Before you get your hackles up, I’m not recommending any scam investment or cryptocurrencies. I’m going to outline a method for saving more — with one decision.
I don’t know which stock is going to be the next Amazon, Google or Facebook. And I don’t have a clue on which mutual fund will have the best-performing portfolio.
What I do know is that cost matters when investing, which was the mantra of the late Jack Bogle, the founder of the Vanguard Group.
I’ve written about this lesson of simple math countless times, but it works only if you apply it consistently: Lower the cost of investing and you’ll have more money in retirement.
You are charged fees every time you buy a stock. Mutual funds charge annual expenses for management. You may even pay commissions on funds and securities. Keep those costs down and your kitty will grow faster.
“Sneaky fees are flat-out killing your retirement plans,” writes my friend financial author Bob Sullivan, author of Gotcha Capitalism, citing Bogle.
“They may very well force you to work an extra four or five years before retiring. They are stealing roughly one out of every three dollars you expect to have in your old age. The younger you start, the worse the sneaky-fee effect is: A twenty-year-old who invests today can find Wall Street has stolen 80 percent of his or her return when age eighty-five rolls around!”
The math doesn’t lie. A 1% increase in fees works out to a 17% decline in retirement funds after 20 years, a government study found. That’s based on $20,000 in a 401(k) earning a 8% return. That kitty would be worth $70,500 fund fees were 0.5 percent. Bump up those fees to 1.5, and the pot sinks to $58,400.
After 35 years, the same one-percentage point difference in fees can drain a $227,000 account to $163,000—almost a 30% hit. “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,” notes Sullivan.
When it comes to choosing mutual funds, go cheap and diversify. You can easily find funds that charge less than 0.50% in annual expenses. They are usually index funds that buy broad swathes of global stock, bond and real estate markets.
These bargain-basement funds should be staples in your 401(k) and IRAs. If there’s not there, ask for them. You can find a list of them here.