end funds are only a tiny portion of my portfoiio. In addition to "management" fees there are 12b1 fees and the hidden trading costs that, IMHO, go to insiders. These fees are invisible to the retail investor. I do have some open end funds but find the information somewhat more visible. Since they trade intraday, I can buy or sell at a known price and if desired place a stop loss.

  • Report this Comment On July 23, 2012, at 9:14 PM, prginww wrote:

    I use a lot of Vanguard index funds for buying into stocks I can't afford to own individually. Vanguards Balanced Index,VBIAX, has a big slug of Apple, Google, IBM, and other high priced stocks I could not swing enough shares to make a difference. So I get them in a fund that charges .10.

  • Report this Comment On July 23, 2012, at 11:00 PM, prginww wrote:

    I regard the fees paid to TMF annually as investment fees, and those are pretty steep relative to my portfolio.

  • Report this Comment On July 23, 2012, at 11:42 PM, prginww wrote:

    After reading this, you will understand why I fired Merrily Loot and Filtch and hired myslef as my fund manager. This is not for everybody as it entails a lot of research, study and investigation into investment opportunities. I use MF and Navallier and check a lot of other sources before going to my $7.00 trade guy.

    Sadly, too many are afraid to invest in quality dividend stocks such as AT&T, BMY, FE P&G and the like. So they leave it in a granny fund or a CD earning 3/10 of one percent.

    I do get aggressive wtih AAPL and a reit, AGNC.

    Finally, keep in mind that 60% of fund managers lose money instead of make money.


  • Report this Comment On July 24, 2012, at 12:41 AM, prginww wrote: recommend not buying any Foolish funds, one presumes.

  • Report this Comment On July 24, 2012, at 10:56 AM, prginww wrote:

    Brian could you clarify something for me on this topic - it would seem to me that if a fund charges 1% of assets under mgmt annually and makes 10% return annually (for simple math) that the fees are actually costing any shareholders 10% of their annual return. Example: $1,000 invested in the fund, earns 10% ie $100/year. Fee of 1% charged on total assets of $1,000 (before 10% return but after return is included it's the same cost) equals $10, or 10% of that $100 annual return. Is that correct? If so, can I safely assume that subtracting the expense ratio % from a fund's posted return will give me the true return after expenses?

  • Report this Comment On July 24, 2012, at 11:27 AM, prginww wrote:

    qcp3rd - no, you can not safely assume that. Funds' returns are always posted NET of expenses. So if you see a fund that returned your 10% with a 1% expense ratio, you can assume that they earned 11% before the expenses were taken into consideration.

  • Report this Comment On July 24, 2012, at 11:44 AM, prginww wrote:


    You've got the right idea, but as barrycahn notes, most returns are given after expenses are taken into account. Check the fine print on a prospectus to be sure.

    Also, starting this August, mutual funds need to be certain to make their expense ratios crystal clear, so keep your eye out for that as well.

    Brian Stoffel

  • Report this Comment On July 24, 2012, at 2:10 PM, prginww wrote:

    Ok thanks for the insight guys. Regardless it seems choosing funds with the lowest expenses is the way to go. I was surprised to see the Vanguard fund referenced with such a lot ratio of .05 and am in the process of reviewing all my funds expenses to see if things like index funds should be switched to someone else for that reason.

  • Report this Comment On July 24, 2012, at 3:54 PM, prginww wrote:


    If you have access to invest in companies like Google, FedEx, and Sysco pre-IPO, then respectfully, I don't think the investment advice from TMF is for you. Your average investor does not have access to those investments, and TMF seeks to educate and provide services so that average people can access and benefit from investing.

    Frankly, I am doubtful of your claimed investing track record. I believe that venture funding of Federal Express was complete by the end of 1974. Since that was your first year as a "professional," I doubt you personally were making any investments in Federal Express. Maybe you worked for a company that made that investment, but that isn't really the same thing.


