Do you deduct fund management fees from your SWR?

[walkinwood]

I was re-reading Bob Cylatt's Work Less Live More and was reminded of the need to deduct fund management fees (and other fees) from my SWR withdrawal.

ie. if you take a 4% SWR from a $1M portfolio and your fund management fees total .5%, you start with $35,000 not $40,000 (as I was thinking).

The reason for doing this is that fees are not accounted for in the SWR studies. When you think about it, you need to estimate the transaction fees that you incur as your fund manager trades stock.

Do you deduct the fund management fees when you do your SWR calculations?

My fund management fees come to .54% due to some actively managed funds I have. I would sell them if it wasn't for the capital gains taxes I'd have to pay. I need to put a spreadsheet together to balance the extra fees with the cap-gains tax if I were to sell.

 

[MasterBlaster]

You got it, deduct those management fees, 12-1B fees, trading fees and so on. It all comes out of your SWR.

If you are in a really crappy mutual fund with total fees in the 3 percent range then they are stealing 75 percent of your income (ie. 3 percent of your 4 percent SWR). You take all the risk and they get all of the profits.

That's why this forum likes those low cost index funds.

 

[Gumby]

Isn't that one of the variables you can adjust in Firecalc?

 

[Spanky]

If management fee is already included in the calculation of fund return, there is no reason to deduct it from your SWR.

 

[73ss454]

So if someone had an annuity with one of those 3.5% ER's mentioned on another thread they would be in big trouble. .5% to do what you want with every year. Gotta have a real big port to buy one of those annuities.

 

[audreyh1]

That's why paying an advisor 1% or more to manage your investments, on top of any underlying mutual fund fees you have to pay, is a very, very expensive way to go. 1% is 1/4 of your potential SWR!

Lowering your investment fees is the most important thing you can do over the long run.

And don't forget that taxes come out of your SWR too!

Audrey

 

[wcv56]

Need to look at the big picture. If you think cost is so important
just buy the indexs as most funds and managers cannot beat them 80% of the time.

Then the important part is how well you can do on your own
compared to a professional. That 1% may only be 20% of what you under perform a advisor.

I think investing today is much more advanced that what it was
only 5 years ago. You better be on your toes more than ever now
days. You have governments now investing in the markets and global influences like never before.

 

[Spanky]

I think investing today is much more advanced that what it was
only 5 years ago.

More options and technologies, but the fundamentals stay the same. That is, diversify among uncorrelated asset, rebalance, keep expenses to a minimum, and stay the course.

 

[FinanceDude]

So if someone had an annuity with one of those 3.5% ER's mentioned on another thread they would be in big trouble. .5% to do what you want with every year. Gotta have a real big port to buy one of those annuities.

As mentioned above, whether your return is 7% or 17%, and whether your ER is .10% or 3.5%, the returns that are published are NET of all expenses. Just re-emphasizing a point..........

 

[FinanceDude]

That's why paying an advisor 1% or more to manage your investments, on top of any underlying mutual fund fees you have to pay, is a very, very expensive way to go. 1% is 1/4 of your potential SWR!

Other than banks, I don't know ANY advisors using "mutual fund wrap accounts"......... I have never used them in my career..........

 

[dex]

If management fee is already included in the calculation of fund return, there is no reason to deduct it from your SWR.

I have to agree with this concept. The mgmt fee is embedded in the return just as sales tax should be included in your SWR.

 

[jIMOh]

If management fee is already included in the calculation of fund return, there is no reason to deduct it from your SWR.

AGREED

 

[MasterBlaster]

If management fee is already included in the calculation of fund return, there is no reason to deduct it from your SWR.

If you believe this you just may be deluding yourself.

The SWRs were calculated using historical returns on market indices. There have been a large number of studies on this SWR topic (eg - The Trinity studies). The studies all use somewhat different indices and somewhat different criteria but they all generally conclude that a SWR over a 30 year span must limit initial withdrawals to something close to 4 percent. Any fees (trading, management, selling expense) would have to come out of that SWR number.

So if your advisor has recently been beating the market, that tells me that you are taking on risk above and beyond what the market in general has. You just may be deluding yourself that during a downturn your 4% or greater SWR is sustainable.

There is no historical data available that I know of to sustain long retirements over tough markets given larger than 4% SWR. In other words if your withdrawal rate plus the management fees are greater than 4 % then it really isn't safe. You may get lucky and retire into a bull market, or at least into a flat market. In that case the concept of a SWR goes out the window. SWRs are for poor markets.

 

[audreyh1]

Ditto Masterblaster!!!!

The Trinity studies etc. are NOT done based on mutual fund performances people! They are done based on market indices with NO trading costs and NO taxes taken into account!!!

You've got to take those fees and trading costs out of your SWR if you truly want to be safe.

Audrey

 

[TickTock]

You need to take the net difference between fund return and index return off your SWR, not the fund fees themselves.

 

[Spanky]

The SWRs were calculated using historical returns on market indices.

Agreed- the future may not be the same. The "safe" withdrawal may be less or more than 4%. As you said, the rate was based on market returns (without fees or taxes). Therefore, keeping the expenses to a minimal is important. If the fund's return (after all fees deducted) is in par with that of market index, there is no need to deduct the fee from an estimated SWR. Your assertion may be correct if you assume that an active fund will always return less than the market.

 

[MasterBlaster]

Your assertion may be correct if you assume that an active fund will always return less than the market.

I didn't quite say that. What I posted was that for an active fund to beat market returns it will have to take on more risk than the market. Taking on more risk inherently makes that fund less likely to provide long term survivability when successive withdrawals are taken out in excess of historically proven rates.

