The biggest financial fear many people have is that they will run out of money.[i] Not only are returns shabby, at best, but human lifespan has gradually been rising. This is not a good recipe for being able to retire care free on the money you’ve put away during your career.
But even with what seems like a reasonable return of 6%,[ii] which is the average investor’s expected return, you could still be earning less than 1%! How could that be? A return is a return, isn’t it? Yes, yes it is, but fees are fees, taxes are taxes, and inflation is inflation.
Here’s what happens to your investment account when money managers, Uncle Sam and inflation put their grasping hands in your pocket.
I’ll round all the numbers to the nearest thousand to keep things easy.
Let’s say you put away a lump sum of $100,000 If (notice that’s a big “if”) you could earn 6% compounding annually without interruption for 30 years, you would have $574,000 in that account! That’s the power of compounding interest… but now let’s account for management fees, taxes and inflation.
A 1%[iii] management fee which is standard on an investment portfolio of less than $1 million will cost you $150,000. (Remember you don’t just lose the 1% every year, you also lose the growth on that 1% you lose, every year.)
In a 24% tax bracket you will lose an additional $123,000 of your nest egg to taxes. (Once again, you not only lose the amount you pay in tax, you also lose the growth on that money.)
And just when you start to reconcile to your losses and say something cheerful like, “It could be worse,” you realize that 2.8%[iv] inflation has taken a $173,000 bite out of your purchasing power. You are left with a purchasing power of only $129,000, which is just $29,000 more than what you put in 30 years ago. This equates to earning less than $81 per month, which is a return of only .85%, NOT 6%!
This example is sad, but it could be worse. What if you don’t earn 6% every year? Will your management fee of 1% go down? (Answer: No) Will your taxes go down? (Answer: Yes) Will inflation stop and wait for you to catch up? (Answer: Not likely).
So, instead of trying to put more money into a sinkhole like this, doesn’t it make sense to put your money in a place that doesn’t charge you management fees, doesn’t expose you to market risk and gives you asset protection?
U.S. Supreme Court Justice Oliver Wendell Holmes Jr., nominated to the Supreme Court by U.S. President Teddy Roosevelt, delivered the opinion of the U.S. Supreme Court on Grigsby vs. Russell in which he stated: “…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.”
We don’t have Justice Oliver Wendell Holmes Jr. anymore, and we don’t have President Teddy Roosevelt either, but we do still have Whole Life Insurance the stuff Justice Holmes mentioned as one of the best recognized forms of investment and self-compelled saving… so use it! Use it to protect, use it to save and use it to get an average, to better than average, return on your money.
There’s no need to risk your savings in the market or pay a management fee every year just because you can.
Use the financial tool your grandparents and great grandparents used to get ahead faster, it still works really, really well.