How much are you paying in fees on your investments?
“Well, I don’t know.”
This is probably the answer most of you would give if I asked you the question above.
If you do nothing else with your investments and retirement funds, you should know how much you are paying in fees and minimize the fees you pay. And even if you know how much you’re paying in fees, do you know the real cost of the fees you’re paying?
If you apply nothing else from the ‘Rat Race Off Ramp’, please read this article, reread this article, and apply it to your investing and retirement accounts. There is a good chance this one blog post can save you THOUSANDS and THOUSANDS of dollars. If this article is an eye-opener for you, please share it with others because most people are not aware of what you are about to read.
Fees Fees Fees
Yes, you will have to pay fees for all investments. However, you should know how much you are paying anyone who is managing your money and investments, whether it is a mutual fund manager, an exchange traded fund (ETF) manager, or an individual money manager, financial advisor or financial planner you hire.
All mutual funds and ETFs have expenses. This makes sense because someone is doing work managing those investment funds. The main way they charge for those funds is through expense ratios. Expense ratios are the fees, as a percentage of your (and everyone else’s) invested money, a mutual fund or ETF charges for managing the investments in the fund. However, fees can vary greatly across very similar funds offered from different companies, or even for the same exact fund from the same company. These fees will chew into your returns over time, and could easily reach into the tens of thousands of dollars ($10,000+) or more depending on how much you have invested. As you’ll see, it doesn’t take a huge nest egg to cost you over $10,000 over the long term. Just because you can’t see the fees taken out doesn’t mean they aren’t being deducted. Fees are disclosed in a fund’s prospectus, and the prospectus even shows you how much you’ll pay in fees over time, as you’ll see below. A prospectus explains how a mutual fund or ETF will operate and what it is designed to do. What the prospectus won’t show you is the effect of those fees when compared to other funds. Below are screenshots taken from the prospectuses of two different 2050 Target Date Funds. A target date fund is designed to have withdrawals begin near the target date. Managers of the target date fund will shift the stock and bond allocation as the target date approaches in an effort to reduce risk and preserve capital.
Example 1: 2050 Target Date Funds
As you can see above, the target date funds prospectuses are literally telling you the amount of fees you should expect to pay over time. All mutual funds and ETFs provide the same guidance. These two funds, the 2050 Target Date Fund from Transamerica (TRNTX) and the 2050 Target Date Fund from Vanguard (VFIFX), are designed to invest similarly over time. Each prospectus also only shows 10 years of fees, which is meaningless if you’re investing until the target date of 2050. So assuming you start with $10,000 and invest $1,200 every year ($100 per month) for 30 years into each of these funds, you end up with vastly different results. Table 1 shows the results of your investments for each fund. Which one would you choose?
With equal growth rates and the same amount of contributions, you could end up with $28,042 more by investing in the lower cost fund at the 2050 target date. As you can see, even though disclosed fees show you’ll pay more, that’s only half the story. You’ll pay more in fees each year, but you also end up having less capital after those fees are paid every year. These extra fees and lower account balance each year cause significantly reduced compounding over time. I’ll cover a few more examples to show the effect of fees over time. You’ll see comparisons for S&P 500 index mutual funds, sector ETFs, and a set of niche ETFs. The comparison for sector ETFs and niche ETFs can be found through links below.
Example 2: S&P 500 Index Mutual Funds
Index funds, whether they are ETFs or mutual funds, are becoming more and more popular for investors. Today, I’ll compare two S&P 500 index mutual funds. An S&P 500 index fund’s goal is to mirror the S&P 500 index’s movement. For this example, I chose the USAA 500 Index Fund Member Shares, USSPX and the Fidelity 500 Index Fund, FXAIX. For this example, the investor started with $0, and invested $1,200 every year for 40 years at a 7% growth rate.
Look at the results! Over $7,000 more in fees and $16,000 less for retirement when you’re paying higher fees. Now, look at the next table. If you make the maximum IRA contribution, $6,000 per year, you pay over $33,000 more in fees and end up with a nest egg over $82,000 smaller over 40 years.
Example 3: Sector ETFs
Click here for Sector ETFs. The example is about information technology sector ETFs.
Example 4: Niche ETFs
Click here to for Niche ETFs. I cover an example about Robotics ETFs.
TSP
If you have any money in the Thrift Savings Program (TSP), the federal government equivalent of a 401(k), your fund fees are low across the board at 0.042%-0.043% for all funds.
Wrapping Up
This may have been shocking post for you to read, but I hope it opened your eyes. I started this blog to help people, and this is one topic that can really help people. Please share this article with others so they can protect themselves from excessive fees and grow their investments for their future as well.
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DISCLAIMER
Disclaimer: Any of the stocks, bonds, mutual funds, or exchange traded funds (ETFs) mentioned in this post or any other post are not a recommendation for purchase. Always do your own research to make an investment decision or consult a finance professional if you so desire. When considering selling any investments, you should consult a tax professional to discuss tax implications.