By Hannah Goldsmith
Many business owners could reap the rewards of their hard work and retire earlier. The key is to review the fees being charged on your retirement and investment plans. Let me explain why and also show you what can be achieved with an example.
The financial services industry charges fees on all investment products – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. There is nothing wrong with that – but most people, even business people, have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
Why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle? Even if you love your business if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
Regardless of age or how much money you have, high industry fees can delay you reaching your desired date to sell your business, or hand it on to the next generation; the day you start your retirement. With the changes implemented following the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on January 3 this year, investors have never had so much information available to them. Investors now have the power to take back control of their money from the financial services industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund manager’s. Yet very few investors understand the fees they are paying and the impact of those fees.
And that’s the problem; without knowing the total financial services industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example:
Joe is aged 45 and has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on his money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was Joe’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. You may be surprised to find out that the total financial services industry charges have totalled £345,512 over this time.
This means it has cost Joe £345,512 to make £467,000 and he’s lost eight years of his desired retirement lifestyle.
Shelly, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs. Shelly realised that she could get the same returns and same consumer protection for 1.1% per annum. She also achieved an average 6% return per annum on her money meaning that she achieved a target fund value of £773,000 by age 65 – eight years earlier than Joe.
By shopping around to get the best fees she has achieved her target retirement fund value at her projected retirement date.
As £300,000 was Shelly’s money anyway she has made a profit of £473,000 in 20 years not 28 and it has cost her only £102,000 (not £345,512) to make £473,000 and achieve her lifestyle objective. If at the time she decided to delay retirement to age 73 like Joe, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.
The question is which of these investors are you most like?
In essence this is about being prudent. When you understand the impact financial services fees have on your money you are in a positon to keep more of your investment for yourself and your fund the retirement lifestyle you want to have.
You may love running your business but one day you will retire. It’s a good feeling to know that you have options to retire when it suits both you and your business.
Hannah Goldsmith, pictured above, is founder of Goldsmiths Financial Solutions and author of ‘Retire Faster’.