Investment Fees Will Cost You Millions

Yes, Millions.

You don’t have to be a big shot for this to be true. In fact, someone investing $833 a month into his 401(k) can see an 8-figure sum (that’s $10 million, people) disappear over the course of a long life span. Today, we will pry into the finances of four people you may encounter at the hospital and discover the net worth they might expect to have over the course of their working and retirement years.

What sort of annual investment fees are we talking about?

  • Expense ratios of mutual funds (0.04% or less to 1.5% or more)
  • Front-End Load or Back-End Load (Up to 5.75% is common)
  • 12-b1 fees (marketing or distributing fee 0.25% to 1%)
  • Assets Under Management Fees (0.5% to 1.5% of managed portfolio)
  • Other (hourly rate, flat fee, admin fee, hidden fees)

None of these fees are mandatory, although the only way to avoid the first one is to completely avoid mutual funds and ETFs. The other 4 categories of fees can be avoided by staying away from fund companies that charge excessive fees and managing your own portfolio. I manage my portfolio made up almost entirely of Vanguard admiral funds, and the total annual fees are a shade under 0.1%.

To take a closer look at the effects of a range of fees on portfolio performance, I’d like to introduce my four friendsWe’ll call them Agnes, Agatha, Jermaine, and Jack.

Jack, the nurse

Jack is a registered nurse. He likes his overnight shifts and early morning happy hours.

Jack has no desire to retire early. He enjoys life and invests enough into his 401(k) to receive the employer match, plus a little extra. At the end of each year, he’s got $10,000 invested, and he does this for 40 years from age 22 to age 62 when he retires.

To keep the calculations reasonably simple, we need to make some assumptions. In order to look at total dollars accumulated, we’ll use nominal (not adjusted for inflation) returns, assuming 8% during working years, and 5% returns with a lower-risk portfolio in retirement. In retirement, Jack will draw $60,000 a year from the portfolio to live and pay taxes. Both his investments during working years and withdrawals in retirement will be made at the beginning of each month.

We’ll look at a realistic range of fees, from 0.1% to 3.0%. When working with reputable advisors, Personal Capital found a range of 1.06% to 1.98% in total average annual fees. Less reputable advisors could add another percent or so on top of that with loaded funds, frequent buying and selling within your account (a.k.a. churning) and hidden fees.


Personal Capital Fees

image credit Personal Capital


To Summarize our assumptions for Jack:

  • $10,000 tax deferred annual investment, in monthly increments
  • 8% nominal returns while working
  • 5% nominal returns in retirement
  • $60,000 withdrawn annually in retirement for spending & tax payments
  • Fees could be as low as 0.1% and as high as 3%
  • Jack works and invests from age 22 and retires at age 62



Jack’s 40 year career as a registered nurse


By investing $10,000 a year for 40 years, Jack can expect to amass anywhere from $1.28 million to $2.84 million, depending on fees. That’s a difference of $1.56 million dollars available at retirement. The DIY plan with 0.1% in fees grows to be 122% larger than the 3.0% fee plan.

And that’s not the half of it.

Continuing on into retirement, keeping spending constant at $60,000 a year, if Jack lives to be 100, he could have an 8-figure portfolio with the lowest fee structure. Or he could be out of money before his 90th birthday. If he survives to age 102, the difference between 0.1% fees and 3.0% fees exceeds $13 million!

If we were to account for inflation, Jack’s spending would likely increase progressively throughout retirement, although at some point, spending tends to decrease as the more adventurous travel days are behind him. Of course, long-term care could greatly increase his annual needs. Long story short, we don’t know what to expect, but in the most realistic scenario, due to inflation, Jack would be more likely to run out of money even earlier in the scenarios with high fees.

Here’s a look at Jack’s balances if he increased spending by 25% in each of the first 2 decades of retirement and then held steady.

Jack’s spending in this scenario will be:

  • $60,000 from age 62 to 72
  • $75,000 from age 72 to 82
  • $93,750 from age 82 to 102



Well, the numbers have changed, and it doesn’t look any better for the high fee scenario in this somewhat more realistic version. The difference between the savvy DIY investor and the investor with high fees is still about $13 million if he gets to be a centenarian.

fees and fawns can come back to bite you

fees (and fawns) can come back to bite you

Agatha, the psychiatrist

Agatha is a psychiatrist employed by the hospital. She enjoys plush leather chairs and just listening.

Getting a later start, Agatha will have a shorter career than Jack, but retire at the same age of 62. For 30 years, Agatha will be investing $50,000 a year into tax deferred retirement plans.

