The ninth retirement mistake to avoid is overpaying in fees and understanding where your money is allocated. Consider this example: If you invest a million dollars with an 8% return over 20 years, with annual expenses at 2.4%, you’d have a net of 2.9 million. However, with lower expenses at 1.5%, your net would be 3.5 million. That’s a $600,000 difference due to less than a 1% fee change over time.
There are three types of costs to be aware of when working with financial advisors or managing your investments. First, transaction costs, like upfront sales charges, should ideally be zero if working with an RIA (Registered Investment Advisor). Second, soft costs, the expenses of ETFs, mutual funds, or individual equities in your portfolio, should be minimized, with industry averages around 0.6%. At EWA, we aim to keep these costs between 0.2% and 0.3%.
Finally, there’s the advisory fee, charged by financial advisors for their value beyond money management. Make sure the value proposition justifies the fees. Keep an eye on these fees and where your money is allocated to optimize your retirement savings.
The ninth biggest mistake to avoid in retirement is paying too much in fees, specifically understanding where your money is going. For example, if you had a million dollars invested with an 8% return over a 20 -year time horizon with annual expenses of 2 .4%, you would net 2 .9 million after that 20 -year time frame.
A similar example, if you had again 1 million dollars invested, 8% return over 20 years, but instead your annual expenses were only 1 .5%, your actual net would be 3 .5 million. So that’s a $600 ,000 net difference by less than 1% of a fee change moving forward.
So it’s important to understand what the three types of costs that you could incur are if you’re working with a team of financial advisors or if you’re just investing by yourself. The first one being transaction costs. So if you’re investing with a mutual fund, for example, there could be an upfront sales charge, A -shares is an example of this.
Speaking on behalf of EWA, we sponsored what’s called a RAP program. So any trading fees, for example, would be covered under a RAP program. So transaction costs should, in essence, be zero if you’re working with an RIA. The second type of fee that you could be paying is a soft cost, and this is the cost of the actual ETFs or mutual funds or individual equities that are inside of your portfolio.
And this is really on the advisor if you’re working with a financial advisor to keep the cost of this as low as possible. The industry average of soft costs are typically around 0 .6%. And at EWA, we try to keep all of our clients, if we’re in ETFs and mutual funds, between 0 .2% and 0 .3%.
Typically we find that the more actively managed the mutual fund, the more expensive it is, and typically the less actually valuable it is inside of your portfolio, we firmly believe in having low -cost ETFs with very, very limited mutual fund exposure. Really the only times that we would seek mutual fund exposure is in the international space when information may not be as readily available as it is in the United States markets.
So the third type of cost that you could incur is an advisory fee, and that is a fee that is charged if you’re working with a financial advisor or a team of financial advisors for their value proposition. It should be very, very strong beyond actually money management in order to justify the fees that they are charging.
So between the transaction costs, the soft costs of the ETFs and the mutual funds, and in order to keep your portfolio on track, you should really be paying attention to how much you’re paying in fees and where the fees are actually going.