The Effects of Investment Fees Over Time
High management fees may rob your retirement accounts and investments’ ability to grow.
Who’s Giving You Advice
When it comes to investing, everyone has an opinion on the best way to go about it. There are stockbrokers and money managers who always seem to have the best ideas but never seem to be able to retire themselves. There are the pundits on TV who are always calling for the next stock market crash and claiming gold is the only way to go. Well, you know the saying, “A broken clock is right two times a day.”
At S.E.E.D., we believe that focusing on the unknown and what you cannot control is an exercise in futility.
Controlling Fees
We believe four investment principles should be followed to improve the chances of achieving long-term investment success. Those principles are controlling fees, controlling taxes, asset allocation, and investor behavior. Let’s focus on controlling fees and their effect on long-term performance.
Because investment management fees are based on a percentage of your assets and usually only differ by a percent or less, most people do not realize the compounding effect that small differences can have over time. Just like paying an extra 1% on your mortgage can have a tremendous impact on the dollar amount of interest you spend over the mortgage’s life, paying 1% more in fees can have an equal effect on your retirement balance.
An Example of Fees
Let’s look at an example of how different levels of fees can affect projected balances. In our model, we are going to assume you start with $500,000 and that you earn a return of 6% before fees. We are going to illustrate what your balance would be in 10, 20, and 30 years assuming a .75%, 1.00%, and 1.25% investment management fee.
|
Year |
.75% |
1.00% |
1.25% |
|
10 |
$844,262.10 |
$823,504.74 |
$803,253.59 |
|
20 |
$1,425,557.01 |
$1,356,320.14 |
$1,290,432.66 |
|
30 |
$2,407,087.53 |
$2,233,872.15 |
$2,073,089.33 |
As you can see, the difference between .75% and 1.25% over 30 years is almost $340,000. So ensure you understand what you are paying and review it yearly with your advisor. And if they say, “It’s only half a percent, what’s half a percent.” You can tell them, “Buying our vacation home!”
If you would like more information or to schedule a no-cost, no-obligation meeting with one of our fee-only financial planners, please call 607-217-5091. Experience the difference. Experience S.E.E.D.
What would S.E.E.D. charge to manage my investments? Visit www.seedpg.com/investment-program
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