The 9th retirement mistake to avoid is paying excessive fees without understanding where your money is going. A practical example illustrates how even a small fee difference can significantly impact your retirement savings over time. There are three types of costs to consider: transaction costs (like upfront sales charges), soft costs (associated with the investments in your portfolio), and advisory fees for financial advice. It’s crucial to minimize these fees to ensure your portfolio’s performance aligns with your retirement goals.
The 9th 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.
Similar example, if you had again $1 million 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, like 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 sponsor what’s called a wrap program.
So any trading fees, for example, would be covered under a wrap 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 zero 3%. Typically we find that the more actively managed the. 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 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 then the hard costs of the advisory fee, 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.