While getting our retirement account records updated, I discovered that some of the money my wife had in a 401k from a previous employer was in a target date fund.
I like the concept of target date funds. They adjust automatically the stock/bond mix as they get closer to the target date, usually a date close to retirement.
Turns out the nifty fund my wife's little stash was in had a not-so-nifty 0.36% expense ratio.
I hunted through the available alternatives and found a total bond fund, a S&P 500 fund, and a Russell 2000 Value fund, all by Vanguard. The expense ratios on these funds were 0.05%, 0.04%, and 0.07% respectively.
I then looked up the stock/bond mix in the retirement date fund and approximately replicated the mix using the three cheaper funds. In about a year, I'll log back in, and rebalance to the new mix of the retirement date fund and repeat each year until I croak or we deplete the account.
How much money did I save my wife? Something close to 0.30% per year was cut from the expenses for that account. In dollar terms it can't be that much, can it?
Well, let's say there was $10,000 in the account. Saving 0.30% in would save about $30 this year. Is it worth $30 to have the other fund company automatically rebalance the portfolio? I don't think so.
But, not only is that $30 gone forever. All future earnings from that $30 are gone too, along with next year's $30 and it's earnings, and the next year, and so on. How much does that amount to? Let's play around with this handy calculator.
$10,000 compounded at 6% annually for 30 years amounts to $57,434.91.
$10,000 compounded at 5.7% (6% - 0.30% in expenses) annually for 30 years comes to $52,753.30.
That's an extra $4,681.61 lost to fees over 30 years. Almost 4700 bucks! New riding mower anyone?
What if there's $100,000 in the account? That's about $46,800 extra paid to the fund over 30 years. Tesla Model 3 anyone?
I told my wife how much money I saved her. She was pleased, but I'm still not getting a new mower or a Tesla.
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