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Originally published Saturday, June 21, 2014 at 8:02 PM

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Wealth is a relative thing

Readers ask about where they stand, financially, among others in their age group and also about low-expense index funds.


Syndicated columnist

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Investing

Q: Early this year, you had a column about living well with little income.

We have a net worth of $2 million, in portfolio holdings and real estate. We’re recently retired at age 66 and 70. We have about $6,000 a month from pensions and Social Security.

Your column stated that the median net worth of the top 25 percent of Americans in our age group was $712,000. Are you able to “ballpark” where our net worth puts us, percentage-wise, on the wealth scale? Just curious.

— T.W., Seattle

A:It’s important to note that the figures are for the median net worth in each group. That’s quite different from the threshold for each group.

The $712,000 median net-worth figure for the top 25 percent of those ages 60 to 69, for instance, could also be considered the threshold for being in the top 12.5 percent.

The median net worth of the top 10 percent who are ages 60 to 69 could also be considered the threshold for the top 5 percent, since it is the middle of the top 10 percent, etc.

This suggests your net worth puts you ahead of about 95 percent of all people in the 60 to 69 age group. Don’t feel you’re that high on the hog? Most people who are well off feel the same way. The reality: The air gets thin very fast as you climb the net-worth mountain.

One thing conspicuously absent from these figures is the virtual wealth people have in Social Security benefits and private pensions.

An independent doctor without a pension, for instance, may have a lower standard of living in retirement than a longtime corporate employee with a pension.

Q: Would you discuss how low-expense index funds operate and cover their costs?

A quarter of a percent for expenses doesn’t cover much oversight, research, trade costs, rent or staff.

A:Vanguard Balanced Index fund (ticker: VBINX) has expenses no greater than 0.24 percent. Its Admiral shares, which require a minimum investment of $10,000, have an expense ratio of only 0.09 percent. Turnover at the fund is only 47 percent.

One of the reasons Vanguard funds, whether managed or index, are less expensive than other funds is that Vanguard is owned by its fund holders. It isn’t a private company making its owner(s) rich.

A typical managed-fund company has a large staff of expensive MBA/CFAs to do research and provide support for portfolio managers.

After that, it will have still more expensive MBA/CFAs to manage the actual portfolios. Most of those payroll expenses disappear with index funds. So do the trading costs. It all adds up.

If we can have a serious discussion about whether we’re better off investing in managed funds from low-cost providers such as Fidelity, American Funds and T. Rowe Price, we have to wonder what allows the truly expensive funds to exist. Answer: Marketing and hype can be more influential than real data.

Questions: scott@scottburns.com

Copyright 2014, Universal Press Syndicate



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