  • Report this Comment On July 24, 2012, at 5:59 PM, prginww wrote:

    i often read articles describing that most mutual funds do not beat an average index fund... Yet, i suspect most people do not manage their retirement funds by leaving them in one mutual fund. when i consider my own employer related fund choices, usually there is an ability to move money in and out of various mutual funds with a fee after 60 or 90 days- Depending up what is occurring in the market i suspect there is group of people that move there money to the better performing funds (usually this more about large -cap, small cap, international, bonds or international... But i never see articles describe the type of performance obtained by simply staying invested in better performing fund choices that most companies offer- i for one would be interested in learning the answer to this question at it might provide a little hope to those of us whose employer contracted choice of funds are limited to mutual funds anyway...thanks in advance!


    is there any good information

  • Report this Comment On July 24, 2012, at 7:03 PM, prginww wrote:

    I read that NYT article as well and recommend it. Here's a brief, relatively unbiased history of the 401(k):,9171,1851124,00....

    The 401(k) has existed since 1980, and thus for nearly the span of an entire worklife. I do not pretend to know why it has been unsuccessful, but to pretend that it is a success is absurd.

    We need some new thinking on this issue.

  • Report this Comment On July 24, 2012, at 8:12 PM, prginww wrote:

    You're insane. Mutual fund fees are not killing my retirement savings. Investing in crappy stocks like those shilled by MotleyFool (any stock at any price, no matter how high the P/E or where they are in the economic cycle), THAT is killing my retirement account.

  • Report this Comment On July 24, 2012, at 8:41 PM, prginww wrote:

    Hi Brian, your bio note says I can see your portfolio "here", but "here" doesn't seem to have your portfolio.

  • Report this Comment On July 24, 2012, at 8:52 PM, prginww wrote:

    why individual investors under perform:

    "For example, while the arithmetic average monthly return of the benchmark was 2.0 percent, the mean gross monthly return of investors was just 0.5 percent. And over 75 percent of investors underperformed."

    see why:

  • Report this Comment On July 24, 2012, at 9:18 PM, prginww wrote:

    Fees are huge when it comes to long term investing. Index funds are a fantastic way to go along with some no loads with some solid expense ratios. But there's many folks out there in wrap accounts paying 1.5% + expense ratios for accounts their advisors look at MAYBE once a year. Often times, Advisors are earning money for doing nothing... but then again, folks have to be responsible for being involved and informed with the money they have earned and are putting out their for their future.

  • Report this Comment On July 24, 2012, at 11:28 PM, prginww wrote:


    I don't have those numbers, but I do have an anecdote to accompany your story. In the years he ran Fidelity's Magellan Fund, Peter Lynch had an annual return of 29% (just amazing). However, the average Magellan Fund holder performed much worse, because he (or she) pulled money out when it should have gone in, and visa versa.


    It seems like you're describing our Rule Breakers service. It is admittedly a more volatile way of investing, but the numbers speak for themselves. The average RB pick is beating the market by about 25%.


    The portfolio I was referring to was the one I publicly set up. The latest update is here:

    A link to all my holdings, big and small, is available here:

    Brian Stoffel

  • Report this Comment On July 25, 2012, at 2:10 AM, prginww wrote:

    "According to recent estimates, there are 58 million Americans between the ages of 50 and 64. The median retirement savings for this group is only $26,000 per person."

    Wait a second -- this article is practically schizophrenic. By that I'm referring to the numbers given at the beginning, followed by those given toward the end.

    Does anyone seriously believe that the "right" mutual fund (however you choose to define "right") will take the average investor from a nestegg of around $26,000 to the $800,000 they reasonably need to retire (assuming their house is satisfactory, and owned free and clear)?

    Note, also, what "median" means. One-half of all these "investors" have saved more than $26,000 . . . and one-half have saved LESS.

    At age 50, shouldn't you have around $400 to $500,000? Isn't that, generally, the target?

    The 401(k) has existed since 1980. (Please see the reference in my previous post.) So, where is the money? Where did it go? (N.B. Rhetorical questions)

    The idea of individual retirement savings has failed. I don't think it's clear why it has failed. I don't see solid research explaining that failure, and I don't think politically-motivated guessing is likely to help us here. But I am sure that mutual fund fees are not the reason.

