In my never-ending quest to clearly explain the devastating effect of investment fees on your savings, I’ve found another way to look at it. Instead of looking at how much of your money gets consumed by mutual fund fees, let’s look at how they affect your retirement age.
Suppose that Katie is 30 years old and is just starting out saving in her RRSP. She has set up automatic contributions of $1000 per month. She plans to increase this amount each year to keep pace with inflation. Katie wants to know, “if I plan to draw $3000 per month (in today’s dollars) in retirement until I’m 95, when can I retire?”
The answer depends on how her RRSP investments perform. For illustration purposes, let’s assume that her investments beat inflation by 4% per year, before investing fees. Of course, she can’t count on this, and returns vary considerably from one year to the next. But the goal here is to see how fees affect retirement, so we’ll do calculations based on a steady 4% real return.
I whipped up a spreadsheet to work out how her retirement age varies with her investing expenses (including her funds’ Management Expense Ratios (MERs) and other expenses). Here are the results:
So, if Katie manages to keep her expenses down to 0.2% per year (including MERs, commissions, and spreads) using inexpensive index ETFs and trading infrequently, her projected retirement age is 61. If she invests in the Investors Canadian Growth Fund with total fund costs of 3.02% per year, Katie’s projected retirement age is 75. That’s 14 extra years of work to pay the higher fees.
Even if we properly account for Katie’s chosen asset allocation, the variability of investment returns, and the need for more safety after retirement, fund costs will still cause a major shift to a later retirement age.
Here are a few more of my attempts to explain the importance of fund costs:
MER Drag on Returns in Pictures
MER: Death by a Thousand Cuts
MERQ as a Better Measure of Fund Costs
MER: the Gift that Keeps on Giving