Paul's Insights: Retirement investing? Beat fees not the market
I often have conversations with clients around investing when they retire. Many treat retirement as an 'end date' for active investing. But that shouldn't be the case. And keeping an eye on the cost of investing is especially important when we leave the workforce.
For most of human history, planning for a long term retirement wasn’t really necessary. But plenty has happened in the ageing space over recent decades.
Better health and less physically demanding jobs mean we are working for longer. However, the biggest change is that in just 50 years our average life expectancy has risen from age 70 to a bit over age 82.
This has extended the time that many of us will spend in retirement. And for some, it could be 20 or 30 years.
It means retirement is still very much a time to maintain a diverse portfolio, with a blend of growth assets like shares as well as more conservative investments.
Retirement, and particularly early retirement, isn’t a time to pull back from growth assets. It’s understandable that retirees often invest conservatively: losses are harder to replace. But market downturns aren’t the only risk.
There is also longevity risk, the possibility you may outlive your money, and inflation risk, the likelihood that the purchasing power of your investments will fall because of inflation. This is a very real threat right now as many savings accounts are paying interest rates below 1.7% – the current rate of inflation.
While the blend of investments you hold throughout retirement should change in line with your needs, the one constant is the need to be mindful of the fees you’re paying.
Despite the need to make our money work hard in retirement, people are often happy to pay comparatively high costs on their investments. Research by InvestSMART found the main reason for this is the widespread belief that in investing, as in other areas of life, you get what you pay for.
For most investors this is demonstrably untrue.
According to InvestSMART research, of the fund managers that attempted to beat a given market index over the 10 years to June 2018 – and charged higher fees whether they succeeded or not – 81% failed to outperform the market. The average fee for this underperformance was 2.12%.
Among the 19% of fund managers that did beat the benchmark, investment fees tended to be lower. That’s no coincidence.
Over time it’s difficult for fund managers to continually outpace market returns. It is because these lowest-cost fund managers charged low fees that they were able to outperform the expensive funds.
Long story short, by aiming to keep annual fees below 1%, which is perfectly achievable, your retirement money can last longer and still provide a decent lifestyle.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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