Last week, we asked “Where’s the Beef?” Today, we ask “Where’s the Fat?”
Its very important to trim the ‘fat’ in your 401(k) plan – or fund expenses. Today on my Blog Talk Radio program, I had a listener ask about fund expenses. These can really affect your long term return on your retirement savings.
Expenses come from managing the mutual fund. The fund family charges a percentage of the assets invested to manage the fund – deciding what to buy, what to sell, and how much to buy or sell and when to do it. Less trading = lower expenses. Also the advisor on the plan may be paid from these expenses.
Knowing this, it would make sense to look for funds in your plan which have a lower expense rate. If its about 1%, that isn’t too bad, much more than that can negatively affect your returns over time.
To give you an example, I did some figuring on my financial calculator . Let’s look at a 22 year old college graduate, starting their 401(k) plan. Of course you would expect them to bump up their contributions over time, but lets say they put in $300/month with an 8% average return until age 66. They would have saved $1,340,048 in 44 years.
What if they were using a fund with expenses that were 1% more? In other words, the fund may have averaged 8%, but the real return was 7% due to higher expenses. With all the other factors being the same, we now have a total savings of $993,985, which is a difference of $346,063. OUCH! If you figure on taking 4%/year of the nest egg at retirement for income, that means we would need to live on less income -$13842 per year less. See where 1% can make a big difference?
So look carefully at your statement. Don’t just look at ‘performance’ but also fund expenses, which do affect long term performance. Have an advisor help you with this and also help you determine how much to save, so you can have the type of retirement you want.
You may contact me through my website at http://www.helpmy401k.us. You can also follow me on Twitter at http://www.twitter.com/deanvoelker. I also host a Weekly Internet Radio Broadcast “Improving Your Financial Health on Blog Talk Radio http://www.blogtalkradio.com/401kcoach