I’m a big fan of using calculators to help clients determine the “real-world” math supporting the use of various wealth-building tools. For example, I built what is my favorite calculator to illustrate the power of paying down your mortgage early using The Home Equity Acceleration Plan.
Mutual funds costs
People blindly pour significant amounts of their investable dollars into mutual funds every year. Unfortunately, most have no idea how much it will cost for the privilege of investing in various funds.
Now even consumers (non-advisors) can find out how much it costs to invest in mutual funds by using a very simple online calculator.
The online calculator will blow your mind. It literally lets you pick from over 18,000 mutual funds and determine the actual fees that would have been paid when investing in the funds over the last five, 10, 15-plus years.
Let’s look at an example of this powerful calculator. Assume an investor (45-year-old male) invested $100,000 in the Allianz AGIC
Emerging Markets Opportunities Fund Class C [AOTCX] 20 years ago, and it earned 8% each year:
Value after 20 years: $287,270
Total Fees: $ 85,895
That’s really pricey. The net return is 5.42%.
Not all funds are so egregious. Let’s look at the much leaner American Fund [AGTHX] using the same $100,000 investment and gross rate of return:
Value after 20 years: $392,594
Total Fees: $ 32,197
This is much better than the international fund, and the net return is 7.08%.
Keep in mind that the net returns do not include capital gains taxes, taxes on dividends or money management fees. When factoring these fees in, the net return will be much lower.
When trying to determine if using mutual funds make the most sense to grow your wealth, this calculator can be invaluable.
Now let’s compare cash value life insurance to the above-listed mutual funds. I’ll take the accumulated value of both mutual funds after 20 years and let them continue to grow at their assumed net rate of return. Then I’ll take equal/level withdrawals from ages 66 to 90 (25 years).
At the end of 25 years, the accounts will have a zero balance. I will only assume a one-time 15% capital gain expense (which is not real world, but is intentionally conservative for the example) and no money management fee.
From the Allianz fund every year: $17,130
From the American Fund every year: $26,292
The question that is answered in the book, Retiring Without Risk, is how cash value life insurance compares to mutual funds. I’ll assume the example investor pays $20,000 a year for five years into Retirement Life™ and then lets it grow until age 65.
How much could be removed from Retirement Life™ each year after taxes and after expenses from ages 66 to 90? $35,783.
Roccy DeFrancesco, JD, is author of The Doctor's Wealth Preservation Guide, and founder of The Wealth Preservation Institute. The DWPG has recently been approved for up to 21 AMA PRA Category 1 CME Credits™ in a self-study format. If you would like to purchase the book at a 33% discount as benefit for being a reader of Physician’s Money Digest so you can earn CME credits in the comfort of your home, or if you have any questions about this article, email firstname.lastname@example.org. For more information on Retirement Life™ email email@example.com.