She will receive the same investment returns as Jack, 8% while working and 5% in retirement. Her retirement spending will be a loftier $100,000 annually.



Agatha’s 30 year career as a psychiatrist


Agatha builds up a larger nest egg than Jack, but by virtue of larger retirement spending, she is at a greater risk of depleting it. Again we see the ginormous disparity between fees of 0.1% and fees of 3.0%. Again, the difference exceeds $13 million if Agatha gets off the couch and does some cardio, giving her a fighting chance to live to 102.

Jermaine, the surgeon

Jermaine is an orthopedic surgeon in an independent group. He enjoys “bone broke” & “me fix”. That’s a BBMF for those keeping score at home. [I kid, I kid…]

Jermaine, who had to be one of the top students in his medical school class to land a spot in ortho, is quite savvy with his finances. He works hard, but doesn’t want to do so forever. Like the PoF, Jermaine has FIRE plans of his own, and plans to work a twenty-year career, retiring at 52.

For 20 years, he invests $150,000 a year, with $50,000 tax deferred and $100,000 in a taxable account. In this scenario, his taxable investments will experience tax drag.

Assuming a buy-and-hold portfolio with a 2% annual qualified dividend (similar to Vanguard’s Total Stock Market or S&P 500 index funds) and a 30% total tax on qualified dividends, his taxable account sees a tax drag of 0.6%, so the overall portfolio will experience a tax drag of 0.4%. (We’ll ignore the small amount of drift the portfolio would see as the tax deferred portion grows at a slightly quicker clip.)

Compared to our first two friends, the investment returns will be the same (8% and 5%) but we’ll subtract 0.4% from those before subtracting fees in our calculations. Retirement spending will match his earlier savings amount, $150,000 a year.



Jermaine’s 20 year career as an orthopedic surgeon


Twenty years of solid investments make Jermaine a wealthy individual. $5 million to $7 million at age 52 depending on fees. What happens in retirement? If the good doctor eats well and exercises like he did as a standout collegiate gymnast, he too might make it to 102. At this point, he might have $37 million or be flat broke. It depends entirely on the investment fees.

“he might have $37 million or be flat broke. It depends entirely on the investment fees.”

Agnes, the executive

Agnes is the CEO of a large multi-state health system. She worked her way up the ranks and bounced from one time zone to another for decades to find herself in this enviable position. Her monthly salary dwarfs her friend Agatha’s annual salary. Agnes enjoys endless meetings and flushing caviar down the toilet just because.

Agnes becomes the CEO at age 52, and invests a cool $1 million per year, $50,000 into a tax deferred account and the remaining $950,000 into a taxable account. With only 5% tax deferred, we will factor in a 0.55% tax drag on the account. She will retire in 10 years at age 62, spend a lofty $400,000 in a luxurious retirement, and the assumptions on investment returns remain the same.



Agnes’ 10 year career as as the CEO


The brief accumulation phase is good to Agnes. She will have $12.6 million to $14.8 million depending on fees. If those fees persist into retirement, we see the gap widen tremendously, to $15 million at age 72, $25 miilion at age 82, $40 million at age 92, and better than $60 million at age 102, at which poor Agnes with the 3.0% fees finds herself several million dollars in debt, while the ultrarich Agnes with 0.1% fees has enough money to name her alma mater’s new football stadium after her favorite cat.

Where are the Customers’ Yachts?” asked Fred Schwed in a book published 75 years ago, based on observation of the fanciful lives of the Wall Street bankers and brokers.

I had my own “Where are the Customers’ Yachts?” moment early in my anesthesia career. A friend who was working in the finance industry (I can’t tell you with which company; it would violate my Principals) invited me to join him and his mentor and a few close friends for a tailgate and college football game.

My friend’s mentor had ten of the best seats in the stadium and a few tailgate spots that cost a few thousand each for the season. If I was supposed to be impressed, I wasn’t. All of this was being paid for with other peoples’ money in a zero sum investment game. At the end of the day, I understood just how important it was to learn to manage my own portfolio. My investment gains could easily become somebody else’s luxury box. No thank you.

Learning how to invest pays, and that’s a fact. Just ask my friends Agnes, Agatha, Jermaine, and Jack. If you already know what you need to know to manage your own portfolio, strong work!

If not, the sooner you get started, the sooner you will find yourself on the path to real wealth and freedom.

Would you like to enter your own data into a spreadsheet like you see above? Check out the customizable Fees Effect Calculator on the Calculators page.

