Okay – so I tend to rail on the cost of Wall Street fees and commissions. But I do so for two important reasons. First, it matters – a great deal. Second, most of us just don’t pay enough attention to fees.
If we discovered termites eating away at our home, we would take extraordinary and immediate action. Well – I’ve got news for you – termites are eating your investment account – and you may be a spectator – doing nothing about it.
What’s the big deal – it’s just a few percent points here or there? Besides – what’s the alternative? Wall Street charges what it charges. There may be a small difference between one brokerage firm and another – or one mutual fund or another – but we’re going to pay something whether we like it or not.
Consider this. An investor who saves $600/month from age 40 to age 66 – and grows their money at 7%, will retire at 67 with $577,635. According to Wall Street’s 4% rule (our investor can draw 4% of their nest-egg each year and not run out of money), that principal amount will produce about $23,100/year of income for life – if there were no fees or commissions paid each year.
But at 2-1/2% in fees – about what the experts think most of us pay – our investor retires with $379,630 instead – which means lifetime income of just $15,200.
Let’s see – $23,100 or $15,200 – that’s a 35% income reduction just because of those pesky fees. And $8,000 a year can mean real lifestyle difference.
Each 1% of fees over the accumulation phase of our lifetime, will impact our income by about 15%. And remember – the meter’s still running. We’ll pay fees and commissions for the rest of our lives.
That will be expensive – but the real impact is the damage that’s already done – how fees drive our retirement income.
Can we build meaningful wealth without fees and commissions? Probably not – but can sure pay a lot more attention to them each day – and take steps to minimize their impact.
If a can of Raid will start getting at those termites – think of what a little attention to the fees and commissions you’re paying might do for your retirement paycheck.