How Fees Affect Retirement Savings Over Time

An interactive illustration

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How Fees Affect Retirement Savings Over Time

Compound interest is a powerful feature of investing. Small sums put aside routinely can grow dramatically over time. However, the same forces apply to retirement plan fees; what may seem like small charges can compound over time, hindering investment growth and resulting in significant forgone earnings.

Follow the scenarios or explore your own
retirement to see the impact of fees.


Janet

Janet

Elinor

Elinor

Janet and Elinor are college graduates in their mid-20s.

Both have landed well-paying positions that will pay annual pretax incomes of about $60,000 — about the average for someone their age with a bachelor’s degree. For simplicity, in these calculations, we assume a steady salary over 40-year careers.

Dollar

Between their own contributions and an employer match, they each plan to save $175 or 7% of pay every two weeks.

Both figure that they have about 40 years of work ahead of them before they can consider retirement. For these calculations, their contributions never change.

Pen

From the options available in their retirement savings plans, Janet chooses Fund X, which estimates a 6% annual return but annual operating fees of 2.05%. Elinor chooses Fund Y, which estimates a 6% annual return but much lower annual operating fees of 0.05%.

Janet

Janet

Elinor

Elinor

$175.00 Regular contribution $175.00
Biweekly Contribution frequency Biweekly
40 Years Investment term 40 Years
2.05% Annual fee as percentage of total account balance 0.05%

If the higher-fee fund picked by Janet (2.05%) performs as well as the low-cost fund picked by Elinor (0.05%), Janet would lose nearly half of her potential investment value to fees and forgone earnings. After 40 years, she would have about $306,000 less than Elinor.

That’s roughly equal to working an additional 5+ years at her initial $60,000 salary.

The higher-fee fund would have to earn 33% more than the low-cost fund annually to allow for comparable fund growth.

Examine the impact of fees on retirement withdrawals or on your own retirement numbers.

Karl

Karl

Adam

Adam

Karl and Adam are both retiring at age 65 and deciding what to do with their 401(k) savings. Through careful planning, low-cost investing, and a little luck, they each have set aside $725,000.

Drink

Each has a few recurring expenses and will be withdrawing $3,500 a month.

To cover these expenses, both want to roll over the accumulated 401(k) earnings into low-risk funds with the understanding that returns will be lower as well.

Pen

Karl chooses Fund A, which estimates a 2% annual return but annual operating fees of 1.25%. Adam chooses Fund B, which estimates a 2% annual return but much lower fees of 0.04%.

Karl

Karl

Adam

Adam

$725,000 Principal investment $725,000
$3,500 Monthly withdrawals $3,500
20 Years Investment term 20 Years
1.25% Annual fee as percentage of total account balance 0.04%

If the higher-fee investment picked by Karl (1.25%) performs as well as the low-cost investment picked by Adam (0.04%), Karl would deplete his savings within 18.4 years while Adam would still have $43,503 at the end of 20 years.

The higher-fee fund would have to earn 61% more than the low-cost fund annually to allow for comparable fund growth.

Examine the impact of fees on retirement savings or on your own retirement numbers.

Investment plan

Investment fees

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Investment value without fees: {{ dollarFormat(investmentNoFeesSeries[cutoffPeriodUser]) }}
Investment value with fees: {{ dollarFormat(afterFeeInvestmentSeries[cutoffPeriodUser]) }}
Forgone earnings: {{ dollarFormat(Math.round(investmentNoFeesSeries[cutoffPeriodUser] - afterFeeInvestmentSeries[cutoffPeriodUser] - totalFeesSeries[cutoffPeriodUser])) }}
Total fees: {{ dollarFormat(totalFeesSeries[cutoffPeriodUser]) }}

Fund comparison

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Savings in a comparison index fund last*: {{ decimalFormat(savingsLastIndex, 1) }} {{ singularOrPlural('year', savingsLastIndex) }}
Difference between your fund and a comparison fund at {{ decimalFormat(savingsLastToUse, 1) }} {{ singularOrPlural('year', savingsLastToUse) }}*: {{ dollarFormat(fundDiffAtXYears) }}
Equivalent to working an additional {{ decimalFormat(additionalYearsWork, 1) }} {{ singularOrPlural('year', additionalYearsWork) }} at the U.S. average personal earnings of {{ dollarFormat(usMedianIncome, true) }}.  
* Comparison index fund charging a {{ percentFormat(annualOperatingFeePctIndex) }} operating fee and earning {{ percentFormat(realAnnualRateOfReturnPct) }}

Fund comparison at {{ decimalFormat(savingsLastToUse, 1) }} {{ singularOrPlural('year', savingsLastToUse) }}

Fund comparison

OUR WORK