It's difficult to predict how well your retirement investments will perform in advance. There are many unknown variables including taxes, inflation, and investment performance. It's even harder to predict what your needs in retirement will be, such as how long you will live and what help you will get from others. But there is one thing you can control: your retirement investing expenses. You can control how much you pay in fees and expenses to invest your money.
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Investing expenses make a huge a difference in how much money you will have in retirement. You could forfeit thousands of dollars over the course of your career if you pay just 1 percentage point higher in fees. That kind of loss can easily prevent you from retiring early. To increase your chances of being able to retire, you need to properly manage your retirement investment fees.
Understand your retirement investing fees. If you invest with a company 401(k), you will have two major expense categories to worry about: administrative fees and investment fees. The administrative fees can be difficult to find. You'll need to look at the plan's annual report. The investment fees can usually be found by locating the expense ratio on each individual fund prospectus.
An easier way to examine your 401(k) expenses is to check out Brightscope.com and do a free search for your company's plan. They can usually give you a report detailing the 401(k) expenses you're dealing with and how your company compares to other similar companies. If Brightscope.com hasn't rated your plan yet or if you have trouble locating the fees on your own, ask your human resources department to help you identify the expenses.
Reduce your investment costs. Many 401(k) plans have high administrative fees and provide few low-cost investment options. So, you may need to take action on your own. There are several options for finding a less expensive route to retirement.
1. Choose less expensive funds within your 401(k). Focus on investing in funds within your 401(k) that have low expense ratios. You can find the expense ratio on the fund prospectus.
2. Petition your employer to improve the plan. If your 401(k) plan has high administrative costs and expensive fund options, consider asking your employer to change things for the better. Show the human resources department their rating on Brightscope.com and suggest more inexpensive fund choices.
3. Diversify your investing accounts. If your company will not work with you to lower fees, consider investing outside the 401(k) plan. You can send a percentage of your monthly retirement contributions to a traditional or Roth IRA or a taxable investment account with a discount online stock broker. You should be able to avoid administrative costs and you'll have access to a larger number of low cost funds.
Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.