No. of Recommendations: 2
So what is the scoop? Why do the fees come into play with these calculations if you just use net returns?

For me, it just complicates things.

Most of the studies on this issue are academic studies. They generally assumed no transaction costs and no management fees. That's fine, as it keeps things simple. But in the real world you do have those fees and costs. So they must be accounted for in some way.

For the management fees, I think it is much simpler to treat them as an expense to be paid from the annual withdrawal. That makes comparison of the manager's performance much easier. You just compare the performance to some benchmark. Then you can see if the manager is making good decisions or not.

Separately, you evaluate the cost of the manager. Is the performance you got worth the fees paid? There are almost always additional benefits you get from an investment manager besides just their raw performance.

Back to the topic, they way I'm reading the OP's summary, it sounds like Pfau is saying the old studies can't be used because they don't account for fees. He's trying to roll the fees into the performance. If you try to do that, you need a study for every level of fees. "I can't use that study because it assumes a 0.6% management fee, and I only charge 0.5%." But account for the fees differently - as a withdrawal from the portfolio instead of a drag on returns - and the studies are relevant again.

--Peter
Print the post  

Announcements

The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.