Jay Vivian, former managing director of the IBM Retirement Funds, on how high fees can push your retirement target age years down the line. Read more about better investing with lower risk.
Transcript
The fact is fees are a lot more important than you think. We did some analysis when I was the head of a big — a big 401 — actually, the biggest 401(k) plan, to try to assess the impact of fees. And what we looked at was, you just take a standard person that starts you know, goes to college and maybe starts at working at age 24 after you know, after a couple years off, let’s say, and they work until they’re 60 and then they live for 25 years or something like that. So what’s the consequence of having to pay 1/100th of a percent? The difference between, let’s say, 1.0% and 1.01% in fees over that whole period.
Now it does add up. It doesn’t seem like it should add up that much, but it turns out that by increasing your cost by just 1/100th of a percent a year over that time period means that you run out of money about three months earlier. Now it depends on the assumptions and I’m trying to simplify things, but the fact that 1/100th of a percent can cost you three months, imagine what 50/100s of a percent, namely half a percent, imagine what 50/100ths of a percent per year would cost you. You’d run out of money years sooner. And obviously you wouldn’t be able to draw down the money so quickly. You’d have to cut the amount of money that you had in retirement. So the consequences of fees are way larger than you’d expect.
