Track Your Retirement Fees
Do you know how much it costs to own your mutual funds or exchange traded funds (ETFs) each year? Do you know how much money you could be giving away to high fees and expense ratios? How many years of retirement are you giving up in exchange for those high fees? It’s important to know how much you’re paying to own an investment. Over time fees and expenses will eat into returns, and one way to think about that is that you are robbing yourself of the power of compounding interest. Earning 5.5% over a lifetime versus 6.5-7% can be huge. There are easy, pain free ways to track your expenses when it comes to retirement and other investment accounts. I use Personal Capital. Others might use MorningStar’s X-Ray Instant Portfolio Analyzer. Doughroller.net has an article on how to use the Morning Star X-Ray tool. There are other free portfolio analysis tools available, such as Portfolio Monkey. For now, let’s talk briefly about how you can analyze your retirement fees with Personal Capital.
Creating an Account
Creating an account at Personal Capital is relatively painless. You’ll need the online banking and account information for whatever you would like to track using the software they provide. You can add most trading platforms, such as Fidelity, Vanguard, and Scottrade. Once you input your investment and retirement accounts into the program, they will automatically populate into your PC account. PC scans your portfolio and will show you dividends, distributions, gains and losses for the day, and so on. Most if not all of the information you would like to know about your portfolio can be had at a glance in your PC account on your computer or mobile device. Now that you’ve created your Personal Capital account, what’s next?
The Portfolio Analyzer
After you’ve created your profile and activated the investment accounts you want to track, you can immediately run an analysis on those investments and discover how much your expense ratios and fees are really costing you. Click on the Advisor Tools section in the header, and select 401k Fee Analyzer. Don’t worry if you don’t have an actual 401k account, Personal Capital will analyze your brokerage and other types of retirement accounts if you have it linked into the software.
This is what you’ll see as soon as you click the 401k analyzer, and within seconds you’ll have gleamed some important information about your fees and expenses. You’ll get an estimate of lifetime contributions, earnings, total fees, a percentage of earnings to expenses, and your weighted average of annual portfolio fees.
Adjusting the Calculator
Along the bottom of the analyzer you can adjust your Annual Contributions, Employer Match, Expected Rate of Return, and any additional investment fees that you may incur, such as trading fees. For this I would estimate the number of trades you’ve made on average for the last few years and multiple that by the per transaction fee. I use Scottrade and it costs about $7 per trade, so if I trade about 25 times a year I would need to enter an estimated percentage of my annual contributions. This slider ranges from 0 to 1% so I think you can get an accurate estimate of what your trading costs are each year based on your annual contributions. Example: 18,000 a year contributed, 25 trades at $7, equals $175 in trading costs. 175/18,000 = .009 (less than .01% in additional fees).
You can adjust your birth date, retirement age, company size, and risk tolerance. Company size is how Personal Capital estimates what your fee levels will be, and I’ve clicked through each option to discover it will vary by about 2 basis points for the different settings. It may vary for your portfolio so double check to see how your expenses differ.
Notice the “my spouse also contributes to a 401k” block? Here’s how you can hack the calculator into letting you contribute more than $18,000, which is the default maximum. Clicking that box will boost your annual contribution limit to $36,000: if you are married or are able to contribute more than they assume, such as contributing to an IRA on top of your 401k, this is perfect.
Revealing the Costs of Ownership
Scroll down the page on the 401k analyzer to reveal this information:
You can see above that each fee producing ETF, mutual fund, or index fund, is accounted for by the Personal Capital software and fees/expenses are automatically calculated. It shows the dollar value of your holdings and how it correlates to what you’ll pay each year. It can’t get any easier than that to be able to visualize how much it really costs to hold, in my case, GENIX, or any other investment tool with associated expenses. As your investments grow, the fees you pay will grow with them – 2% of $200,000 is a lot more than 2% of $20,000. Some of the amounts may not seem like much but over time they build up, and can have an out-sized impact on your total returns.
What You’re Giving Up: Time
Let’s go back to the snapshot of the 401k fee analyzer.
If my portfolio holds the same funds, stocks, and ETFs that it does now, then by the time I retire at age 65 I will have lost 12% of my potential earnings to fees! According to the calculator, I will donate over $370,000 to the expense category. That is 2 years of my retired life that I’m trading to own a portfolio with a weighted expense ratio of 0.47%. That’s not terrible, but it could be lower. I’d rather lose 6% of my potential earnings to fees, wouldn’t you?
Look at the chart closely, and try this with your 401k fee analyzer on Personal Capital. The losses associated with fees and high expense ratios accelerate over time. In the last 5 years before retirement, I will incur $171,292 in fees if I keep the same allocation I have now. Those funds that charge hefty fees now will have an even bigger impact as my investment in them grows. This is crucial to understand. The first $208,235 (no small number!) is spread out over the first 29-30 years. The last $171,292 of a whopping $379,527 fee total — amounts to more than $34,000 a year in fees in those critical years right before retirement. A prudent investor will see this, identify lower cost options for his or her portfolio, and seek to eliminate these high costs in order to put the brakes on the runaway train of reduced returns over time.
No matter which program or calculator you use, it’s important to start evaluating the costs you incur in the funds and ETFs that you own. If you are below the Personal Capital benchmark of 50 basis points (0.5%), you’re doing alright. See if you can find ways to lower your costs even further through low-cost index funds and ETFs, such as VOO, BND, IVW, and more, found here. The less you pay to own a fund, the more you money you have working for you. Know how much you’re paying, why you’re paying it, and how it will affect your earnings in terms of percentage lost and time lost. These answers can help you on your road to financial freedom and grow your money in a smarter, faster way.