An ideal retirement requires a lifetime of saving, smart investing, and consulting with people who charge based on your assets. But when planning and saving for retirement, you might also face hidden fees -- fees to trade, fees to advise, and even fees to market their own insurance products. Some of these fees are avoidable, but many are not.
To get an adequate idea of exactly how much you might be paying in fees and charges, read up on these seven hidden fees that come with creating a retirement fund.
1. Advisory fees
While financial advisors need to eat and pay rent just like anyone else, the rhetoric they use to express how much you're being charged might be a little too inconspicuous. Advisors often talk in "basis points," which simply means "tiny fractions of a percent." So for example, 1% comprises 100 basis points, and 50 basis point fee equals 0.50%.
An advisory fee of 1% of assets is typical, but you need to understand what 1% will cost you. Let's say your portfolio is valued at $500,000. If you're being charged a 1% advisory fee, you'll have to pay $5,000 annually.
2. 401k expense ratios
401k plans are offered at most mid-to-large-sized companies, but many of the people who contribute to them don't realize that these retirement savings plans aren't free. Depending on the funds you pick, you could be stuck with high expense ratios that will slowly chip away at your hard-earned retirement savings. And, these expense ratios might not be explicitly expressed to you. Instead, they might be buried in 60 pages of fine print.
Your expense ratio might be somewhere between 0.5% and 2%, which doesn't seem like much. But just as compound interest magically accumulates at an exponential rate over a significant period of time, so does a 2% expense ratio that works just as hard against you. So when picking funds for your 401k, try to pick funds with low expense ratios.
3. 12b-1 fees
12b-1 fees are annual marketing or distribution fees on some mutual funds. These fees are typically included in a fund's expense ratio. Initially, 12b-1 fees were introduced to help investors by marketing a mutual fund to yield higher assets and lowered expenses. However, some argue 12b-1 fees can bring down your returns instead of improving your fund's performance.
This past September, the Security and Exchange Commissions (SEC) filed proceedings against First Eagle Investment Management, an asset management company that allegedly improperly used investors' mutual fund assets for payments to cover "marketing and distribution of fund shares." According to the Wall Street Journal, "First Eagle dipped deeper into funds' assets than allowed under a plan known as 12b-1 plan." First Eagle will have to pay $25 million to reimburse shareholders, plus pay interest and a penalty of $12.5 million, reports Reuters.
4. Annuities fees
Annuities -- a type of insurance that pays out a fixed sum of money to the holder every year -- might seem like a great product for people who want to pace their money out for the rest of their lives. But, this kind of contract can come with hidden surprises.
Some notoriously high fees include commissions by the people who sell you the annuity to begin with, which can soar as high as 10%, reports CNN Money. There are also surrender charges, which are implemented if you decide to pull out money in the first few years. This fee can range from 7% to 20% in the first year. And lastly, annual insurance fees, investment management fees, and insurance riders fees can cost you a significant amount as well.
5. Ongoing yearly fees
Mutual fund fees can be broken down into ongoing yearly fees and loads, with each eating away at your returns. Ongoing expenses usually include a management fee -- between 0.50% and 1% of the assets, according to Investopedia -- administrative costs and the 12b-1 fee, which combined make up a mutual fund's expense ratio. It's important to note that there is no clear correlation between high expense ratios and high returns. In other words, just because your ongoing expenses are high, that doesn't necessarily mean you'll always get high returns.
Loads are typically manifested into a front-end load and a back-end load. A front-end load is an expense incurred at the purchase of the fund. A 3% front-end load on a $5,000 investment will mean that $150 goes toward the sales fee, and $4,850 will be invested.
Back-end loads are deferred sales charges, or redemption charges, that come into effect when one sells a fund before a certain time. Back-end loads tend to decrease the longer one waits to sell the fund. According to Morningstar, in the first year back-end loads start at around 5% to 7%. They go down to 0% in the next five to seven years.
Not all mutual funds come with these kinds of expenses. So if possible, look for no-load funds instead.
When you start to move into retirement, taxes will likely become one of your biggest expenses. Traditional IRAs and 401k plans can be tax-deferred, which can maximize savings. But, when you withdraw from these accounts, you'll have to pay taxes on the amount. Interest earned through savings accounts is taxed at your ordinary income rate, and the income that some bonds generate might be taxable as well. And any profits from selling an investment are taxed at the capital-gains rate.
Before you start putting your money in taxable accounts such as mutual funds and bonds, it's recommended that you maximize your 401k and IRA options first, reports Forbes.
This article originally appeared on GOBankingRates.com.
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