Do you know what you pay in fees? What fees do you see as justifiable? Would you rather end up with an 8-figure portfolio or be flat broke? It’s a silly question, but many people make choices that are more likely to make them the latter.

Please look for the comment box below and say hello!


  • fantastic cases. it really hits home how lower fee is the best way to guarantee higher returns. thank you!

    • I appreciate that, Dr. Liu. I just saw a headline on Vanguard’s site today. “Cost is the New Performance”. Makes sense to me. According to the article, the average mutual fund expense ratio is 1.02%, or > 20 times the cost of their Admiral funds Total Stock Market or S&P 500 Index.

  • Hatton1

    One of the reasons I left Merrill Lynch was I added up my mutual fund fees on the expense analysis page on personal capital and discovered it was $27000/year. My broker said that really is not much for an account of your size. I still pay $11000 but this will decline over time. My ratio is 0.25. I own some low basis American Funds that I no longer reinvest the dividends. I put the dividends into Vanguard funds. It is easy for an advisor or broker to spend your money. Mine was always going to Europe. $16000 is real money to most people.

    • Your advisor’s “yacht” was the European vacations. It’s silly to think that clients would be impressed by the advisors’ expensive status symbols and lifestyle. Where does the money come from? The investor’s portfolio. Of course, many DIY investors do even worse on their own by letting emotion thwart a sound investment plan, but if you’ve got the gumption to stay the course through thick and thin, you can do quite well for yourself.

      I’m glad to hear you’ve been able to whittle your fees down to something more reasonable.


  • Sobering indeed. Great post.

    Our kids have their first Vanguard account at age 7 and 9. If there is one piece of advice that I hope sticks with them from Dad as they get older is to read about Jack Bogle and what he did for the investor. The horrendous impact of fees over a lifetime makes you want to reach for the whisky bottle and drown your sorrows. Oh, and move your funds to Vanguard. Before the whisky.

    • A sobering post that makes you reach for the bottle. 🙂 I can appreciate a good oxymoron.
      I read both Bogle books my local library system has in circulation. I may have to break down and actually buy some of the others, or request them from the library and see what happens. I don’t think I would learn much that would change the way I manage my money, but his books are full of wisdom and affirmation of what I believe to be a sound investment plan.

      Your kids are just a couple years older than my boys . All they have so far are piggy banks and 529 accounts. Way to be ahead of the game with them!


  • Fantastic post. I love the different cases! Regardless of your income or savings rate, the story is the same: High fees will kill your portfolio returns!

    Couple that with poor returns (maybe even some negative years), and the detrimental affect is huge.

    Along these lines, I performed an experiment many years ago. I divided my portfolio into two chunks. Stock Funds and Individual Stocks. I left the funds alone for 10 years, and I occasionally made trades in the individual stocks, as I saw fit (probably only a couple times a year). The funds had pretty typical fees, about 1% some more and some less.

    After 10 years it was very clear – the value of the individual stocks was double that of the funds. Meanwhile, the funds were barely worth more than what I started with. True story.

    The difference could be due to my investing savvy, but it could also be due to fees! I kept expenses very low.

    • Thank you my eight-appendaged friend. I knew the difference in fees would lead to substantially different outcomes, but when I actually ran them in Excel, I was blown away.

      Holding an individual portfolio is a good way to keep fees ultra low. I could take advantage of Vanguard’s 25 free stock trades a year and have a portfolio with no fees, unless you count the bid/ask spread when purchasing the stock. I don’t though, because I believe the risk involved outweighs the benefit, and I don’t care to track a collection of different stocks and pay attention to all of them. For some, it’s a hobby or part-time job, but it’s not for me.

      I don’t doubt for a second that you did well in your 10 years, and it could by your investment savvy, but it could also be due to chance. If you held Apple and Google out of proportion to their market cap over those 10 years, that would have worked out well. Not trying to knock what you did, but for every 1 that beats the market, 3 to 5 might underperform. I’m glad it worked out well for you.


      • Well, we didn’t hold any Apple or Google, that’s for sure. This was before Google, and Apple was a stinker at the time. 😉

        We still maintain the hybrid approach today, many years later. I think the biggest difference was fees. I don’t claim to have any superior investing acumen, but I did learn my lesson about fees. 😉

        I’m a real life example! Today, on the ‘fund’ side we mainly keep *extremely* low cost index funds.

        • Very nice. AAPL was a stinker, but don’t you wish you had picked some up then? I do. But hindsight vision is much, much better than 20 / 20. It’s like 20 / 0.001.

