[pictured above: interesting rock formations at Natural Bridge State Park]
The Spend | Mutual Fund Expenses
Once you're saving money for retirement, you have to choose how you'll invest your savings. You can choose from tens of thousands of securities including stocks, bonds, mutual funds, ETFs, and many, many others.
Choose wisely - otherwise, you'll lose a good chunk of your nest egg to investment fees.
Since it's hard to say where you are with retirement, let's make a couple assumptions to illustrate the point. Let's say you have $10,000 already saved for retirement and that you're adding $5,000 per year using mutual funds - the most common investment vehicle for retirement savers.
The average cost for a diversified portfolio is around 1.05%. Alternatively, you can have a similar portfolio using low-cost index funds at a fraction of the price - 0.19%. On $10,000, that's a total cost of $105 versus $19, respectively.
The Opportunity Cost | Retirement
When you compare costs, you're looking at a grand total of $86 difference between average cost mutual funds versus index mutual funds. Not much. At least, not yet.
The Long-term Opportunity Cost | 30-year Value
Since ten grand isn't going to lead you to the Promised Land of Retirement, let's further assume that you add $5,000 per year to your investment portfolio and that you repeat this for 30 years.
That $86 difference starts to add up. In fact, as your portfolio grows and compounds, so too does the impact of investment expenses.
In our hypothetical, the difference in portfolio values over 30 years is $137,888.82. In big boy letters, that's ONE HUNDRED THIRTY-SEVEN THOUSAND EIGHT HUNDRED EIGHTY-EIGHT DOLLARS AND EIGHTY-TWO CENTS.
When you look at the final values of the comparison portfolios, one is worth $774,775.94 and the other is worth $912,664.76. Which would you rather have?
No Guarantees, Except Fees
In the investment business, there are no guarantees, except fees. Not one financial advisor can ever guarantee a market rate of return. What all financial advisors can guarantee, however, are fees.
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