In other words, The SWR for a growth fund (or other sector fund) is actually less than the stated 4%.

 

[mexmeme]

I was re-reading Bob Cylatt's Work Less Live More and was reminded of the need to deduct fund management fees (and other fees) from my SWR withdrawal.

ie. if you take a 4% SWR from a $1M portfolio and your fund management fees total .5%, you start with $35,000 not $40,000 (as I was thinking).

The reason for doing this is that fees are not accounted for in the SWR studies. When you think about it, you need to estimate the transaction fees that you incur as your fund manager trades stock.

Do you deduct the fund management fees when you do your SWR calculations?

My fund management fees come to .54% due to some actively managed funds I have. I would sell them if it wasn't for the capital gains taxes I'd have to pay. I need to put a spreadsheet together to balance the extra fees with the cap-gains tax if I were to sell.

I was a confused about your math. If your fees are .5%, shouldn't your deduction from your SWR be $200. As I am new to retirement, maybe I don't understand financial math.

 

[MasterBlaster]

I was a confused about your math. If your fees are .5%, shouldn't your deduction from your SWR be $200. As I am new to retirement, maybe I don't understand financial math.

The 4% SWR lets a retiree take an annual payout of $40k from a $1MM portfolio (ie. $1MM X 4% = $40k). If the management scrapes off .5% every year then you can only take $35k (ie $1MM X (4-0.5 = 3.5%) = $35k). Those management fees come right out of your income.

the $200 number is not correct

 

[jIMOh]

Ditto Masterblaster!!!!

The Trinity studies etc. are NOT done based on mutual fund performances people! They are done based on market indices with NO trading costs and NO taxes taken into account!!!

You've got to take those fees and trading costs out of your SWR if you truly want to be safe.

Audrey

If I assume my MF will return me 8%, then the return being provided to me is 8%, the expenses come out before the 8% return is put in my account. No need to adjust SWR if I can withdraw 4%, and my expected returns from the MF are X% going forward.

However if someone has B or C shares with a back end load, or some other sales charge/ maintainance charge on their account, this fee would come out after the same 8% in example above. In this case the SWR would be affected by the expenses and loads.


Disclaimer- I purchase all my mutual funds 100% no load. I usually use T Rowe Price funds, and the returns I expect from my portfolio will be different than the returns another person will get from a different mix of the same or different mutual funds.

This discussion can take on different meanings depending on the terms the investor made going in (paying loads, deferring loads, back end loads).

Trinity study assumes a 60-40 portfolio for 4% SWR from what I have read. There are many MF with a 60-40 mix (balanced funds) which have returns between 5-10%. Choose a good one if banking on a 60-40 mix of investments for 40+ years of retirement income.

 

[walkinwood]

If the fund's return (after all fees deducted) is in par with that of market index, there is no need to deduct the fee from an estimated SWR.

Spanky, you bring up a good point, so I went to the Vanguard site and got the latest 1yr S&P 500 return and the return for the Vanguard 500 Index fund.


500 Index Fund Inv 16.31%
S&P 500 Index 16.44%

The expense ratio for the fund is .18% and you'll see that the fund under performs the index by an amount very close to the expense ratio. The same holds for 3 and 5 year numbers but is less pronounced in the 10 year number.

I don't know if these performance numbers take dividends into account.

So, even if you are using index funds in your portfolio, I think it still makes sense to deduct fund management fees from the SWR if you are basing it on the studies that use indexes and not funds for their calculations & findings.

Regards,
ww.

 

[MasterBlaster]

Jimoh:

You need to do some more reading about SWR's.

Your assumptions are not valid.

- You might start with the Bernstein article:

The Retirement Calculator from Hell

 

[jIMOh]

Jimoh:

You need to do some more reading about SWR's.

Your assumptions are not valid.

- You might start with the Bernstein article:

The Retirement Calculator from Hell

Be specific. Why? The article had nothing to do with expenses and is something I have seen before. Your argument is about expenses, then you show an article about asset allocation.

Assuming I am 80-20 the year I retire, and that my mix of mutual funds is returning me a solid 8% (or more).

The expected return of the investment portfolio is 8%. My MF assess their annual fees in neightborhood of .7%. Therefore the "real" return is 8.7%, but because the fees are taken out before the money hits my account, the real return to me is 8%.

 

[aenlighten]

Then of course

you have to consider what risk is as small value has been higher return and lower risk than the market. While large fees will definitely hurt the safe withdrawal rate, low fees would be swamped by individual portfolio returns. Using a long term return should yield a better estimate than market less fees, especially with a nonmarket allocation and over near future rather than the distant past. Adjusting withdrawals for performance makes considerable sense, particularly over the long term.

 

[MasterBlaster]

Jimoh:

Even though your average growth is on the order of 8 %. If you need income to live on, if you retire into a dropping market you will spend everything before the market has a chance to recover.

Quoting from the Bernstein article:


These calculators all make the same erroneous assumption -- that your expected rate of return is the same each and every year. In other words, let's assume that the real (inflation adjusted ) rate of return of the S&P 500 will be 7% in the future. You might conclude that you can withdraw an inflation adjusted $70,000 of your $1,000,000 Vanguard Index Trust 500 IRA each and every year indefinitely, and maintain yourself with the same real income in the long run. And you'd be wrong.

It turns out that if you have rotten returns in the first decade you will run out of money long before reversion to the mean saves your bacon in later years.


Look at some of the diagrams in the article, It's not a pretty picture.

Again... SWR's are to protect you from yourself in bad markets.