    The real bottom line is that we need to preserve Social Security. You know, just like we need oil and natural gas until better technologies are actually in existence to replace them.

  • Report this Comment On July 26, 2012, at 4:12 AM, prginww wrote:


    Interesting article, and I'm not surprised to learn that most individual investors aren't even aware of how poorly they're doing, but the line that you quoted doesn't make much sense. The mean monthly return of the benchmark was 2.0%? Who makes a mean monthly return of 2.0% (other than Tony Soprano)?

  • Report this Comment On July 26, 2012, at 2:46 PM, prginww wrote:

    People should think and control their own retirement funds especially when they are older.

    I am a 'diy' guy, I believe this helps me stay more involved and mentally active, plus it is cheaper!

    Maybe I am not so smart that I don't need help from the Motley fools and others, but I have some winners and a lots of losers, the real answer is that I am beating the market.

  • Report this Comment On July 27, 2012, at 8:32 AM, prginww wrote:

    My personal experience bears out the author's statements.

    I've kept detailed records on my investments which include stocks and funds. My funds include Vanguard as well as American and several other companies.

    The so called managed funds have lagged and my records go back to 2000.

    Good article,

  • Report this Comment On July 27, 2012, at 7:00 PM, prginww wrote:

    Darwood, your records only go back 12 years? See, that's the problem. Even assuming we can draw inferences from past performance (see, e.g., Fooled By Randomness, for example), 12 years isn't enough. Or at least not unless you were able to make enough to retire on during that 12-year period. (That's why "market conditions" are so much less important for anyone who pulls in an 8-figure bonus per year. The truth is, whatever happens, they are done with having to work -- at anything -- including investing.)

    Frankly, I have two managed funds that have NOT lagged during this period. In fact, they held up remarkably well through 2008-09, outstripping index funds and other managed funds by a lot. I wish I had put more money into them, actually. BUT, that proves nothing. Maybe it was blind luck, and I don't know how to tell the difference between perspicuity and luck. The truth is, in this market, I don't know. We've never been here before.

  • Report this Comment On July 27, 2012, at 10:41 PM, prginww wrote:

    Sunny7039, My records go back longer than 12 years. My investments in mutual stock funds go back only 12 years because prior to that time I owned no mutual stock funds, preferring other investments.

    My portfolio is currently a diverse one, including both funds and individual stocks and according to the "M* X-Ray tool it's a "core" portfolio, That info is provided simply to provide a very broad idea of what the portfolio is probably comprised of. There's more info under my "general information."

    At this juncture I think the "information age" has made some fundamental changes to the landscape.

  • Report this Comment On July 28, 2012, at 1:22 AM, prginww wrote:

    "To give you an idea of how scant that $26,000 will be when combined with Social Security and spread out over the rest of one's life, consider this: Almost half of these middle-class workers will be living on a food budget of $5 per day."

    That's WAY off if you own your own house and frugal. I retired when I was 56, for reason of health and music study opportunity (an unfulfilled childhood dream), and I knew I'd live frugally until Social Security kicks-in: the first check I'll get, Soc. Sec. tells me, will be about November 14th!

    When I was considering retiring in my mid-50's, people I knew in their 60's and 70's told me that I could get by on $1000/month if I needed to since I owned my own home. They were right.

    I had a significantly larger nest egg when I retired at 56 than the $26K in the article, but I'd still have done it one 25K.

