Investing Fees: A $400,000 Dilemma That Can Rob Your Nest Egg Blind

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Investment fees can amount to enough money over a working lifetime to jeopardize your ability to retire comfortably.

We talk about this often at Money Talks News — see “Of All the Fees You Pay, This One Is the Worst by Far” for starters. But a recent study by Personal Capital underscores the danger.

The study’s main takeaway? The total amount of money that investors lose to fees can amount to $400,000 over a lifetime. As the study reads:

“Over the course of a full lifetime, hidden fees can add up to hundreds of thousands of dollars … This study clearly illustrates a wide range of fees charged to clients, and that identifying fees is notoriously difficult. Consumers need to be diligent about what they are being charged …”

For the study, Personal Capital examined the long-term cost of certain investment fees charged by 10 national investment advisory firms in Personal Capital’s database. These firms range from Wall Street powerhouses such as UBS and Merrill Lynch to low-cost leaders like Vanguard and Charles Schwab, with Personal Capital itself also included.

Personal Capital is an online investment advisory firm, but it also offers free wealth-tracking tools. These are like an investor-friendly equivalent of a budgeting software program.

For the study, Personal Capital focused on two types of investment expenses:

  • Advisory fees, also known as management fees: This cost is usually a percentage of the total amount of your money being managed by a financial adviser — that is, a human financial adviser. (Personal Capital did not look at robo-adviser fees.) The study notes that advisory fees can vary widely. Among the 10 firms in the study, advisory fees varied from as much as 3 percent at Ameriprise to 0.28 percent at Charles Schwab.
  • Expense ratios, also known as fund-related fees: This cost is associated specifically with mutual funds. We detail it in “Money Lingo You Need to Know for Financial Survival.” The average expense ratio varied from 0.5 percent at Ameriprise to 0.08 percent at both Personal Capital and Vanguard. To learn more about Vanguard’s longtime cost-cutting quest, check out “The Key Lesson Vanguard Can Teach You About Getting Rich.”

The study found that investment fees can cost you more than $400,000 over a lifetime. That figure stemmed from a hypothetical investor’s situation that involved the investor:

  • Starting to contribute $18,000 to a 401(k) at age 21 and increasing this contribution by 2 percent every year thereafter.
  • Increasing yearly contributions by the Internal Revenue Service’s “catch-up” amount at age 50. That amount is $6,000 for tax years 2017 and 2018.
  • Stopping contributions at age 65.
  • Earning annual returns of 6 percent.
  • Paying fees as a percent of assets, with fees remaining level.

As the report explains this hypothetical situation:

“While the difference between a 1.0% annual fee and a 3.0% annual fee may sound trivial, the impact over time can be staggering. For example, the total additional amount lost to fees in this example is more than $400,000 …. Even a one percent difference (i.e., 2.0% vs. 1.0%) costs the investor an extra $240,000 in fees over the full time horizon.”

To learn more about how much of your retirement savings you might be losing to investment fees, check out:

To learn more about investing and growing your wealth, check out Money Talks News’ “Grow” page.

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