Good post.  I think the impact is actually even greater.  If you hadn't paid those fund fees, you would have been able to invest the capital and earn the 8% return on all the cash until age 65.  If you include that opportunity cost, you're actually giving up about $4.6M for the 1% ER case. 

On the other hand, very few people manage to save $15K per year or manage to make 8% returns over a long time horizon. From the data I've seen, the numbers are more like a few thousand bucks and 4% (sadly).  Also, it's likely that when you become a millionaire in your 40s you'll be sucked into more "sophisticated" products like hedge funds, where you'll have the privilege of paying more like 4% per year in fees instead!

Best,
Oildog

I ran $3000, $4000, $5000, yearly saving goals every year with 5% increase every year till age 65.

No matter what your savings levels are, you'll end up paying 47% of your net worth to mutual fund industry over your lifetime.

With 5K start, a great saver will end up with close to $2M at age 65. He/She will pay close to $1M (magic number in my spreadsheet is 47%) to mutual fund industry during these years!!

I constructed low cost ETF portfolios for some of funds I own. Methodology:

Use M* to find asset value mix & find equivalent ETFs. For example took TRowe target retirement fund, used SPY, EFA, AGG to construct equivalent portfolio. I did not find "low cost" options did any better (for me to throw in towl) than actively managed fund in last 5-10 years. Keeps me interested in funds. I unfortunately also own OAKLX, where low cost option is no brainer.

As academia preaches, fund costs (and taxes) do eat a lot into your lunch. I am finding ways to convince myself through this random musing :- )

do_AA,

You said: Contributions = 15K Fixed/ year for life

I'm assuming you actually meant 15k annual contributions until age 65, or 45 years of contributions. The costs are remarkable, but so is the power of time and compounding.

Here is what you did not say; An investor who begins investing at 20 and adds 15k/year for 45 years will end up with 6.35 million dollars!  If that investor waits until 30 to start, he ends up with 2.7 million.

Using the 8% ROR, consider the 45 year investor in your example: In the first 5 years of investing, he contributes $75,000 and ends up with $88,000. Compounding has made him $13,000. In the last five years, the investor again adds his $75,000, but compounding in those last five years has boosted his portfolio from 4.2 million at 40 years to 6.35 million at 45 years. Compounding in the last five years has earned  2.15 million.

It's unfortunate that when investors are new and excited about investing, nothing much appears to be happening at all. When you are young, saving/investing contributions far outweigh everything else. Also, you have to keep plugging away, and you have to operate as lean and efficient as you can. You don't need to beat the market. Just be sure you don't give anything away to costs and behavioral mistakes.

By the way, taxes can easily take much more than 1% if you aren't careful.

Investing is not a race horse; it's a plow horse.

Paul 

oildog:

Good post.  I think the impact is actually even greater.  If you hadn't paid those fund fees, you would have been able to invest the capital and earn the 8% return on all the cash until age 65.  If you include that opportunity cost, you're actually giving up about $4.6M for the 1% ER case. 

On the other hand, very few people manage to save $15K per year or manage to make 8% returns over a long time horizon. From the data I've seen, the numbers are more like a few thousand bucks and 4% (sadly).  Also, it's likely that when you become a millionaire in your 40s you'll be sucked into more "sophisticated" products like hedge funds, where you'll have the privilege of paying more like 4% per year in fees instead!

Best,
Oildog

And let's not forget about the loads some funds charge.

Greg

Oh, I take all that stuff with A "Grain of Salt", seeing as alot of it is marketing by Vanguard and the Indexer's band of reknown..... and alot of Indexer Firms.   And it gets more Press by them when They start loosing Clients.. and $...   and Hey? Aren't we a Capitalistic-Supply Side  Society? If we don't get the people to Spend and Buy vs save? What happens?  Our Economy will  Collaspe! And Kiss your Job Good bye..

And do you want to see Thousands of Bear Stearn type People Driving Taxi cabs?Selling Apples and Pencils on street corners?

They need that $ to pay for the BMW's, +$500k Homes in the Suburbs and live the Good life ! The American Dream...And 50% of the East Coast would go into Bankruptcy! Especially Boston,Mass..!

Sure, go ahead and pay less fee's, but you also will make Less..And Ever notice how  these Aritcles always come out of the Woodwork during a Down Market?  mmmmm

8% apy? In what? a Bal Index Port? Probably have to be at least a 70/30 if not higher equity mix per my Records, since 60/40 and less did only about 7% past 10 yrs,.

And I like how they like to leave out AMBF's that ave 10-12% apy for past 10 yrs...

and how would you like to be paid less for your Job? and are you self employed? And the average working Life of a Fund Mgr. is how Long? and he is more Self Employed than anything else and thus should and has to make at least 5x as much if not more..since if he screws up? his career is Ruined and has to become either a Taxi cab driver or worse, A Index Fund Mgr..

And I love how Salary people attack the Self Employed.. not even having been there ..

I think All Salaried People ought to be converted to at least 25% to 50% on commission basis... Giving one a Guaranteed Salary is more Unionizing than anything else..and restricts production and performance and Attitudes..

same kinds of people probably complain their Dr. is overpaid too or a Top Speicalist is way over paid.... Like Europeans and Canadians about our Health Care system, but they change their tunes when they have to come to us to save their lives/butts.( even Their  Prime Min. and Gov't Leaders & Familes Come to us to save their Lives )

If a Guy/Firm wants 3% fees to make me 25-100% more than the next guy? He's worth it! IMO and they should Be raising their rates and Fees to All those Nickel and Dimers..> would you want to have to spend the time  taking care of some $5,000-$50,000 account making a lousy $30/mo from it ( Ave 1.3% on $27k = $350/yr fees)  ?

Min. should be raise to Get into the game.. To at least $10k per fund.. It will keep those Nervous -Nickle & Dime people out of the markets,  that influence the markets and drive them down alot more than they should be..when they should be putting their Nickels and Dimes into a Home and CC's instead..?

hey? There's an alternative to paying those Fee's! Own Rental Property instead..

No person I know had 15k to invest during any year in their 30s, much less when they were 20 (and every year in their 20s). A few had big money, but had trust funds instead of jobs, and therefore no 401k plans.

However, I do think that the fund industry as a whole is out to steal our money.