          A you say, those fees will get you. 2% or 3% doesn’t sound like much. That’s $20 or $30 for every $1000 you have, right? But it can completely deplete a portfolio if given enough time.

          I don’t mean to be critical of your stock picking, which was obviously above average. I just like to make evidence-based decisions, and a significant majority of professional fund managers fail to match the indexes, and those that do rarely reproduce those results year after year.


  • Frank

    Great post demonstrating erosive effect of fees over long periods. I am confused by your first bar graph showing fees of 1.74% for TDAmeritrade and 1.48% for Schwab. I have accounts at both and purchased their no load low cost ETF’s with very low ER. Do the quoted numbers reflect the average fees of their client’s assets?

    • Thanks, Frank! The graph comes from research done by Personal Capital, and it includes advisors’ fees for full service portfolio management. A brief article was linked in the post, but you can read the full white paper here.

      I have heard that both Schwab (and Fidelity) have quality, low cost index funds that rival Vanguard’s. I haven’t looked into TD Ameritrade, but if the ER is low and there are no hidden fees, that could be another good option.

  • I have my account at Schwab and they do have no commission ETFs with low expenses. They started with their own ETFs and I believe about a year ago added some others that also trade commission free. SCHD (dividend focus) has an expense ratio of 0.07% and SCHB (US Broadmarket focus) has a 0.03%. Those expenses are down quite a bit. I believe they were previously around 0.10%, still quite low.

    I have used a similar approach to Mr. Tako. About half of my stocks are in ETFs and half are individual buys. My portfolio doesn’t have a 10-year time-frame yet though to compare.

    It really is easy these days to avoid high fees. Hopefully, that message gets out there more and more.
    cd :O)

    • Those are extremely low cost funds, on par with Vanguard’s offerings. SCHB actually beats Vanguard’s Total Stock Market index by a couple basis points. Thanks for sharing with us!

      If you want to see a spirited discussion regarding individual stocks v. passive index funds, check out WCI’s Picking Individual Stocks Is A Loser’s Game. Some people took it personally, as if he was calling them a Loser to their face, when he was actually borrowing a phrase introduced to me by John Bogle that describes how investors as a whole will match the total market returns, and fees and middlemen will reduce their take, making it a “loser’s game” for the investors. The Gotrocks Family parable describes this phenomenon nicely. When Bogle repeats Buffett, I listen.


      • I had actually participated in that discussion on WCI. :O) Index funds are great so that you can set it and forget it, but for those that like a bit of excitement, taking a portion and building their own portfolio can be as satisfying (more so for many) than spending hours on a lake in a boat. :O) I’ll check out the parable you linked.

        • Oh, that’s too funny. I read through the comments once when the post was now, but didn’t re-read them all yesterday. I’d much rather be on the boat, but I find this blogging bit to be quite enjoyable, and I’m sure some people would much rather trade stocks than write blog posts replies to comments. 🙂


  • Frank

    Thanks for the link to the Personal Capital white paper. The fees quoted for TDAmeritrade (as an example), include 0.21% average mutual fund fee and 1.53% average advisory fee. I have bought Vanguard ETF’s at TDAmeritrade which are part of their no transaction fee ETF’s and with low expense ratio. Same for Schwab, as another reader stated. Getting rid of the advisory fees is easy, just do it yourself!

    • Nice, thanks for sharing the hard numbers with me and our readers.

      I’ve started writing a big post on DIY investing, with step-by-step instructions and lots of links to quality resources. It sounds like you can skip that one, but I think it will be helpful for individuals trying to figure out where to start.


  • SacredCowSlayer

    I’ve been down this ‘low fees equal nirvana vs. total performance that I can put in my pocket” discussion in my mind, and on my calculator for years.
    My personal understanding:
    1. I own a fund that returns 10% over long periods of time, either in dividends, or by realized/unrealized capital gains, that charges me 50% fees prior to the “total return” calculation of 10%. I have 10% to spend or on paper.
    2. I own the lowest cost Vanguard whatever, and it returns 9.5% with a mgmt fee of 0.000000000000000001%. I therefore end up with 9.5% to spend.

    Option #1 is better for me.
    I like the THOUGHT of option #2.
    The reality is that #1 is best.

    Can it provide 10%, after expenses, forever? No.
    I am a “market beater” not a “market’s average returns are good enough” person.
    How does it work out in the real world?
    The key to market timing is to not think of every little tinkle up or down as an opportunity.
    An OPPORTUNITY (capital letters for emphasis) comes along and you’ll know it. It does not have anything to do with calmness, rational thinking, “life will continue on as normal.”
    OPPORTUNITY comes when:
    1. The TV is screaming that all is lost, sell it all.
    2. Millions upon millions of jobs are being cut.
    3. Reasonable people declare that oil and gas will never be used again, so sell off any holdings you own.

