In my weekly Forbes column, I published an article on how to become a millionaire in under 20 years. There’s no mystery to it. Save a reasonable amount of money each month (maxing out a 401k will get the job done) and invest it wisely in low cost index funds. Done and done.
And then I get an email that really angered me. It was from Tony Robbins. Yes, that Tony Robbins. No, it wasn’t a personal email. He was promoting an investment advisor firm he’s recently joined called Creative Planning. So what’s the problem?
He emailed me a link to an interview he did with the founder of Creative Planning, Peter Mallouk. I had never heard of Creative Planning or Mr. Mallouk, but I listened to the interview. It turns out that Tony Robbins is a partner of the firm. One of the points being made was how important it is to keep your fees low. Tony (I feel like he and I are on a first name basis) pointed out how even one percent can make a big difference. He invoked John Bogle, founder of Vanguard, as support for the importance of fees. So far, so good.
After I listened to the interview, I decided to look up the fees Creative Planning charges. It turns out it’s not easy to do, which is always, always a red flag. I searched high and low on its website to no avail. Finally I found a chat feature on the website and asked about their fees. They start at 1.2%!
If you are new to Dough Roller, 1.2% may not seem like a lot. Well, let me tell you: it’s a fortune. If you invest $1,500 a month for 40 years and earn 6.8% after fees (instead of 8% without fees), the difference in your retirement nest egg is huge. Care to hazard a guess?
$1,513,630.27. So yeah, 1.2% is kind of a big deal.
Now to be fair to Creative Planning, their fees do go down if you have more to invest. According to the firm’s Form ADV, the fee drops to 1% for assets between $500,001 and $2 million. And if you have more than $50 million (I’m not kidding) the fee goes all the way down to 30 basis points. (That’s what Vanguard charges with just $50,000 in investments, by the way.)
So all of the above led me to the idea of today’s article and podcast.
How to Become a Millionaire the Hard Way
Assume we can save $1,000 a month. How long will it take us to accumulate $1 million?
1. The Hard Way: If we stuff the $1,000 under the mattress each month, it will take us 1,000 months to accumulate $1 million ($1 million / $1,000 = 1,000 months). That translates into 83.3 years, so basically you’re looking at the year 2100.
Note too that with even modest inflation, say 2%, you’ll never accumulate $1 million in today’s dollars. Eventually the 2% will eat away at more than the $12,000 you’re saving each year. Fortunately, we can do better than the Mattress Mutual Fund.
2. Fixed Income Portfolio (5%): Assuming a 100% bond portfolio we can expect to earn about 5% on average over a long period of time. This and the other return assumptions in this article are taken from Vanguard’s model portfolio allocations based on data from 1926 to 2015. At 5%, it will take us 33 years to build up a $1 million nest egg. A lot better than 83 years, but still not great.
3. The 50/50 Portfolio: A portfolio of 50% stocks and 50% bonds has returned just over 8% since 1926. With this return, it takes just 26 years to become a millionaire.
4. The 70/30 Portfolio: Increase the stock allocation to 70% and the returns jump to about 9%. It also reduces our time to the cool $1 million to 24 years.
5. The All Stock Portfolio: Finally, we can hit the $1 million mark in 22 years with a 100% stock portfolio. While the ups and downs are bigger, the average returns climbs above 10%.
These returns don’t account for fees or taxes. Let’s look at fees. Using the 70/30 portfolio and adding an asset management fee of 1.5% adds three full years it will take to become a millionaire. During this same time it takes to accumulate our golden nest egg with a 1.5% fee, our no fee portfolio climes to over $1.36 million.
Fees matter. A lot. Sorry, Tony.