Investing Pioneer Showed Us How Fees Rob Our Retirement Funds

Investing Pioneer Showed Us How Fees Rob Our Retirement Funds
Photo by Billion Photos / Shutterstock.com

How could a lifetime of investing lead to Wall Street keeping 80 percent of the returns, while the consumer/investor keeps only 20 percent? Quite easily, as investing and fee-fighting pioneer John Bogle taught us.

I explain it in chapter 5 of my book “Gotcha Capitalism.” Here’s the relevant excerpt — I present it again today to honor Bogle, a true consumer hero:

Sneaky fees are flat-out killing your retirement plans. They may very well force you to work an extra four or five years before retiring. They are stealing roughly 1 out of every 3 dollars you expect to have in your old age. The younger you start, the worse the sneaky-fee effect is: A 20-year-old who invests today can find Wall Street has stolen 80 percent of his or her returns when age 85 rolls around!

Perhaps you are wondering how I could claim that a tiny 2 percent fee could end up costing you years off your retirement.

But I’m not the one making that claim. The U.S. Labor Department is. And so is Congress’ investigating arm, the Government Accountability Office.

In a study conducted during 2006, Congress found that a 1 percent increase in fees works out to a 17 percent decrease in retirement funds after 20 years. Here’s the example it used: $20,000 parked in a 401(k) earning a reasonable return for 20 years would be worth $70,500 if mutual-fund fees were 0.5 percent. Increase those fees to 1.5 percent, and the kitty sinks to $58,400.

As time goes by, the impact gets much worse. Using similar numbers, the Labor Department found that after 35 years, the same 1-percentage-point difference in fees can shrink a $227,000 kitty all the way down to $163,000 — nearly a 30 percent punishment. A difference like that can genuinely impact your quality of life at retirement — or simply force you to keep working. If you save a respectable $10,000 per year into your retirement, you’d have to work an extra five years to make up for the loss caused by that 1 percent fee difference.

Who gets hit the worst by these fees? Those who follow Wall Street’s advice and begin investing as soon as possible. Let’s go back to that precocious 20-year-old we’ve already mentioned, who began investing even before she could drink.

Taken cumulatively, a 20-year-old who makes a one-time investment and then lives to the ripe old age of 85 will find that fully 80 percent of the money generated by that investment goes to Wall Street, with only 20 percent left to our judicious investor. John Bogle, founder of Vanguard, tells this tale by using simple numbers: $1,000, invested at age 20, and never touched through age 85, assuming an 8 percent return each year, nets the investor $160,682 after 65 years. But subtracting a 2.5 percent cost of investing each year, the return shrinks to $34,250, with Wall Street taking $126,432 — that’s 79 percent to Wall Street, 21 percent to the investor.

Bogle calls this, fittingly, “The Tyranny of Compounding Costs.”

You can see a year-by-year breakdown of this on PBS’ Frontline website.

More from Bob Sullivan:

What’s your take on Bogle’s legacy? Share it below or on the Money Talks News Facebook page.

Retire on your own terms with help from this course

The Only Retirement Guide You'll Ever Need gives you the knowledge you need to retire on your own terms. Sure, you can pay a financial adviser, but this online course gives you total control to create a customized retirement plan around the things that matter to you -- without the fees you can expect from financial firms and advisers.

You'll get expert, personalized advice. You'll have access to the latest tools. You'll have ongoing support. And when you've completed the course, you'll be ready to approach your retirement with confidence and with peace of mind.

It's time to plan the best years of your life. Let's get started.

Read Next

5 Health Care Costs That Medicare Does Not Cover
5 Health Care Costs That Medicare Does Not Cover

Don’t let these common medical expenses catch you off guard in retirement.

10 Things That Can Ding Your Social Security Benefit
10 Things That Can Ding Your Social Security Benefit

Here are 10 things that could mean less money in your pocket during retirement.

15 Ways to Never Pay Full Price for Anything
15 Ways to Never Pay Full Price for Anything

A good deal can get you 50 percent off — and more. Here are 15 tips to get you there.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Comments

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed.