Most people who utilize a bank,a broker, or their company 401(k) plan for their investments don’t realize the impact fees (many times hidden) have on their returns. You may know that mutual funds charge a management fee, but did you know the potential expenses in a mutual fund can be up to 3.17% (more if your broker charges their own fee) according to this excellent article in Forbes.
So how does this really impact your return?
Let’s assume two people invest $30,000 and let it sit for 30 years. Investor A simply invests with index funds where the average expense ratio is just .18%. Investor B invests with a broker and total expenses are 2.50%.
We will assume an 8% return for both investors (although more than 90% of actively managed mutual funds don’t consistently beat the index). Lets see the difference in the portfolios at the end of 30 years:
Investor A: $287,144
Investor B: $149,518
That’s a difference of $137,626 or 48% of your potential returns. If you make $40,000 a year that is over three years of income in retirement.
Unfortunately most people don’t realize or don’t understand the expenses they are charged and these add up over the years. They can have a HUGE impact on your returns and force you to work a few extra years or decades!
If you are serious about investments and want to retire some day then you need to have a basic understanding of fees. I encourage you to check out the fees you are paying by going to www.PersonalFund.com. This site will give you an estimate of the fees you are paying for your funds.
As always, if you have any questions please don’t hesitate to ask.