As you carefully invest for retirement have you ever considered how much money you have lost from costs? Are you aware that the people making the money are the financial institutions, advisers and specialists who are skimming off apparently small amounts? Growing and filling their nest egg at your expense.
The numbers are eye opening. A simple calculation shows that the average costs of these advisers, asset managers and investment specialists will, over a 40 year period, crush the “real return” on your retirement savings by about 75%.
The “real return” being the actual amount that you gain after taking away the effect of inflation.
This is based on the average so in many cases the real gains may be completely wiped out by the costs. So after saving for 40 years you may have gained nothing!
A study carried out in 2004 calculated that the average administration costs of a retirement fund are about 3% of the asset value every year. Over a period of 40 years each 1% in costs reduces the final value of your investment by about 30%.
To explain in cash terms the following example explains the loss as a result of these costs:
Assume that you save $ 500 a month for 40 years and earn an average real return of 5% you will end up with $ 743 000. This is made up of $ 240 000 of your contributions and $ 503 000 of investment gains.
With costs of only 1% the $ 743 000 will be reduced to $ 581 000 – a loss of $ 162 000! With costs of 3% the investment that was going to be $ 743 000 has now been halved to a measly $ 366 000.
Many retirement funds have costs higher than the average of 3%. So there are many, many retirement fund investors who receive little or no real investment returns after 40 years of saving.
To create the illusion that these numbers are insignificant the costs are quoted as a small percentage. It may based on a percentage of your contribution or based on the total assets. It is very easy to be fooled into believing they are not important.
If this was honestly explained you would understand that with a real return of 5%, a cost of 1% there will be a reduction of 20% in your investment return. You would be fully aware that 60% of your real return would be lost with a 3% cost, and your real return will be zero with 5% costs!
These examples have given you a true idea of the impact of costs on your investing for retirement. As you consider your retirement investment options make sure you fully understand the impact of this “little number” which can actually eat up all benefits that you expected to receive. Your quality of life and retirement options available to you may be completely changed by this measly 3%!
So be aware, your investing for retirement may be a futile mission if the advisers, product providers and asset managers are the ones getting the cake while you are lucky to pick up some crumbs!