Management of the Retirement Funds (What happened to creativity?)


I have been trading stocks and making the investment decisions related to our personal portfolio for the last 40 years. Some were good, others not so much, but at the end of the day, we are retired and living in Sarasota, so I guess it worked out. As a retirement gift to myself, I thought it would be great to turn over the bulk of the responsibility for managing the retirement funds to an expert. Certainly they could do at least as good as I had done. And so the adventure began.

The goal for those of us with money to live on in retirement is to make some predictable income and not lose the money that we have. We have the most sophisticated financial industry in the world so I thought that there would be several great options to choose from. You can’t imagine my disappointment when the world that brought us the zero down variable rate mortgage couldn’t give me a good safe way to earn 8% on my money.   The bigger frustration was that they had a lot of offerings that said they could but actually didn’t. Now, I didn’t review every financial product out there for retired folks and there may be some very good programs that I missed. I’d appreciate hearing about them.

Let’s look at some of the products that I did find. They tend to break down into two broad categories of offerings. The annuity that takes a lump sum from you up front and makes a periodic payment back to you for some period of time. The other product is a management of your portfolio for a fixed fee. This doesn’t guarantee anything except that the broker gets paid their fee. The magic number that both these products advertised was an annual 8% return with limited downside risk. But the reality is that neither looked to deliver on their advertised results. I want to make it clear that these products are the best solution available for certain individuals, but let’s go into the product with a realistic understanding of what you will get.

The annuity is the scarier of the two products that I looked at. These products claim to offer an 8% yield and have the math to support it, but read the fine print. The basic premise is that you give the annuity company $100,000 and they pay you $8,000 per year for some period of time. It could be your lifetime or the longer of your lifetime and your spouse’s lifetime.   They may give your heirs some of the original principal back. Let’s look at the math very simply. Using the above example, an annuity that takes $100,000 from you today and pays you $8,000 for the rest of your life will have a yield that depends on how long you live. If you live 20 years, then the actual yield is 5% and the $8,000 that you get paid in the first year is only worth $5,500 in year 20 if inflation is 2%. If you want to take any of your original investment out the cost is very high. The provisions vary between annuities, but if you die earlier than 20 years, the yield is lower, longer it’s higher. The contracts are very complex and in my opinion designed to make the simple conclusion that I came to above as difficult as possible for the customers to understand.   You might live forever and be the big winner on the annuity, but these are nothing more than repackaged life insurance programs and the insurance companies will win more than lose.

The managed retirement account is offered as the alternative to annuities from several big brokerage firms. I asked two firms to give me a proposal for managing our portfolio. We have well beyond the average retirement savings so I thought the programs would be interesting. Each proposal came in with lots of financial analysis and a historical yield of about 8% a year. Of course, the historical yields are no guarantee of future yields. Still, they promised upside in good years and minimal risk to the original investment. Not a bad overall pitch. Then I dug into the details. Both programs charged a 1% annual fee based on the account balance or $1,000 for every $100,000 that they managed. The real frustration for me was that most of the money that they managed was placed into mutual funds and bonds. They had some “internal” funds but those were no more than a third of the portfolio. The yield on the bonds were about 4% and the mutual funds had fees. I felt paying 1% to have someone put my money into stock mutual funds and low yield bonds was not a good way to go. But I have been picking mutual funds for years with good results so again, this is not a bad solution for some. Just an expensive way to go.

After looking at the options, I have chosen to manage my own money for the time being. It’s split between dividend stocks and mutual funds. I’m exceeding the 8% yield so far, but it’s been a good market. I have spoken to several individuals that use financial managers successfully. These individuals offer to manage your portfolio for a fixed annual fee.   You need someone that’s smart and willing to do the work. You should not give them the authority to access your money. You should talk to a number of their existing clients and make sure that they aren’t selling you products on which they make a commission.   If you find someone that’s willing to work on a fixed fee, communicate with you at least monthly, take your calls when you have a concern and is not making anything off of you other than the annual fee that’s good. Then they need to be successfully guiding their clients to good yielding and safe investments.   I am sure that they are out there.

My bottom line is that I expected some creative solutions from the brightest financial minds in the world to manage my money. The solutions that I found were designed to give me poor results and the company that I bought them from the good results. They were creative, but not to my benefit. Caveat Emptor!



  1. Check out WealthFront –

    I’ve been hearing lots of positive things. Curious what your thoughts are on it!

  2. I took a long look at Wealthfront and was generally pleased with what I saw. The organization is well staffed and their approach is sound. Their fees are very reasonable at .25% annually and the use of ETF’s keeps the fund fees very low. Of the 6 funds that they would invest retirement money in 3 were rated 4 stars by Morningstar 1 was rated 5 stars and two were rated 3 stars. I ran the portfolio for a 35 year old family with combined income of $200k and $150 in retirement funds. Based on a high risk tolerance, the only real clinker in the bunch was the municipal bond fund at 9% of the portfolio. In this market, I’d opt for cash over bonds. But other than that it’s a well reasoned balance. If you take the proposed current balance and project that unchanged for the past 5 years the yield is just under 8%. All in all not bad. I still prefer to self manage, but for those with limited time or high discomfort in self management, this is the best option that I have seen by far.

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