Investing Pioneer Showed Us How Fees Rob Our Retirement Funds

Photo by Billion Photos /

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
12 Ways to Never Pay Full Price for Anything

Stop paying retail prices. Here are plenty of ways around that.

7 Common Online Shopping Mistakes That Will Cost You

How many of these costly online shopping missteps are you making without realizing it?

7 Things I Never Buy at Costco

A bulk buy isn’t always the best buy. Here’s where I shop for these items instead of a warehouse club.

Half of All Retirees Say They Fear This

Chances are good that you share this fear. Here’s a way to overcome it.

7 Things That Prove Cheaper Isn’t Always Better

These purchases can end up costing you more if you try to go the cheap route.

View this page without ads

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

Get Started

Most Popular
9 Mistakes Everyone Makes When Shopping on Amazon

Are you losing money due to any of these missteps?

7 Changes Coming to Social Security and Medicare in 2021

Recently, both Social Security and Medicare made some major announcements about benefits for 2021.

Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?

The rules are complicated when it comes to eligibility for survivors benefits.

Can a Twice-Divorced Woman Claim Social Security Survivors Benefits?

Understanding survivors benefits rules is the key to getting the most from your benefit.

These Are the 10 Worst Cars for Depreciation

Two types of vehicles are especially likely to see steep plunges in value.

9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

10 Things I Always Buy at Trader Joe’s

From snacks to sweets to side dishes, stock your cart with these time-tested favorites on your next TJ’s run.

Longer Trips to This Type of Store May Raise Coronavirus Risk

An airborne-disease expert recommends exiting these stores within 30 minutes.

5 Ways Social Security Will Change in 2021

These adjustments will affect both workers and retirees in the new year.

8 Things You Should Buy at Restaurant Supply Stores

You don’t have to be a chef or a restaurant owner to shop here.

3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

19 High-Paying Jobs You Can Get With a 2-Year Degree

There are easy high-paying majors available in the U.S. — and no bachelor’s degree is required. We’re here to help you find easy degrees that pay well.

Stop Buying These 19 Things Online

The internet has changed how we shop. But for some things, you’re still better off buying the old-fashioned way.

Cut These 11 Expenses Now If You Hope to Retire Early

Like the idea of financial independence? Part of the FIRE equation is cutting costs.

27 Things You Should Never Pay For — and How to Get Them for Free

When you know the tricks, you can save big on all kinds of useful things that others pay for.

4 Tax Credits That Will Be More Generous in 2021

If you are eligible for these tax breaks, they will slash your federal income tax bill — dollar for dollar.

7 Tips for Building an Emergency Food Supply

A pandemic or natural disaster could leave you reliant on your existing emergency food supply. Is your pantry well-prepared for emergencies? Knowing what to stock up on for emergencies can be a difficult task and we’re here to help.

15 Things You Can Get for Free in December

December is here, which means it’s your last chance to take advantage of fabulous freebies in 2020.

View More Articles

View this page without ads

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

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.