Are High Fees Eating Into Your 401K and IRA?
I have an important question for you: what’s the ER on your 401K funds?
If you don’t know the answer to this question, chances are you’re paying too much. We’re living in the days of index funds and ETF’s. So if you’re paying anything more than 0.5% fees on a fund, it’s considered high. Anything more than 1% is considered extremely high; and anything more than 1.5% is high-way robbery.
To get a sense of the profound difference that fees can have, here’s a story of three friends.
At age 35, David, Tyler, and Joe each invest $100,000 that they have saved up through the years. But they all go with different funds.
All three funds happen to have equal performance, at 8% annually. And so at age 65, they all meet up to compare each others’ results. Upon going over each of their portfolios, they realize that the only difference between their funds were the fees they were paying.
Here’s what David, Tyler, and Joe end up with, respectively:
So what are you paying in your employer-sponsored 401K or self-funded IRA?
As you can see, a percentage point here and there might not seem like that big of a deal, but you’re looking at potentially hundreds of thousands of dollars over your working career. If you don’t know how much you’re paying, you need to log on to your plan and see what types of funds you’re money is in. Employer-sponsored plans typically have notoriously high fees. Especially if you’re working at a smaller company. Don’t delay! Do this today! And if you have a working spouse, it behooves you to have them check theirs as well! At the end of the day, you don’t want to retire by yourself right?
So how much in fees do the Kims pay?
My wife and I have most of our money in passive index funds and ETF’s that have fees that are nowhere close to even 1%. The bulk of of them are below 0.1%! And the biggest percentage of our stock portfolio is in Vanguard’s Total Stock Market Index Fund, Admiral Shares (VTSAX), and it has a rock-bottom expense ratio of 0.04%!
We max out every tax-advantaged space that is available to us: his and her IRA’s and his and her 401K’s. Any monthly cash-flow that is unspent gets thrown into our taxable accounts. The majority of our tax-sheltered accounts are in Vanguard index funds, and the majority of our taxable accounts are in Vanguard and Schwab ETF’s. All of them have super low expense ratios (fees) and low turn-over (the lower the better, due to taxes on capital gains distributions).
Do you know what you’re paying in fees in your 401K, IRA, or in your taxable account? Are you surprised to see that fees could take such a big bite out of your nest egg? Why do you think that the vast majority of people are unaware of such a crucial piece of information where they’re losing out on tens, if not hundreds, of thousands of dollars?