If you're investing, there are a number of fees you could potentially incur.
You could be forced to pay a commission to buy and sell investments. You may also have to pay a management fee or advisory fee. These fees are common with funds where a person or automated algorithm selects a group of investments for you, such as exchange-traded funds and mutual funds. Sometimes, there's also an administrative fee, especially with 401(k) accounts.
While investment fees are common, they can also be costly. It's important to understand how they affect the return on your investments and what you'll end up with after they are accounted for.
Image source: Getty Images.
How can fees affect your investment performance?
To better understand the impact of investment fees, check out the chart below. It shows how much fees would reduce a $1,000 investment over 10 years if the investment earns 8% annually.
|
Investment Fee |
Total Return After 10 Years |
Cost of Fees |
|---|---|---|
|
0% |
$2,159 |
$0 |
|
0.25% |
$2,110 |
$49 |
|
0.5% |
$2,061 |
$98 |
|
0.75% |
$2,014 |
$145 |
|
1% |
$1,967 |
$192 |
|
1.5% |
$1,877 |
$282 |
|
2% |
$1,791 |
$368 |
|
3% |
$1,629 |
$530 |
Obviously, these fees can add up to a small fortune -- especially when you're investing larger amounts. If you have an investment account balance of $10,000, for example, the fees will be 10 times the amounts shown on this table -- so even a 0.25% fee would end up taking around a $490 chunk out of the money invested.
A longer timeline also means fees make a bigger difference as well. So when you're investing for retirement over decades, they really take a bite out of the balance you end up with.
If you start saving $5,000 a year at age 30 and continue at this savings rate until you're 65, you'd end up with just over $930,000 if you paid no investment fees -- but even a 0.25% fee would reduce your final balance down to $878,226. And a 1% fee would bring that balance to just $739,567. That's almost $200,000 less.
Be smart about investing to minimize fees
When you're working hard to set aside cash for your future, the last thing you want is for high fees to make it harder.
To make sure that doesn't happen to you, compare the costs of different things you're investing in. Look for a brokerage firm that charges low or no commissions, and choose funds with limited fees. And if your 401(k) charges a high administrative fee, consider investing only enough to get the employer match, and then supplement your retirement savings with an IRA.
By being mindful of investment fees, you can keep the returns on the money you diligently saved -- and you can hopefully have more financial security because your nest egg will be bigger.
