Investing: Fees

A post about a high cost index fund appeared in my twitter feed, and I gasped:


Do you know the effect of fees on your money?  It’s an important variable in your plan, and one that you control!

Felix and Freya

Felix and Freya are twins.  Since I just made them up, I’ll make them 30 years old.  They are perfectly normal and identical in every part of their lives except one:  Fees.  Felix pays them, and Freya doesn’t.

They start investing today, each saving $500 per month towards retirement.  They sink 100% of their money into S&P 500 index funds.  (And if you think you can beat an S&P 500 index fund with no fees, you should meet someone smarter than you.)

  • Freya has no fees and gets exactly the market return.
  • Felix incurs the 2.33% fee from the fund @TomGartner shared.

They’re retiring in 40 years.

Free of Fees: Freya’s Future

A graph of Value over Time for a retirement plan with no fees over forty years
Figure 1: Freya’s Retirement Plan with No Fees

Using the model based on historical real stock returns, Freya’s path over the next 40 years is likely to be similar to the graph depicted in Figure 1.  She can expect to have a little more than $1.1 million to draw from at Age 70, though her nest egg is as small as $450 thousand in the worst case scenarios and as large as nearly $3 million in the best case scenarios.

Full of Fees: Felix’s Future

A graph of Value over Time for a retirement plan with substantial fees over forty years.
Figure 2: Felix’s Retirement Plan with 2.33% in Expenses Each Year

Using the same model, but withdrawing 2.33% in fees each year, Felix should expect a dramatic drop in retirement savings.  He can expect around $630 thousand in his nest egg at Age 70.  His best case scenario of $1.4 million pales in comparison to Freya; and his worst case scenario of $290 thousand may lead to serious hardship in his later years.


Felix and Freya do the same work over their lifetimes and contribute the same amount to the retirement goals, but they will enjoy vastly different outcomes.  Here’s the difference in their account balances each year.  Take careful note that in the short term Felix’s additional costs are hardly a blip on the radar.  But over the course of an investing life time, Freya nearly doubles his money.  There is no other variable to control for in this example:  It’s all about the fees.

A graph of the cumulative cost of fees over 40 years of investing
Figure 3: How much Felix will spend on fees.

What Can You Do About Fees?

First, go look at the expense ratios for any fund you’re invested in.  Can you get the same exposure with a lower cost fund?

Second, it might be impossible or prohibitive to get out of a current investment, but you can improve your outlook by putting all future investment funds into lower cost alternatives.  You almost can’t go wrong investing in passive funds at Vanguard: I recommend the three fund portfolio which can be had for less than a tenth of one percent in fees.  If you’re restricted, perhaps by poor 401(k) options, you should still look at the fees of the available investments to improve your long term potential.

Third, there are good reasons to pay a financial advisor – for example if you know that you need help with the behavioral side of investing.  However, you don’t need to pay fees to stick to a simple plan: Know the value of a high savings rate and invest in the whole stock market at the lowest cost possible.

The magic of compounding works for you with returns on investment and against you in exactly the same way with costs. To a large extent, you can’t control the returns you receive, but you can and should control your costs. With apologies, I have to end this post with: It’s your choice, FREEdom or FEE(dumb)*.


*I have some regrets in life, but I’ll go to my grave defending horrible word play and hacky puns.

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