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An Easy Way to a More Secure Retirement

Why focusing on investment returns isn't the answer

By Walter Updegrave

(This article originally appeared on

When it comes to investing, most people focus on returns (or lack of them, given today’s wobbly market). But if you really want to enhance your long-term financial security — especially in light of projections for subpar investment gains in the years ahead — you’d do better looking for ways to pay less in fees.

Do you know how much you pay in total investing fees each year? Unless you’re diligent about keeping track, the answer may surprise you. In a recent study, Personal Capital looked at the combined advisory and investment fees charged by 11 large investment firms and found that they averaged from just over 1 percent to almost 2 percent a year.

How Fees Slice Investment Returns

That may not sound like much, but effectively shaving one to two percentage points a year off investment returns can dramatically diminish the wealth you accumulate over the course of your career. Indeed, even if you’re in the later stages of your career, bloated investing fees can substantially reduce the size of the nest egg you take into retirement.

Here’s an example. Let’s say you’re 50 years old, earn $100,000 a year, receive 2 percent annual raises and you have $500,000 saved for retirement. And let’s further assume that you save 15 percent of salary each year and that your investments earn 6 percent annually before expenses. If your investing costs run 1.5 percent each year, at age 65 you would have a nest egg of just over $1.3 million. That’s an impressive sum, for sure. But if you can cut the investing fees you pay  to 0.5 percent a year, you would enter retirement with $1.5 million, or roughly $200,000 more. And that’s without having to put in an extra cent from your own pocket.

But the effect of lower fees doesn’t stop at retirement.

The Gift That Keeps On Giving

Cutting investment costs benefits you throughout retirement as well, by allowing you to draw more from your nest egg without increasing the risk that you’ll run out of money before you run out of time.

Let’s say you have a $1 million retirement portfolio invested in a 50-50 mix of stocks and bonds for which you pay fees totaling 1.5 percent a year. If you want to have an 80 percent or so chance that your savings will last at least 30 years, you would have to limit yourself to an initial withdrawal of 3 percent, or $30,000 a year, according to a withdrawal calculator created by David Blanchett, head of retirement research at Morningstar. You would subsequently increase that $30,000 figure by the inflation rate to maintain purchasing power.

Cutting expenses to 0.5 percent a year, however, would allow to maintain that same 80 percent success rate while boosting your initial withdrawal to roughly 3.5 percent, or $35,000, effectively generating an extra $5,000 a year of sustainable inflation-adjusted income.

So how can you put the advantages of low investing costs to work for you?

How to Lower Your Investing Costs

Well, in the case of actual investments, it’s pretty simple: stick as much as possible to funds with the lowest expense ratios.

You can search for such funds using Morningstar’s Fund Screener tool or you can just go with broadly diversified index funds and ETFs, many of which have fees of less than 0.20 percent a year.

There’s no guarantee that every dollar saved in fees translates to an extra dollar of return, but a 2015 study of fees by Morningstar found that funds with lower expenses tend to be better performers.


If you’re working with an adviser — many of whom charge 1 to 2 percent a year on top of investment fees — you’ll also want to be sure you’re not overpaying there.

Start by making sure you know exactly what services you’re getting for your money. Is the adviser mostly managing your investment portfolio? Or is he or she also providing financial planning services, such as help with budgeting, insurance issues and developing and monitoring a plan for turning savings into income? You can then check out other advisers to see what they’re charging for similar services.

Based on what you find, you may decide to go with someone less expensive, or use your research to negotiate a better deal with your current adviser.

Advisers Who Charge Less

There are also other options.

If you’re looking mostly for someone to invest your savings, you can check out the investment advisory services offered by many large investment firms that create and manage portfolios of mutual funds.

If you’re okay interacting mostly or exclusively online, a “robo-adviser” that employs algorithms to create and monitor portfolios, typically for 0.5 percent a year or less, may be a possibility.

Or you might consider Vanguard’s recently launched Personal Advisor Services, which combines online technology that can create portfolios with access to a human adviser for a fee of 0.30 percent a year (not including the cost of the underlying funds).

If you feel you require more assistance than an online program provides — say, help in developing a retirement income plan or deciding whether to convert a traditional IRA to a Roth — you can always find an adviser who’s willing to work for an hourly fee rather than charge a percentage of assets year after year.

Bottom line: take a hard look at what you’re paying in total fees for investing as well as other financial help, and then see if you can reduce that cost. Even a small improvement may significantly boost your financial security for years to come.

Walter Updegrave is the editor of, a site that offers easy-to-understand-and-follow advice on retirement and investing. Walter previously wrote the Ask the Expert column for and MONEY Magazine and has published four books on personal finance. If you have a question on retirement or investing that you would like Walter to answer online, send it to Ask Real Deal Retirement. You can follow Walter on Twitter @RealDealRetire and reach him at [email protected]. Read More
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