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~Fees can suck a portfolio dry~

 

Recently I’ve been helping some staff members make changes to their retirement accounts to reduce the fees that they are paying on their investments.  So I thought I would explain the significant effect that fees can have on one's investments over time.

 

My sense is that many school employees have generally been steered wrong in two different ways regarding their retirement accounts.  

 

The first problem is that school employees often have investments that are just not appropriate for their needs.  I can write more about that issue in a future newsletter.

 

The second problem (which is ironically related to the first problem) is that school employees tend to have investments with very high fees.  These fees go right into the pockets of those in the financial industry.  If you're not investing through Fidelity or Vanguard, there's a very good chance that you are paying a number of fees that are excessive.  Some of these fees will show up directly on your account statement, but the vast majority of them won't because they are built directly into the structure of the funds that you are investing in.  That's what makes this so problematic.

 

 

And while one may think that the effect of these fees over the long term is negligible, the opposite is actually true.  These fees compound over time in a massive way.  Consider the hypothetical scenarios below.

 

The first table shows the effect on a younger employee who's just getting started investing money from each paycheck (26 paychecks per year).  The second table shows an older (seasoned?) employee who has been investing for some time and has 10 years remaining until retirement.

 

The right-hand columns (in red) show the loss to the employee, over time, due to paying fees that are either .5% or 1% too high.  

 

Someone who has just started their career:

30 years until retirement		Reduction in portfolio
Starting portfolio	Investment per paycheck	due to fees that are .5% higher	due to fees that are 1% higher
$0	$200	-$89,000	-$169,000
$0	$300	-$133,000	-$250,000
$0	$400	-$177,000	-$337,000

 

Someone who is getting close to retirement:

10 years until retirement		Reduction in portfolio
Starting portfolio	Investment per paycheck	due to fees that are .5% higher	due to fees that are 1% higher
$200,000	$200	-$30,000	-$57,000
$300,000	$300	-$49,000	-$86,000
$400,000	$400	-$61,000	-$114,000

*the above figures are hypothetical and assume that the stock market compounds at its historical rate of 10% **historical results don't guarantee future results

 

If you compare the two red columns in one table, the right-hand column is always higher than the left-hand column because the fees are higher.  Then, as you move down from one row to the next, the red figures also get bigger because the amount invested is higher, and the fees are based on the size of the investment.  This is a feature of financial fees, not a bug!

 

The results are pretty stark.  The newer employee who started out with no savings and invested $300 per paycheck for 30 years, and was paying fees that were 1% too high, lost out on a quarter of a million dollars!  That is insane.

 

The seasoned employee in the second table who already had a $300k portfolio and was investing $300 per paycheck, missed out on almost $90k over the 10 years before they retired.  That's a lot of dream vacations!

 

And of course, both hypothetical employees will continue to be invested after they retire so these costs will continue to mount over time.

 

So, if you tend to lay awake at night worried about how the folks who work on Wall St. are going to afford to feed their children, rest assured - they are going to be just fine!