A rounding error. Insignificant. Nobody pays attention to the 1%. Well you should, because it could shave hundreds of thousands of dollars, pounds or euros off your investments and wreck your dreams of a wealthy and happy retirement. Hard to believe, isn't it? But it is true. I’ll explain.
Guilty as charged
Whether you save for retirement in a pension, or by directly investing in stocks and shares, there are charges for doing so. These include trading platform fees, underlying fund charges and fees, and commission for any financial advice. You need to examine these charges very carefully because they can vary massively and will be deducted from the money you have invested.
The lower the charges, the more money you will have left for yourself when you reach retirement. It therefore pays to keep them to a minimum, particularly annual charges, which can seem tiny but really add up because they are deducted from your investments year after year after year. And because they are charged as a percentage of your holdings they will get more punishing as your portfolio grows in value. You cannot escape them altogether, but with a little effort you can shrink them massively.
Expats are particularly vulnerable to sky-high investment charges. Commission-hungry, unregulated offshore advisers lure many into buying expensive offshore portfolio bonds or inflexible fixed-term contractual plans which lock their money away for years, with huge penalties for those who try to break free. Upfront and annual charges on both types of plan can be punitive. In the worst cases, they can total 5% a year, which you will pay regardless of how your investments perform. Even if the market grows by 7% a year, you will get just 2%, which is little better than cash.
Even much lower fees can erode your future wealth. Say you invest directly in a mutual fund with an annual charge of 1.50%. That doesn't sound much, does it? However, it will still nibble away at your money, year after year, until one day you find you have far less than you expected. Let's say you already have $300,000 of retirement savings, and are investing a further $1,000 every month. You are 40 years old, and plan to work another 25 years. Your money is invested in a spread of funds with an average charge of 1.50%. Now let’s assume your money grows at 5% a year after charges. After 25 years, you will have a total of $1,192,731 in your pot. Congratulations, you're a millionaire, kind of. However, you could have been a lot wealthier.