Thinking about retirement is boring.
We’re in the now generation. We like instant gratification. We want to hustle and make fat stacks of cash now!
Retirement planning & saving money is pretty much the opposite.
Building wealth is only hard because it usually requires delayed gratification, which we hate. (tweet this!)
Even if you’re trying to start a business and explode income growth, that takes delayed gratification too.
That said, what you’re about to read is an extremely important concept.
Internalize this point immediately and do something about it (aka take action in real life, not just Facebook share “cool post bro”)…if you commit to the concepts below, you will have more cash down the road.
That’s what you want right? Fat stacks of cash?
Think in longer terms. I know you don’t want to, but do it anyways. Unless you tragically die before your time (I witnessed this happen yesterday I’m sad to say)…then you will live to see the fruits of your efforts.
And how are your efforts going?
Are you going to thank yourself 20 years from now? Or wish you had saved dollars smarter?
Too lazy to spend 7 minutes reading this? Here’s a 3 min video summary, as well as 3 bonus videos on how to diversify! Grab it here
Why fees matter
Continuing with the 3rd grade level theme…let’s nail down this point quickly and easily.
Fees are what you should be focused on when investing. Not returns. Fees.
- You can’t control your returns
- You can control your fees.
- FEES EAT RETURNS.
You can’t control your returns
- You love coins and hot princesses
- You hate Bowser and koopas
- Your goal is to navigate from land to land in order to reach the Princess, and collect as many coins as possible along the way.
(side note: it’s funny how we don’t actually care about the princess at all when we play the game. Coins either really. What do we care about? Getting to the Bowser fight of course. Why can’t we treat our life’s work this way? Think about it.)
As Mario, you have the power to choose your path sometimes.
Your goal is to stomp Bowser, collect coins and rescue princesses, what path do you take?
- The land with the most coins?
- The land with the least koopas?
You, Mario, can’t control how many coins you receive and hold onto.
- Some coins are hidden.
- Some are out of your reach.
- Some you’ll lose when koopas eat you, like your bud Sonic.
You, TSD reader, can’t control the stock market, the bond market, or any other market. You can choose different investments, but you can’t predict the future.
You decide which paths to take, which investments to make, but you can’t precisely control how many coins are returned to you from outside forces.
You can control your fees
So you reach warp zone pipes, which land do you chose? The easiest of course.
The levels with the least amount of koopas, bob-ombs, boos, and holes in the ground.
Why? The overall goal.
You’re more likely to reach the princess and hold onto coins when you choose the easiest levels. The levels with the least dangerous enemies and obstacles.
However, there are dangerous baddies hidden in seemingly easier levels too. You can’t see these enemies up front, perhaps until you’re already dead.
You, TSD reader, have the tools and resources on THIS VERY PAGE to discover the baddies.
You can roughly know your fees in your:
- savings plans
- brokerage accounts
- mutual funds
- Index funds
- 401Ks, retirement accounts, etc.
You have the game genie to detect those evil fees, before they eat all your coin returns. (except for evil hidden mutual fund fees. see below).
Fees eat returns
Without any koopas or Bowser, Mario would just sail through life w/ millions of coins and hot princesses. But life’s not that easy; there is always a cost.
But what cost?
Some Super Mario levels are harder than others. More obstacles and baddies.
And the more baddies, the less coins Mario will hold onto, and the less lives he has. Period.
- more baddies, less coin
- less baddies, more coin
- more fees, less returns
- less fees, more returns
Fees eat returns for breakfast, and fewer returns is always a bad thing.
Take a quick look at this infographic, stolen from https://www.americanprogress.org/.
Fees matter a ton.
Fees are what you should be focusing on when you choose investments.
Small percentage change = fat stacks of cash
That’s what you wanted right? More money?
You want it now, but chances are you’re not going to have it tomorrow or this week.
Over time, the difference between 0.17% and 1.17% is the difference between
- Comfortably retiring at 60 and living the rest of your life without stressing over going broke at 91.
- Working until 70 and wondering when you’ll run out of money when you’re old, gray, and need that money to actually live.
A 1% change in fees for the average American equates to thousands and thousands of dollars (people in the infographic above only made $30k a year, saved 10%, and a 1.05% difference in fees gave Laura an extra $96,096.)
That’s a 1% change. What’s the effect of 3% change? Astronomical.
You, right this very second, are paying hidden fees.
This is not a conspiracy…I am not a crazy hippy investor screaming about how “the man” is trying to screw us.
Mutual funds have hidden fees, and 95% of you who hold any securities have some of your money in mutual funds. Actively-managed mutual funds.
If you google your mutual fund name, you’ll likely end up on Morningstar, or your brokerage website. The fees they’ll advertise are called….expense ratio.
Your expense ratio is widely advertised. It includes:
- Marketing costs
- Distribution costs
- Management fees
Most investors think this is the only fee they’re paying, and it’s usually quite small, on average around 0.90%.
(remember index funds from the last post? They still average way less. VTSMX stock index is 0.17%.)
But alas Mario, there are always more baddies than meets the eye.
- Expense ratio – average 0.90%
- Transaction costs – average 1.44%
- Tax costs – average 1.20%
- Cash drag – average 0.83%
- Soft dollar costs – who the hell knows
- Advisory fees – only if you’re paying a fee-based financial advisor to invest your money.
All in all, the average cost for taxable accounts is 4.17%.
For non-taxable accounts, it’s only 3.17%!
Here is further reading, if you desire to move past the 3rd-grade level:
How to find out exactly how much you’re paying in fees
The SEC does not require mutual funds to make their trading costs (the costs associated with buying and selling securities) known to investors.
You can read your fund prospectus cover to cover (have fun with that), and you won’t find these hidden fees. Funds aren’t required to tell you, so why would they?
Let’s look at the #3 rated large-growth fund: T. Rowe Price Blue Chip Growth Fund.
Advertised cost: 0.71%
Look at all those “NONE”s! Sweet!
Never mind that the 0.71% is still to high to pay for an asset that has a 96% chance to perform WORSE than their cheaper index counterparts.
You get that?
- Generic mutual fund – does NOT beat market, and costs you more
- Generic index fund – IS the market, and costs you less
And here are transaction costs mentioned (remember they cost you 1.44% of your portfolio every year):
And on page 41:
The bottom line takeaway
- Fees matter, and make a difference in the actual money in your pocket one day.
- Do not ignore fees.
- For the long-term, make fees a significant factor when you choose investments.
That is all.
The bottom line solution
You can start right this second.
- Avoid mutual funds like the plague.
- If the publicized fees are over 0.25%, it’s probably a mutual fund.
- If the publicized fees are over 1%, stay away
- Choose the index
For the passive investor (that’d be you), index funds are the way to go. You can set up your 401k’s and IRA’s to have a highly diverse set of index funds.
- stock index funds
- bond index funds
- international index funds
- REIT index funds
- and more.
Use this handy tool to plug-in different funds/investments
It’s awesome. Play around with it. It will SHOW you the effect of fees (and lots of other stuff)
Next: what’s the secret magic portfolio to never lose money and still make money?
Ok Mario. You probably want to know exactly what levels to choose. Which paths to take.
Tune in next week for part 4 of this retirement series: The perfect portfolio