There may be many things that are keeping you from saving, but after you’ve set money aside for your retirement nest egg, you could have another thing sneaking in to grab cash from the egg. That snake could be somebody you trust – somebody who is helping you invest. It could be the company that manages your retirement fund.
I have seen and heard ads that warn about high fees telling me that I may be paying for my retirement accounts. My instinct isn’t to trust advertising because I figure they are trying to sell me something. However, this particular advertising is accurate about high fees because a lot of companies that manage your money actually do charge high fees. There is a good chance that the advertiser themselves have high fees too though.
Those fees are like a little snake that is just swallowing some of your nest egg. How much? According to a 2015 Morningstar Report the average expense ratio on funds was 0.64%. This may not sound like much, but it adds up quickly.
Consider this Scenario
A poor guy named Kevin decides to invest with a fund that charges a little higher fee than the average – 0.7%. He diligently starts out by investing $15K and continues investing $15K per year for 20 years earning a return yield of 6% minus fees.
His account value after 20 years is about $539K
This might not sound too bad, but those fees cost him about $45K! He would have had over $584K without those fees.
There is good news though
If you just look, you can find several companies that charge much lower fees if you invest in the right funds. Vanguard, Fidelity, and Charles Schwab are just a few good places to find the low cost funds. I personally like Vanguard quite a bit.
Vanguard isn’t a secret by any means. For example, at Vanguard there is a fund called the Vanguard 500 Index Fund. I own some shares of this fund, and I’m certainly not the only one – the fund is currently the largest mutual fund and has over $255 Billion worth of assets as of writing this!
There is one thing that you will want to note about Vanguard. They have something called Admiral Shares, which have even lower fees than their normal shares. The Vanguard 500 Index Fund Admiral Shares have a fee of just 0.05%!
Let’s get back to Kevin
You met him just a little bit ago, and saw that fees damaged his investment by $45K. Consider him saving the same amount for the same time and yield, but instead with the Vanguard 500 Admiral fees.
With the lower fees and the same return, his investment would grow to over $581K!
I know I’d rather have $581K than $539K. Wouldn’t you?