The Retirement Gamble

The discussion about fees is extremely important and the following is a sample:

Those are the fees that they charge.

Fees, expenses, portfolio turnover inside of the fund, sales loads, advisory fees, operating expenses — take them all out, and the net return divided up by investors is what’s left. So costs are a crucial part of the equation.

And a lot of people say, “So what?” Well, think about this. We’re lucky enough to get a 7 percent return on the market. That means it should not surprise anybody that investors as a group divide up 7 percent. Suppose it costs two percent — maybe a little bit high but in the ballpark — to gain that return. Then investors who grossed 7 percent will net 5 percent.

Now, when the market’s going up, as it did in the ’80s and ’90s, at 17 percent a year, 2 percent doesn’t seem like much. But it’s an awful lot. And if you compound a 7 percent and the 5 percent return over, say, 50 years, let’s call that an investment lifetime — well, in fact the investment lifetime is longer than that — something like 70 percent of the market return goes to the purveyors of the services, Wall Street if you will, and 30 percent goes to the fund owners.

So it’s greatly underrated, in part because we’re all so short-term-focused. We don’t think about investing for a lifetime. [1]

Again, as an example, over the lifetime of your investment, a 2% fee will consume about 70% of it. (And most companies do not offer no- or very-low-fee funds in their retirement offerings.)

[1] http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...