As you struggle with investing for retirement, have you ever considered how much money you lose through costs?
If you're like most people, you haven't given it a thought. You trust the system. You believe that the system cares about you and will look after you.
But do you know that the people making the real money are the financial institution advisers and specialists? They generate their wealth by skimming off their small 1 or 2, or 3% per cent.
They're growing their nest egg at your expense with this seemingly small fee.
Fees are killing your savings.
The amount you are losing will shock you!
A simple calculation shows that over 40 years, the average fees of advisors, asset managers and investment specialists will crush the "real return" on your retirement savings by about 75%.
This massive loss coming from many years of compounding the small percentages!
So initially, you need to understand that the "real return" is the amount you get after taking away the effect of inflation.
A loss of 75% is the average.
So in many cases, the real gains may be completely wiped out by the costs. So after saving for 40 years, you have gained nothing!
Several studies have calculated that the average administration costs of a retirement fund are about 3% of the fund's asset value every year.
This is significant as over 40 years, each 1% in costs reduces your retirement investment return by about 30%.
How much of your retirement investment are you losing through costs?
Be prepared for a shock! The following example shows you how much you are losing.
Assuming that you save $500 a month for 40 years and earn an average real return of 5%, you should end up with $743 000.
The amount comprises $240 000 of your contributions and $503 000 of investment gains.
- With costs of 1%, the $743 000 will be reduced to $581 000 - a loss of $162000!
- With costs of 3%, the investment that should have been worth $743 000 is now a measly $366 000 - a loss of $377 000.
Reread this, as it seems to be impossible. But unfortunately for you, it's not.
Then some even sadder news is that some retirement funds have costs higher than 3%. And in addition, many funds have not achieved a real return of 5%.
So in these cases, after 40 years of scrimping and saving, the investors in these funds will receive little or no real investment returns.
Little percentages = a lot of money.
The costs are quoted as a 'small' percentage to create the illusion that they are insignificant. But they are based on your contribution or the total value of your investment, or both.
So without doing the math, it is easy to be fooled into believing they are insignificant.
However, with an honest explanation, you would easily understand it. The agent would tell you, "With my fee of 1%, your quoted real return of 5% will reduce your potential investment return by 20%."
Or "At a more realistic investment fee of 3%, your potential return will reduce by 60%."
And sadly, your real return with my projected 5% costs will be zero!
These examples should be a "wake-up call" about the impact of costs on your investing for retirement.
So as you consider your retirement investment options, ensure you fully understand the impact of any "small percentages".
In money terms, the sum of these 'little' fees could have been greater than the amount you receive.
Your quality of life in retirement could go from perfect to poor ... all changed by this measly little 3%!