    I have a pension that pays, after taxes and health insurance, about $900/month. I spend $3000/year ($250/month on avg.) on college piano tuition. My property taxes, homeowners insurance and car ('97 Taurus running fine) insurance come to about $240/month. I spend about $800/yr ($67/month) on diabetic prescription, doctor, dentist, ophthalmologist and other specialist copays. I average spending about $1500-$1600/month (about a $600-$700/month drain from my nest egg), and have given up some things temporarily during my six-year limited-income period (like overseas vacations) but I don't live like a hermit. I have learned where the freebies are like the National Zoo in D.C., the Goddard Space Flight Center Visitors Center, and a number of super-parks where a lifetime senior pass is cheap. Also cost free, I perform classical music formally for audiences on piano several times per year including the ACE recital of the Peabody Institute of Johns Hopkins University in Baltimore and at the Maryland Hall for the Creative Arts in Annapolis. I take one several hundred dollar vacation/year, I go occasional NFL and major league baseball games (which can be financial adventures!), attend classical and pop music concerts, and have spent $700 in the past year on a mountain bike and accessories for exercise. I like half-and-half with my coffee, which I grind from whole beans each morning. I have strawberries or blueberries and bananas with my cereal and I try to limit restaurant & fast food visits to 6x per month. When asked to babysit the pre-teens in the next generation of the family, I can afford to take them to the National Zoo, or Gettyburg (including the pay-for movies in the museum), or to a working demonstration farm, or beach etc. and then McDonald's or a regular but low-priced sit-down restaurant.

    So if I had to, I could get by on $1000/month, though I'd be looking for a lot of freebies.

  • Report this Comment On July 28, 2012, at 11:00 PM, prginww wrote:

    PE Student;

    What is optional or discretionary is a matter of personal preference and cash flow. Some people go to the library to access the internet. Others have high speed internet service in their homes. Some have land lines, some cell phones, some both. A few have none of these.

    In our country, the "poor" according to recent published studies have air conditioning and color TV.

    There is a price to pay for everything, and that includes where we live. Real estate, sales, and state income taxes vary quite a bit. The trade off is what we get for the taxes we pay.

    As an example of the options we each face, many people at 60 are spending more on insurance because they make a decision to purchase Long Term Care Insurance. Experts point out the average costs for the elderly and if one has fewer assets, then LTC is a viable consideration. You didn't include that so I assume you have decided you don't need it. That's a personal decision. Ditto for health insurance. Some purchase "catastrophic" major medical insurance and pay lower premiums. Ditto also for automobile insurance, with larger deductibles.

    My spouse and I are debt free and practice "living below our means." However, we frankly do live a life commensurate to a couple which lives in a country in which the average family is wealthier than something like 90% of the rest of the planet.

    BTW. thanks for going to MCD, I say that as a shareholder!

  • Report this Comment On August 01, 2012, at 8:17 PM, prginww wrote:

    For those of us in that age group one has to remember that none of this retail investing and individual retirement savings existed for most until after we had graduated from college or otherwise began the long working journey towards retirement. There was no individual investing for 99% of people. You either paid a bundle for Merrill Lynch or Prudential or... whomever to manage you money or put it in CDs. In most cases you weren't even involved in the investing decisions unless you overtly asserted yourself into the decision making. And then over the objections of your "advisors" who exhorted doom and gloom if you didn't follow their advise.

    Even Motley Fool didn't exist for the first 25 years of my journey.

    So yes, 90+% of my generation is totally incompetent when it comes to investing or retirement planning. The game changed when were looking elsewhere. It was not part of the paradigm until after the best effects of compounding had left them behind.

    If I am able to make 10 times my current salary, which was the benchmark until a few years ago, that will be a small miracle, and now it's 20 times?!?!?!

    What 401Ks have become is the financial services retirement plan. They take whatever they want and you get the leftovers. Or you get so fed up with it that you take it all over like I finally did and get involved in this investing stuff. I had to, I did not want to. I do not enjoy investing but the alternative scares the hell out of me.

    And it's even worse for the next generations. The younger ones not want to continue supporting Social Security they only put the minimum in their 401Ks to get the full match. Even with todays retirement environment they are no more concerned or worried about it than we were. They are concerned about starting and raising families and putting their professional creds in place as they should.

    And the 40-50 somethings that have teenagers graduating from high schools are in the worst situation. Many have paid hefty sums that they otherwise could be saving to keep their kids in good schools either by living in expensive neighborhoods or sending them to private schools. And now they are being told college scholarships and loans are either drying up or getting crazy expensive. Most were expecting to retire by selling their house and with that market in such bad shape and not many signs of improvement in the next 5-10 years... But, now that house has to be used as collateral for college loans. Bad financial decision making for them to put their kids first?

    My enlightened employer did not even offer a brokerage account in my 401K until 2 years ago.

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