How to avoid hidden investment fees
When you start investing, one thing you’ll want to learn about is fees — or how much you’re paying out of your returns to grow your money. Even if you’re already on top of your investing costs, you might be surprised (and motivated) to see how much money you can keep by lowering these charges.
First, there are several different kinds of fees to be aware of — and it can be confusing to identify them in your account.The main fee to look for is an expense ratio, or the actual cost for an investment fund to operate a fund (such as an index fund or a mutual fund.) Then also look for a management fee — this is what a financial services company may charge for its services.
The average stock and bond mutual fund expense ratio is about 0.79%, according to an Investment Company Institute report. And that’s the average asset-weighted cost that investors pay; it doesn’t include other charges like fund management fees, which can easily bump your all-in costs close to 1% (nor does it include an advisor’s fee, which can also add to your expenses).
The place where fees can make the most tangible difference is in your retirement account, since you’re saving steadily for decades. According to PBS report from earlier this year, the fees on 401(k) accounts, can add up to more than $109,000 over a lifetime.
The following graph assumes monthly contributions of $1,000 over a 40-year period, and shows returns net-of-fees, on a total return of 8%:
It doesn’t sound like a lot but you can see that keeping the difference in fees – just 69 basis points – a year adds up over the course of 30 or 40 years. By lowering your costs that much, you’d save about $180,000 over 30 years in this scenario, and about $567,000 over 40 years. Whatever your goals are, you’re paying for the best possible outcome. So as you get started with investing, or give your investments a tune up, weigh the costs in the present carefully. If you do so wisely, you can have more of what you want in years to come.
Jon Stein is the founder and CEO of Betterment, a leading online investing company that delivers smart, personalized financial advice paired with low fees and a superb customer experience. Got money questions? Hit us up at firstname.lastname@example.org.