Last Week’s Question of the Week: According to a 2018 Fidelity study, how much do we estimate the average couple retiring at age 65 will need to cover their health care and medical costs in retirement? Is it $100,000, $280,000, or $700,000?
ANSWER: The average couple retiring today at age 65 will need $280,000 to cover health care and medical costs in retirement.
HOST: You talk about retirement planning on this show, and I suppose it is important to understand what associated fees can and will show up when we are investing either on our own, or in our 401ks or with a finance professional?
KLAAS FINANCIAL: Yes, we love to disclose on this show easy and digestible information to shed light on the financial industry. No matter what you are doing, whether it be having a bank account, or having your lawn mowed, there are always associated costs to doing business. So, investment fees are a fact of life, someone, somewhere is getting paid, thus there are fees. We like to clear the confusion and hopefully spell out the basics.
To be clear, we feel that it is important that you understand what you are paying for, how much it should approximately cost, how competitive those costs are BEFORE you invest. Most people don’t even realize that they get charged fees in their own company retirement plans, and for those that do understand this, they don’t know what that percentage looks like.
Just remember that all investment fees are not bad and can be important in making sure that someone is managing your investments well. First of all, there can be a LOAD which equals a sales commission or sales charge. For example: When you put money into your IRA, you’re likely buying shares in a mutual fund. The investing professional you’re buying those shares from will get a percentage of the money you invest, otherwise known as a load. There are three types of LOADS:
- Front-end load: For example, if you invest $1,000 into a front-end load mutual fund that has a 5.00% front-end load, you’ll pay an up-front fee of $50 and your initial investment will be reduced to $950. Therefore, a front-end load fund charges the fees at the beginning when you first invest.
- Back-end load: Also known as CDSC charges (contingent deferred sales charge), this actually means that when you take money out of the retirement account, you will pay usually higher fees.
- No-load: Since a financial professional is not involved there is no commission. However, one important note is that when the value of your fund increases, however, the expenses will also go up and cut into your profits.
HOST: What about if I use an advisor, what type of fees will I see?
KLAAS FINANCIAL: There are three basic ways that advisors get paid:
- Commission-only Advisors: Paying through a load (see above)
- Fee-only Advisors: Fee for service, hourly, project based etc.
- Fee-based Advisors: May use a combination of methods. Your fee may show up as an “assets under management fee” which is when your account is charged each year as a percentage of how much money is being managed for you. An example of this would be that you have a balance of $750,000 and say your advisor charges 1% as an assets under management fee, then you will pay approximately $7,500 in fees per year.
Other fees to be aware of include expense ratios, which are the fees that cover the annual fund operating expenses. For example, you may see in a prospectus or year end statement an expense ratio of 1% which means that if you have $1,000 invested in your mutual fund, then your cost in that one fund is essentially $10 at the end of the year. These fees make up an expense ratio:
- Management fees (portfolio managers).
- Distribution and service (12b-1) fees: Pay for a fund’s marketing costs—how much it takes to promote the fund.
- Administrative fees and operating costs: Salaries managers, record keeping and research.
NOTE: Some funds are more expensive to run than others which will impact how high or low the expense ratio is.
HOST: How much should we estimate that people will pay out of pocket in retirement for health care costs?
KLAAS FINANCIAL: We like to provide facts, or at least good estimates of averages on this show. According to a Fidelity estimate in April of 2018, the average couple retiring today at age 65 will need $280,000 to cover health care and medical costs in retirement.
The good news is that the figure is up only 2% from last year’s estimate of $275,000, a smaller-than-average increase. The bad news, of course, is that it’s still a huge number, reinforcing the fact that Medicare coverage is neither free nor completely comprehensive. Fidelity’s estimate assumes premiums for Part B doctor coverage and Part D drug coverage, out-of-pocket costs such as deductibles, as well cost-sharing requirements for drugs. It also includes certain services and devices that Medicare doesn’t cover, such as hearing aids.
HOST: Basically there are always fees associated with investing but you should simply understand what they are, and how they impact us, right?
KLAAS FINANCIAL: Yes, sometimes all of us are short-sighted when we look at what a fee really means. Look for the value of the fee. Are you getting good advice through both good and bad markets? Essentially, are you staying on course with the help of a professional? Are you focusing on the long-term results of your portfolio? Do you understand how you are charged, how much you are charged and the overall structure of the fees?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.