The average American can save $200k in management fees easily

The average American can save $200k in management fees easily

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Have you ever looked at the management fees of your investments?

For most people who glance at their statement, a fee of 1 percent doesn’t seem like much. It’s only 1 percent right? It’s going to cost you if you want to retire in less than 10 years, or any number of years. Get your financial future set up with these five other easy actions.

Take a look at the VTSAX, the Vanguard Total Stock Market Index Fund, which has a .04% expense fee. State Farm has a SP500 fund that has a 1.43% expense fee. These two hold the same stocks but are wildly different in terms of fees. The average US equity investment expense ratio is .82% for actively managed fees and .23% for ETFs that track an index, such as the SP500. Here’s a page showing the most egregious fees on the most common funds.

The average person who makes $50,000 a year, who saves 5% of his income and invests in the SP500 will save $200k from 22 to retirement age if they move their money from a high expense fee fund to a low one. The person who takes the average equity expense fund will end up having $780k in their portfolio and the person who puts his investments in the Vanguard portfolio will end up with $1m. A crazy difference, isn’t it? The power of compound interest is enormous — make it work for you!

But wait, you say, “My investment fund produces returns in excess of the SP500 (Or whichever benchmark your current investment fund tracks). X portfolio manager is really smart and Y sector is bound to do well because of Z reasons!”

The odds are tiny that you’d be able to pick the right fund manager — and that your fund manager would end up beating his benchmark.

Only 5 percent of fund managers managed to beat the SP500 for 6 years in a row. 7 percent managed to beat the international fund they were benchmarked with, and 5 percent managed to beat the emerging markets benchmark. This is just over a 6 year stretch, can you imagine how much worse it gets over time? The really sobering thought? 99 percent of funds underperform the benchmark they’re tied to over time.

Convinced and ready to invest in a low-expense fund? Be sure to also check which accounting method your broker/yourself is using to save a ton on taxes.

Option 1 – Vanguard

The Vanguard Retirement funds are one of my favorites. They consist of 4 different funds in a diversified portfolio: domestic equities, international equities, US bonds. and international bonds. Vanguard calculates the weight of these 4 funds by your age and target retirement age. So if you’re planning on being FI/RE’d you can look at the number of years until your expected retirement. These retirement funds are often thought of as “Funds of funds”, and people ask if there are double expense ratios — there aren’t. Vanguard simply charges a weighted average of the original funds, so there aren’t any extra fees in buying the Target date portfolio.

Option 2 – RoboAdvisors

Roboadvisors, such as Betterment and Wealthfront offer diversified rebalancing portfolios that also do tax loss harvesting (TLH). The two most known ones, Betterment and Wealthfront, charge .25% on assets under management. While you still need to pay the fund expenses on top of the RoboAdvisor fees, this is still worth it for people who have smaller assets. The fee you pay per year is probably lower than the savings the TLH gets you on your yearly taxes.

Another option is Ellevest, who offers a free investment plan. Signing up for the free investment plan doesn’t come with any strings.

Option 3 – Easy 3 Fund Portfolio 

You can also build an easy 3 fund portfolio consisting of domestic stocks, international stocks, and bonds. Having these 3 funds accounts for a highly diversified portfolio. I’d recommend this when your taxable assets get large — it’s much more worthwhile for you to do TLH yourself when you have big dollar value swings that are in excess of execution fees.

Take a look at the spreadsheet and customize it to your own data. Which way do you currently handle your portfolio?

 

Author: Olivia

Olivia worked in finance and wants you to learn the secrets of financial independence. She’s on track to reach financial independence before 30, and she wants to teach you how you can retire in less than a decade as well.

She thinks everyone needs an emergency savings fund and uses CIT Bank . They have the highest yielding rate at 1.55% and only require a minimum of $100. No monthly fees or charges like other big banks!

Her favorite free investment plan is from Ellevest. Go to Ellvest and click “Get Started” to get yours.

Her favorite personal finance tool is Personal Capital, which allows her to track her spending, historical net worth, and monitor her credit cards. It’s an upgraded version of Mint, in her opinon.

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2 thoughts on “The average American can save $200k in management fees easily

  1. I honestly don’t think it’s the lack of tools or the mechanisms to allow people to invest or save money in America – it is a simple lack of discipline and awareness of their spending. It’s always the big money question on how to get people to save more.

    Also, I wanted to get your thoughts between buying into an actual Vanguard fund over the ETF. Honestly, doesn’t seem to be a big difference to me in terms of expense ratio beyond the spread of buying/selling the ETF.

    1. I think it’s the lack of knowledge about financial topics because we’re a society which doesn’t like to talk about money. A lot of people (even incredibly smart people) don’t know the basics of even personal finance and will just invest in whatever a financial advisor does for them and get charged 1% or something ridiculous. They won’t realize how much expense fees will eat into their lifetime returns.

      Behavioral economics/finance is one of my favorite things to read about, and I agree, it’s a very difficult thing to solve.

      I’d just get the mutual fund (VTSAX) with a min of $10k to get the Admiral shares to save on 60% of the expense fee over the Investor shares. Not because it has that much of a different if you’re just holding it long term, but because you can automate VTSAX investments, whereas you can’t do that with the ETF (theoretically you could, but Vanguard does not offer this, and let’s face it, this hurdle will probably have you delaying your investment if you had to do it yourself each time you got a paycheck.). This is a better explanation on Investor vs Admiral shares savings in comparison to retirement funds:

      http://birdsofafire.com/index.php/2017/12/29/vanguard-target-retirement-funds-vs-diy-admiral-shares/

      Hope that helps :)!

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