Did you know that over 25 years, costs of only 2% of your savings could be costing you up to 40% on your eventual retirement fund?
If you are not careful, the fees you pay simply to invest your money will be eating away at your retirement savings and will significantly reduce what you have left.
However, you can take action and increase your average retirement savings with a few simple decisions. Read on to find out how.
Why Do Costs Matter So Much?
You might not think of investment costs and fees as a bid deal but they can add up fast. Not only do you have to pay the fee but you lose out on the compound interest you would be earning on that money.
You lose all growth on that money for many years. Here is an example. Let’s assume you invest $100,000 and earn a return of 6% per year for 25 years. With no costs, you will end up with $430,000. With costs totaling 2%, you only end up with $260,000.
That 2% can wipe away nearly 40% of your final retirement savings. All of a sudden 2% isn’t so small, is it?
Higher Costs Do Not Equal Higher Performance
It is a common misconception that funds with a higher price are better managed. In reality, it is the exact opposite. Research on mutual funds has shown that low-cost funds outperform high-cost funds.
This is primarily because high-cost funds have a very hard time adding enough value to overcome the additional expenses. Both the cost and lost compound interest earned.
How to Control Your Costs
If you do not know what fees and costs you are paying on your retirement savings and investments, chances are you are paying more than you think. Every investment has costs.
The first step you need to take is to get a full understanding of all the costs you are paying.
Sales Commissions
Most investors are probably aware of the sales commission fees they pay. Anytime you invest through a commissioned broker or advisor you will pay a sale charge.
Mutual Fund Expense Ratios
Whilst you won’t pay sales charges on large 401(k) plans you will find expense ratios. These are fees the fund charges to cover their operating costs.
Generally, actively managed funds will charge just under 1%. Passively managed stock index funds on the other hand may only charge around 0.14%. This is because index funds simply track the index rather than trying to beat it.
Trading Costs
Trading costs are fees the fund pays when it buys and sells securities. These costs are hidden because they are not required to be disclosed.
Administrative Fees
Admin fees are simply fees charged for having an account with your mutual fund, brokerage, or 401(k). Many places will waive the fee if you ask them and if you have enough money invested with them.
Advisory Fees
This fee is usually around 1% and is charged by an adviser to help manage your investment.
You can essentially have someone manage your investment at a much lower fee using balanced funds. many 401(k) providers, such as Invest4Life, will offer personalized investment and retirement savings plan advice for free.
Maximize Your Retirement Savings
When it comes to maximizing your retirement savings, do yourself a favor and get on top of the costs you are paying. These small and simple changes can change your life.
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