1% is a Lot More Than it Sounds

You might have discussed your retirement plans with a different financial advising agency and thought you received a really reasonable fee schedule. Many retirement plan brokers operate by offering a 1% rate for your regularly scheduled annual fees on your account balance. This figure might sound low but over time, that 1% (also known as a wrap fee) adds up and can substantially cut into your returns. Let’s explore an example of how this works:

Elderly couple looking disappointed after counting their savings.

Parameters

In this example, let’s say that an individual opens a retirement account with $200,000 and remains fully invested until the age of 90 at 5% growth with no withdrawals. This person (let’s call her Jill) pays a 1% fee every year on their initial $200,000 investment. Jill’s 1% fee will be in effect from age 65-90.

Growth

If Jill’s investment grows at a 5% rate compounded annually, she will enjoy $413,666 of growth by the time she reaches 90. Sounds great, right?

Not So Fast

Here comes the 1% - AKA wrap fees.

There’s a common misconception that these annual fees apply only to your initial investment. Unfortunately, that is not the case. The 1% gets tagged onto your balance every year, meaning that as your account grows, so do the fees.

The Damage

Over the lifetime of the investment, on $413,666 of total growth, that one percent amounts to $86,870 in fees by the time Jill reaches the age of 90 - or 21% of the account’s total growth. That is a staggering amount!

What Does This Mean for Jill?

What initially seemed like a minuscule amount, over the lifetime of the investment, ended up being almost half of the initial $200,000 investment. That $86,870 is money that is not earning interest or creating additional income for Jill. Economists call this problem “lost opportunity cost.”

Get the Most Out of Your Money with Annuities

At Annuity Authority, we pride ourselves on being financial guardians for our clients. If you don’t want to pay more than your fair share while guaranteeing your returns, trust us to find the best annuity solutions for your retirement. Reach out to our team today to get started!