Starting to save for retirement in your 20s and continuing throughout your life can make even modest earners millionaires. But you may also be making someone else a millionaire in the process.
A 25-year-old couple with a combined income of $75,000 who together saved $5,000 annually in a 401(k) with a $2,000 employer match, would accumulate almost $2.5 million after 40 years in the workforce, assuming an annual 7.5 percent return, according to calculations by David Loeper, president and CEO of Wealthcare Capital Management and author of the new book Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money. A financial services company charging 1.5 percent worth of fees to that account would make $ 1,033,880 over the same time period, Loeper calculated.
Even small fees erode your nest egg over time. An annual fee of just half a percent of the account balance over a 30-year career can reduce purchasing power in retirement by one-eighth, according to recent calculations by the Center for Retirement Research at Boston College.
It seems obvious that retirement savers should try to minimize fees as much as possible, but this is far from a simple task. Most 401(k) plans have a limited number of investment choices, and sometimes it requires scrutinizing the fine print to spot all the fees charged. “Expense ratios are not transparent and people aren’t aware of these fees,” says Loeper. Perhaps retirement savers are able to overlook 1.5 percent fees during bull markets, but in a year of double digit 401(k) losses, fees only further diminish your account balance. Loeper says a reasonable expense ratio is 0.75 percent of the account balance or less. “That should be the absolute maximum,” he says.