The good news is, millennials have finally gotten smart about saving for retirement. The bad news is that many of them are getting robbed blind by investment fees and don’t even realize it. According to a new study from NerdWallet, investing retirement savings in a common, mid-cap managed mutual fund — what most of us might consider to be a pretty sensible strategy — could cost a staggering $590,000 by the time they reach retirement.
NerdWallet’s calculations start with the assumption that someone starts saving at 25 years old and starts off with $25,000 in a retirement account, to which they add $10,000 annually for 40 years, and on which they earn an average 7% return. If that money goes into a fund managed by a person that charges a little over 1% in fees, as opposed to an exchange-traded fund that tracks the market and costs less than one-tenth that amount to manage, that millennial investor will pay $215,000 more in fees over the duration of their career, which has an even bigger impact once compounding interest is factored in, adding up to $533,000 less. If a millennial investor decides to totally go it alone, the combination of savings from fees and additional interest on that money adds up to $592,000 by retirement.
Although the lower-cost example given here is an ETF, another low-cost option for millennials (or anyone, really) looking to maximize the impact of their retirement savings is an index fund, which also is programmed to track a particular stock index without intervention by a person. Another option for people who don’t want to add “retirement portfolio management” to their list of hobbies is to turn to a robo-adviser. Like the name suggests, this is a somewhat automated tool that splits the difference between managing things yourself and paying somebody else to do it for you — and NerdWallet found that it also splits the difference in terms of cost, saving more than $200,000 by retirement versus a managed target-date fund.
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Moral of the story? Even if you’re doing the right thing by socking money away for retirement, take a look at your statements and find out what you’re paying in fees. By putting your money into lower-cost investment vehicles, you could make a significant difference in your standard of living once you retire.