Why Eat Cat Food In Retirement

While I was in a line up at the grocery store checkout this past week, a lady in front of me was buying a dozen cans of cat food. The gentlemen behind her made a joke and said, “No retirement plan?” Everyone found it funny and I was a little jealous I didn’t come up with the joke.

But it got me thinking, why would anybody want to eat cat food in retirement when cans of people food are cheaper? For example, 1 can of 85g cat food is $0.60 whereas a 200g can of salmon is $1.35 ($0.05 cheaper if you go by weight), a 284ml can of soup is $1.05, and a 398ml can of Chef Boyardee pasta is $1.29. All are cheaper by weight.

You get the point. Cat food must taste better?

Mutual fund MER

So what does this have to do with personal finance? Last week’s post Management-Expense-Ratio-MER I wrote about how much MER can affect your portfolio.

There are many ways to skin a cat and a lot of people are still in high cost mutual funds; $1,467,000,000,000 worth in Canada. I did not find the statistics but some of the almost 1.5 trillion would be in group or employer-sponsored plans in which you have little choice but invest in mutual funds (cat food). The vast majority would be through the banks or independent financial advisers.

In 2016, the number of Canadian mutual funds that focused on US stocks that outperformed the index was zero. Investors in these funds are still paying the full MER. Remember, the average management expense ratio in Canada is 2.53%.

On “Interesting Stuff on the Web” I posted an article from Bob Brown Six Themes That Will Drive the Next Five Years where he gave his forecast for equity returns of about 6% over the next 5 years.

One reader of my blog commented “If you take into account the 6% return on stocks after the 2% inflation forecast gives us a real return of 4%. Let’s say the tax man takes 20% then we are down to an after tax real rate of return of 3.2% much of which will come from dividends. If you give up another 2%+ in expense ratio, an investor might as well put their money in long term certificates of deposit and eliminate risk.” I couldn’t say it better myself.

Mutual Funds Fees

It is important to note that all rates of return are published net of fees. For example, if the fund shows a 10% return, it actually earned 12.50% but the MER was removed already. You will never see this fee as it is taken off the fund usually on a monthly basis.

Front end load

This fee comes right off your investment. For example, if you are investing $10,000 and you pay a front-end fee of 2%, you will pay $200 for the purchase and $9800 will get invested. Paying a front-end fee means you have less money at work.

Back end load

A back end load is different in that you do not have to pay anything up front. You still pay the MER usually monthly. However, the mutual fund company has locked you into a 6, 7 or 8 year time frame where, if you leave their company before a certain time, you will have to pay a penalty for leaving early. The longer you stay with the fund company, the smaller the fee. Typically, you can still move your funds around within the same company without triggering fees.

Final Thoughts

Some would argue, that for the 2.5% fee you are getting financial/tax advice from professionals, and that is fine as long as you understand what fees you are paying.

It’s like buying cat food instead of people food in retirement. Active vs passive (what tastes better). As long as you understand the fees you are paying and the services you are receiving for that 2+% MER. If you use the cheaper options out there, you might have a enough left over to buy the really nice organic cat food.

Disclaimer: No cats were harmed in this post!!

 

 

Comments

  1. Hi Steve,
    I have to admit and am slight embarrassed to say that I still have a couple funds in my portfolio with expense ratios on the higher side. I think they can have a place in one’s portfolio if they serve a purpose. One of the funds I am thinking of is a small cap international fund. I like it’s diversification and portfolio of stocks I could never research, hold and maintain on my own. I have held it for 20+ years in a taxable account so selling it would also unlock capital gains tax I don’t want to pay. That said, over the years I have transitioned most of my holdings to individual stocks, low cost mutual funds and ETFs for all of the good reasons you have mentioned in your last couple posts. Do you have any higher cost funds left in your portfolio? Tom

    • Hi Tom, like you I invested in mutual funds for over 20 years(1990-2010 ish). I had a great financial adviser, which helped out in the younger years for taxes,insurance,will,estate planning etc. When he passed away I moved my portfolio over to cheaper ETF portfolio. Getting back to your question I did keep one of my global mutual funds for the reason you stated and I really liked the fund manager, but eventually I switched out and into global and international ETFs. When I get time I am going to do a comparison of the two and see if I would have been better to hold the mutual fund. Thanks for the comment Steve

      • FYI all my funds where in registered accounts so no taxes where involved.(that would have questioned my decision)

      • Thanks for the reply Steve. Making the transition from higher cost to lower cost holdings is a great way to squeeze extra return from one’s investments. Your post has motivated me to take a look at my holdings for additional opportunity. Tom

    • Hi Busy Mom Thanks for the comment. I have my opinion but I do see the merits in mutual fund investing. They are great for specialty areas of the market and if your getting good financial advice built in to the MER of the product you invest in. My main concern is the fees are somewhat hidden and the average investor doesn’t know what it’s costing. Thanks for stopping by. (I checked out your Website Nice !!)

    • Hi Thanks for the comment. Go figure, I don’t even have a cat. I just hope the average investor knows what they are paying for the service they are
      receiving.

  2. Great and funny analogy! Overly-high investment fees are definitely not in the interest of the average investor. And, when the funds you are paying those exorbitant fees for do not beat their benchmark index, it becomes a damn rip-off!

    • Thanks Enoch
      I hope most investors know the cost of the products they buy. (all investments not just mutual funds) I feel most investors just go along with whatever the nice person at the bank tells them to do.

  3. I think the bottom line is that history shows it is hard to find the wining fund that can justify the expense ratio. Some active funds will no doubt beat the benchmark. I like the saying “forget the needle buy the haystack”. For my stock investments I will stick with indexes there are other areas I think you can pay professionals to leverage getting ahead, like property management on rentals.

    • Hi DM exactly “forget the needle and buy the haystack”. Good point on property management it does pay to get professional advice for somethings. Thanks Steve

  4. Haha, that’s a pretty funny joke! I almost didn’t get it at first.
    Then the visual of eating cat food occurred in my mind then I almost gagged. haha.

    Great review of the way mutual funds bite you in the butt!

    • Thanks GYM, I don’t have a cat or dog so I definitely won’t be eating animal food in retirement(I hope). Cheers Steve

  5. I feel like what you get from most advisors isn’t that they have stellar performance, but they’re there to hold your hand through good times and bad. My father only recently switched away from those after realizing how much money he was leaving on the table. But that was a multi-year process, and he’s still incredible uncomfortable with it even if he knows, intellectually, he’s better off without them, He gets a lot of comfort from knowing there’s somebody, besides himself, looking after this.

    Yeah and never really got the cat food thing, that stuff is actually pretty expensive. I can feed myself WAY cheaper 😛

    • Welcome Mr SLM, Ha Ha !! I just like people food better and I don’t have a cat.

      I don’t want to totally dish on financial advisers, if you are getting good tax,estate,investing advice the 2.5% MER might be worth it. There is a lot of people that don’t know what fees they are paying. Thanks for stopping by.

  6. Steve,

    Those cat pictures are so cute.

    You explained very well about the mutual fund fees. Some people say, the front load or back load is just like asking a person: “Do you want to be slapped on the right face, or the left face?” The answer is “None, I don’t want to be slapped, period.”

    The loads are not good, no matter front or back. It’s one of the ways the sales people are compensated. Understanding the fees are very important to an investor. Some people don’t want to invest themselves, and don’t mind paying those load fees. But the fees add up.

    • Thanks Helen, I agree with your comment. There is many investors that have no idea what they are paying in fees. If they are getting good service and understand the fees they are paying I think that is great. (just not for me)

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