Saturday, February 15, 2014

The Mathematics of 401(k) Fee Management

The managerial aristocracy and investment community make a very basic assumption of the human condition - we don't like mathematics.  And if we occasionally pretend to like it, we really don't understand it.  And we especially don't understand it in the context of compounding.

From The Atlantic - - The Crushingly Expensive Mistake Killing Your Retirement:

"This 1.25 percent difference in annual fees adds up to a six-figure difference in lifetime earnings. That's because you don't just lose the money you pay in fees. You lose the returns you could have had on the money you pay in fees, too. As you can see in the chart below, this compounding effect doesn't matter much for the first 20 years or so, but really accelerates after that. If you chose the lowest-cost index fund, you'd have $15,000 more at age 45, $55,000 more at 55, and $159,000 more at 65. That would balloon to $257,000 more if you waited to retire at 70."

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