Businesses love to nickel and dime us with little fees.
While shopping, a great price might snag your eye. It draws you in. You’ve found the deal of deals.
But then there’s the maintenance fee. And the shipping and handling fee. And the warranty fee. And the fee for the state law that you’ve never heard of … but the government has to get its cut too.
So by the time everything is calculated, that great deal is a lot less great. Your money isn’t stretching as far as you thought it would.
As savvy shoppers who love a bargain, we are usually pretty good about walking away from a so-called bargain when all the fees are tallied in front of us.
But what about the hidden fees that are eating quietly away at your retirement?
While 2% here and 3% there might not sound so bad, it can make the difference between your retirement savings running out in 20 years or 30 years…
Don’t Overlook the 1%
It’s just 1%.
Plenty of investors have told themselves time and again that it’s just a small percentage. It won’t have that big of an impact on their savings.
But that 1% fee will have a double blow on your retirement nest egg.
First, fees are based on a percentage of your assets. As your nest egg grows, so does the amount that you’re paying out.
Sure, $10,000 invested equates to just a $100 fee.
But what about when your retirement nest egg has grown to $500,000? Now you’re paying out $5,000.
That’s $5,000 I’d rather put to work for me in the market.
Second, a fee also represents an opportunity cost. Every dollar that you’re giving away in fees is a dollar that you’re not investing in your retirement. It’s a dollar you’re not growing into another dollar.
Let’s tackle a quick example.
Go back to the beginning of your career. You’re 25 years old, and you’ve wisely been socking away money since you graduated from college. You’ve got a retirement account worth $10,000.
Now you’re socking away $10,000 a year in that retirement account, and it’s earning an average of 7% per year. You’re planning to retire in 40 years at 65.
That 1% fee is going to cost you more than $519,200 in returns.
That’s a cumulative cost of 24.3% in fees!
It’s time to pay attention to those fees.
A Critical Alternative for Retirement
Actively managed investment vehicles such as mutual funds typically have significantly higher fees, with most averaging above 1%. Of course, they have come down over the years due to increased competition from passive investments.
If you’re invested in a mutual fund, take a moment to check them on Morningstar. Are fees eating up your returns?
That marketing-beating return might not look so impressive once the fees come out.
Another option is to invest in passively managed investments such as exchange-traded funds (ETFs). The SPDR S&P 500 ETF (NYSE: SPY), which simply follows the broad market S&P 500 Index, has a fee of only 0.10%.
The iShares North American Tech ETF (NYSE: IGM) is a popular tech ETF that has a fee of just 0.48%.
Using the same example as above, if you’d trimmed your fee from 1% to just 0.5% per year, you’d have paid out $274,237 in fees.
A cumulative cost of just 12.8%.
That’s definitely an improvement.
The Infinite Nest Egg
Effectively growing your nest egg for retirement is more than just picking the right investments. It’s also watching to make sure that you’re not throwing your money away on unnecessary fees.
That’s why Ted Bauman created his “Infinite Nest Egg.”
This system to grow your retirement savings focuses on outperforming the market while at the same time protecting you from potential market crashes.
And through the use of ETFs, you’ll be spending a lot less on fees.
Whether you’ve got 20 years until retirement or you’re already retired, it’s not too late to take steps to keep fees from devouring your nest egg.
Sr. Managing Editor, Sovereign Investor Daily
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