    I wait, sometimes for half a decade or an entire decade, to buy. WHen it’s time to buy an asset class, or the market, I step in with 5-10 years worth of cash and crush it.
    The hardest part of this strategy is waiting 5-10 years to make any investments. Would’ve been great to buy long dated Treasuries in the meantime, but I read the wrong things (interest rates will rise soon, beware, etc). Oh well.
    Examples: I sold in 2007. All of it.
    Sat on my hands till 2009.
    I bought in Jan-April 2009. All chips back on the table. Was too early by 3 months, no biggie.
    Sat on my hands for 7 years, until 4 months ago after accumulating and waiting 7 years, then bought energy with 6 years of savings. CEFs, individual blue chip MLPs, ETFs in the energy space. All at 40-60% discounts to their pre-crash prices.
    What’s next? Who knows. Perhaps a total market crash, or perhaps another asset class will crash like energy just did. Healthcare is due a correction once we get costs under control and insurance reigned in. Depending on who gets elected will determine how that works out, possibly. Maybe not. Maybe the utility industry will crash next? Consumer staples? Telecom? Regardless, SPDRs will be there to let me own the whole industry (with low cost ETFs, no less! XLE in January-March 2016 was the one to buy, which one is next?)

    Regardless, this produces, in many cases, 50% returns per year for a year or two, then because these all pay 3% dividends when they’re at their all-time high, I end up earning 6-10% dividends by buying at 40-60% discounts to their previous high prices.. Nice.
    I know, I know, do the math, SacredCowSlayer. getting 10% for 5 years, plus 3% dividends is the same/greater than getting 0% for 5 years then 50% in year 6 with a 6% dividend. Or, the outcome is the same, so why bother?
    I will ask this: would you rather own XLE at $30 and watch it go up, or $60 while watching it go to $30 and (hopefully) back to $60? What if it never recovers to $60 and stops at $45? Which has a greater margin of safety?
    So, that’s the view from the Deep South.
    Let the flaming arrows be launched. I already know what you’re thinking, by the way. “You can’t reliably time the market, fees really matter because I say so, yes, but you are lucky 3 times, etc etc.”
    I would point you to Warren Buffet’s “luck” and market timing. Many times he waits for a crisis, THEN strikes. AMEX after the famous “salad oil fiasco” of the late 60s, preferred shares from Goldman Sachs in 2009 paying 10%, etc. Not all his buys are distressed, but many are. “Quality, distressed assets = long term capital gains and dividends.”

    Before you reply, read “Yes, You CAN Time the Market” by Ben Stein and Phil DeMuth. I’m just following the plan of a book I read! Also, don’t site “sources” that say “you can’t time the market, so just BUYBUYBUY today.”
    Why buy at all time highs? You know that, by looking at a historical chart, if you had saved bucks and slammed them into your favorite, low cost fund any time in 2009 you’d be ahead now.
    What’s the next asset class to crash? Be ready with massive cash for a major purchase!
    I can take the barbs headed by my way, sitting on my growing, massive dividend stream from distressed, quality assets purchased at 50% discounts. I write this post out of interest in presenting another side to the standard, “you can’t time the market/fees are the most important thing” posts I read everywhere. Think on it. We’re all smart folks. See what you think.

    • I would rather buy low and sell high like you, and I haven’t read the Stein / DeMuth book, so I may not be qualified to reply.

      I believe you have done well timing the market, and I know individual stock pickers who have also done very well with their choices. I also believe that the majority of market timers and individual stock owners will fail to beat the total market.

      For me, the emotion of deciding when to buy and sell, and the regret that comes with mistiming those events would drive me up a wall. For that reason, and what I believe is a low likelihood of personal success, I choose to dollar cost average and take the returns the indexes deliver. It works for me. If timing works for you and you’ve done well, more power to you.


  • Anonymous

    Nice article. You mentioned once that you have a four fund vanguard portfolio. So do you just rebalance once per year and keep adding each year and so on etc.

    Tax harvesting etc.?

    I like the 3 fund but is there anything more really to the basics?

    It seems after reading several books they simply say the same thing.

    The more complicated part comes in 2 parts.

    1. Asset allocation to manage risk.
    2. Which bonds etc to put money in for tax and inflation issues.

Share your thoughts with the PoF community.