The 80/20 rule, or ‘Pareto Principle’, states thatthe majority ofresults come from a minority of causes. For example, 80% of wealth is owned by 20% of the population.
The same is true of investment costs: if 20% of assets are invested in private markets (private equity, private debt, infrastructure, real estate etc) they may well account for 80% of total costs.
To make sense of investment costs we need data. The CTI templates are changing the landscape and enabling funds to access cost information more readily.Before CTI even existed, the Institutional Limited Partners Association (ILPA) introduced a global template, which has been a real step forward for transparency.
At CEM we work with both ILPA and CTI templates.Managers are willing to supply them, particularly CTI templates in public markets where compliance is good. However, it’s much harder in private markets and globally the ILPA template hasn’t proved a silver bullet.
It’s important to say that most General Partners (GPs – fund managers for private assets) are complying willingly with requests for data via the templates.Some however are not and we have seen pushback for a variety of reasons, e.g., ‘everything you need is in the financial statements’ or ‘please see our website’.Some simply don’t respond at all.
So why is it so hard?Some big funds work with a handful of public market managers who have a UK presence and are generally well resourced.The fund however may invest in hundreds of GPs globally.Sourcing detailed breakdowns of costs for each template can be a significant undertaking and far from straight forward.
·Lack of incentive – Returns in some private asset classes have been great for a sustained period. Consequently, great waves of money have flowed into private markets.Demand significantly outstrips supply. The level of ‘dry powder’ (committed capital that hasn’t yet been ‘drawn down’ by the GPs) is now at $2.3 trillion and rising – there is twice as much money committed globally as there is ‘in the ground’ [Source: McKinsey Global Private Markets Review 2020]. This has created a huge imbalance of interests between investors and GPs.Many GPs can pick and choose the pension funds they want to work with, so they have little or no incentive to complete templates.
·Lack of resources - GPs tend to be smaller than their public equity counterparts andmaylack the resourcestorespond to multiple requests.
·Lack of consistency – The definition of full transparency isn’t universally agreed upon. CTI came on top of ILPA and adds another ‘standard’.Some funds have developed their own templates.GPs complain, not unreasonably, about the lack of consistency on the part of investors in terms of their demands for reporting.
·Geography - GPs are often based in different countries to their LPs; making it difficult toexert regulatory pressure to respond to data requests.
So, after explaining to a top Wall Street GP what a CTI template is, convincing them to complete it can be just a step too far.In any event, finding these costs is only half the battle. Making sense of them is something else entirely.Privatemarket cost structures are inherently complex, making it difficult to understand what’s going on and what is a cost. Some of the challenges include:
·Complexity –On top of the base fees and performance fees (carried interest), there are a variety of different direct and indirect costs such as set up, due diligence, break-up, and monitoring.
·Share of revenues - GPs oftenearn fees from running the companies that make up the private equity portfolio. If a GP isn’t set up to provide full transparency, these costs can be difficult to find (sometimes requiring looking beyond partnership’s financial statements to portfolio company statements).
·Treatment of rebates - The investor is also entitled to a share of the revenue, but this is generally not actually transferred to them.It is instead held by the GP as a payment towards gross management fees.When reporting management fees, many exclude the withheld ‘rebate’ and report a net fee, making it difficult to calculate the gross fee.
Private market data is essential to give investors the full picture on their costs and how they compare with others: better information leads to better insight, more informed decisions and ultimately a better result for all stakeholders.
David Jennings, Client Relationships Manager & Joao Barata, Analyst at CEM Benchmarking
FAQs
Let's say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.
How long will $400,000 last in retirement? ›
Safe Withdrawal Rate
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
Is $1.5 million enough to retire at 70? ›
A $1.5 million nest egg can be more than enough to retire on, but it depends entirely on how much money you plan on spending. The more income you expect to replace, the more you will need to draw down from your retirement account and the larger it will have to be.
At what age should you have $1 million in retirement? ›
Based on this, if you retire at age 65 and live until you turn 84, $1 million will probably be enough retirement savings for you. However, it's important to remember there is no one-size-fits-all amount.
How long will $1 million last in retirement? ›
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
Can I retire on 500k plus Social Security? ›
Most people in the U.S. retire with less than $1 million. $500,000 is a healthy nest egg to supplement Social Security and other income sources. Assuming a 4% withdrawal rate, $500,000 could provide $20,000/year of inflation-adjusted income.
Can you live off the interest of $1 million? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
What is the average Social Security check? ›
Social Security offers a monthly benefit check to many kinds of recipients. As of December 2023, the average check is $1,767.03, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.
What is a good monthly retirement income? ›
As a result, an oft-stated rule of thumb suggests workers can base their retirement on a percentage of their current income. “Seventy to 80% of pre-retirement income is good to shoot for,” said Ben Bakkum, senior investment strategist with New York City financial firm Betterment, in an email.
What is the magic number to retire? ›
Americans' “magic number” for retirement savings is at an all-time high — $1.46 million to retire comfortably, according to responses from Northwestern Mutual's 2024 Planning & Progress Study.
1,821,745 Households in the United States Have Investment Portfolios Worth $3,000,000 or More.
How many people have $1000000 in retirement savings? ›
However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.
What is the average 401k balance for a 65 year old? ›
How much should I save for retirement if I make 100k a year? ›
Consider other income sources
Let's start to put this together. With a $100,000 salary, the average person will need $80,000 in retirement income. If you anticipate $30,000 in annual Social Security income, this lowers the need from your savings to $50,000.
Can you retire comfortably on 100k a year? ›
“With a nest egg of $100,000, that would only cover two years of expenses without considering any additional income sources like Social Security,” Ross explained. “So, while it's not impossible, it would likely require a very frugal lifestyle and additional income streams to be comfortable.”
How to retire with $2 million if you make $100000 per year? ›
If you want to retire with $2 million, you'll need to invest about 12% of a salary of $100,000 starting in your 20s. Waiting until you're older will require a larger portion of your pay. If you wait until your 30s, then that number is closer to 17% of your salary.
How much income will 500k generate in retirement? ›
It may be possible to retire at 45 years of age, but it depends on a variety of factors. If you have $500,000 in savings, then according to the 4% rule, you will have access to roughly $20,000 per year for 30 years. Retiring early will affect the amount of your Social Security benefit.
