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Home > Your Investments Are Costing You Your Retirement!

Your Investments Are Costing You Your Retirement!

August 21st, 2014 at 06:06 pm

We hear all of the experts telling us that we need to save for retirement. The more we save, the better off we will be (and the greater the likelihood of retiring in the first place). But over the years, little has been talked about what your investments are costing you. Only recently has there been an uprising to get the mainstream media to report on mutual fund expenses.

This uproar led to 401k plans needing to disclose how much they charge in fees. Sadly though, it has fallen on deaf ears. Most investors still ignore the impact fees have on their portfolio. Many take the price versus quality stand, meaning that you have to pay more for better quality. When it comes to investing, this is just not the case. I will talk about this a little bit more later, but for now I want to show you how much your investments are costing you.

Getting Taken Advantage Of

Text is According to the ICI and Link is http://www.icifactbook.org/fb_ch5.html
According to the ICI, the median expense ratio of equity mutual funds in 2013 was 1.25%. What exactly does this mean? It means that for every $1,000 you invest in a mutual fund that charges 1.25%, you are paying $12.50. You might see that and think it is no big deal. But it is for three reasons:

First, this 1.25% is not a one-time fee. You pay it every single year you invest. So if you have $1,000 invested for 35 years, your fee is $4437.50. You might again say, no big deal.


But, odds are you do not have $1,000 invested, you have more. And as your investment grows in value, so too does the fee. If you have $50,000 invested, you are paying $625 per year. Increase your investment value to $150,000 and you are paying close to $2,000 a year. Remember, these two numbers are per year. Over the course of 35 years you pay over $21,000 on the $50,000 investment and $65,000 with the $150,000 investment. Now I have your attention?


Sadly though, the pain does not end there. When the fee is taken from your investment, you lose the opportunity of that money staying in your account and growing. We all know that interest compounds on your investment over time. Well, if you take some money out of the investment, you lose out on the chance for compounding to take place.


Here is an example. You invest $10,000 in a fund that charges you 1.25% and I invest $10,000 in a fund that charges me 0.25%. We both keep our investment for 35 years and it grows at the exact same rate, 8% per year. At the end of the 35 years, how much money do we have invested?


Your investment is worth $95,000. My investment is worth $135,000, which is a difference of over $40,000! You paid just over $17,000 in fees and I paid just over $4,000 in fees. But there is still the opportunity cost. You higher fee caused you to miss out on over $35,000 of additional growth.


This is why fees matter and why you need to pay attention to them. The more you pay in fees, the more you lose out on additional investment growth. As I said before, there is no correlation with higher fees equaling higher returns. It does not work that way. In fact, the less you pay in fees is better because these tend to be index funds which simply track the market.
Text is See my last post on passive investing and Link is http://moneysmartguides.savingadvice.com/2014/07/10/what-is-passive-investing_124357/
See my last post on passive investing to learn more.

These index funds do not have a management team that they have to pay to pick and research stocks, so they can charge a lower fee. Do not get caught up in the idea that a fund manager is going to beat the market, he or she will not. Yes they may do it here and there, but over the long-term, no one has consistently beaten the market. You are better off paying a lower fee and taking what the market gives you.

But I Am Not Paying A Fee

Some might try to tell me you are not paying a fee because you never get billed for it. Unfortunately, you are getting billed, you just do not see it. The way fund fees work is that they are taken off the top, before you even see anything. So, if your fund charges 1.25% and they tell you that you earned 8% this year, the fund really earned closer to 9.25%. You just saw a return of what was left over after they took their fee. (Side note: if the professionals take their fee off the top, should this not tell you something? Think about it: it is the same thing the IRS does, they take their cut before you see yours. This is why you need to set up automatic saving and investment plans, because they work. You save and invest before you see the money.)

Final Thoughts

Do yourself a favor and pay attention to the fees that your investments are costing you. I bet you have some that will make you sick. If you need help with calculating everything yourself,
Text is check out my post reviewing Personal Capital and Link is http://www.moneysmartguides.com/personal-capital-review-answer-investors
check out my post reviewing Personal Capital. If you want more information on how to become a successful investor, be sure to
Text is read my stock market millionaire post and Link is http://www.moneysmartguides.com/become-stock-market-millionaire
read my stock market millionaire post. Remember, by not know how much fees are costing you, you are short changing yourself.

3 Responses to “Your Investments Are Costing You Your Retirement!”

  1. Petunia 100 Says:
    1408643370

    Great post. Smile

  2. My English Castle Says:
    1408647573

    I'd recommend people checking out the PBS Frontline special on retirement planning and fees,

  3. moneysma Says:
    1409685011

    @ Petunia 100: Thanks!!

    @ My English Castle: I saw that episode and it was a good one. I think the re-run recently aired too. If you have Amazon Prime, you can watch episodes for free.

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