The Greatest Retirement Loss…Fees

Fees come in all sorts of shapes and sizes when it comes to your retirement savings. Everyone wants a piece. At the end of the day it can feel more like your saving just to profit financial institutions and the government. It can be incredibly frustrating but it is just a part of life. You have to try your best to limit and avoid these fees at all cost. Otherwise your savings will be eaten away and strangled by the crushing weight of the following fees.

Taxes
You might not think of taxes as a fee but they are. It is a fee imposed by federal and local governments. They range from estate taxes to welfare taxes to income taxes. It is important to understand how they effect each of your investment vehicles. When setting up your account you need to think about whether you expect your total tax burden to be higher today or during retirement. If you believe you will be paying higher taxes during retirement, invest in a Roth, but if you believe your taxes have peaked now, invest in a traditional pre-tax account. This is one of the hardest decisions to make so I personally invest in both. I figure why not lower my current tax bill now but at the same time lower taxes in the future. Each persons circumstances will be unique and you have to decide when you want to pay taxes on your retirement account. The government will always get its cut but you have some power in choosing when they get it.

Flation
Throughout your life you will see you accounts and investments ebb and flow through periods of deflation and inflation. The Fed has done an amazing job over the past few decades at creating an insanely unstable economic foundation for our country. Unless these ludicrous policies are changed, your investments will rise and fall at breakneck speed. You have to decide how much tolerance you have for this instability. How flation can be a fee is if you panic, sell on a dip and then buy in again on the peak. This would be the worst fee you could ever face because it will create a negative return. Simply put, investing in our current environment requires significant intestinal fortitude and you have to figure out how much you have. Then choose your investments based off your risk tolerance.

Professional
Usually when you hear someone mention retirement fees, they are talking about the professional variety. These fees include such things as administrative costs, fund fees and loads. Some of these we can control and other we can’t. For example, your 401k choices are not yours to make. Obviously you can select the funds you want to invest in but usually there are other fees such as administrative fees that you have no control over. Everyone in the plan has to pay them whether they want to or not. The goods news is many companies offer matches which can help to offset these fess. Outside of your 401k you have more control. This is the reason why Vanguard has come to dominate the mutual fund industry. They charge minimal fees leaving more in investor pockets. I think an example of how devastating professional fees can be is in order.

If you invested $1,000 each year for 40 years at a 10% yearly return how much would fees effect your final investment total?

No Fees0.5%1%2%
$442,592.56$386,519.99$337,882.45$259,056.52

As you can tell, the investment is heavily impacted by the professional fees that are charged. The message is clear, choosing low fee funds is essential to meeting your retirement goals.

So remember there is a lot of hands reaching out to take your retirement savings but a diligent, careful approach can limit fees of all kinds. It is something we all need to try and do in order to preserve as much capital as we can.

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