We know what you’re thinking but, no, future Nik is not high on time-travel fumes. Paying an extra 2% in fees can decrease your final retirement savings by 40%. Here’s the low-down on high fees.
The standing start
Let’s use a simple example and assume that you invest R10,000. You don’t add to it, or withdraw any money for 30 years.
Let’s also assume that your money grows at 6% above inflation every year for the 30 years. So after a year, your R10,000 is worth R10,600.
Now let’s see what happens to your money when you pay 3% in fees, compared with 1%.
R10,600 – 3% fees (R318) = R10,282
vs
R10,600 – 1% fees (R106) = R10,494.
Sounds okay, right? At 3%, you’re about R200 worse off. Even the next four years don’t look so different:
After five years, the more expensive investment is still only around R1,200 worse off. But it’s taken five years to get to where the lower cost one got in three.
The acceleration
Now look what happens if we check in every five years rather than every year.
After year 20, the more expensive investment is worth almost R9,000 less than the low cost one. It’s also eight years behind – the low-cost fee got to R17,000 in year 12.
Over time, the gap keeps widening ... and things start to get really fast. Try not to blink.
After 30 years of paying 3%, your R10,000 investment has grown to R23,031. At the lower cost of 1%, it’s worth R42 484. Paying 2% more has cost you more than 40%.
Don’t stop now
What happens if you’re one of those diligent rarities who stays invested for an entire 40 year working life? You’ll end up with less than half. At 3%, your investment grows to R30,416. At 1%, it grows to R68,808.
Feeling bewildered?
If your maths and time-travel hasn’t left you at a loss for words yet, consider this: although you get R30,416 out at the end, you started off with R10,000. So your money grew by only R20,416. What you don't see is that, over those 40 years, you’ll have paid a total of R23,000 in fees. In other words, you made more money for someone else than you did for yourself.
For those of us who won’t be getting a visit from our future selves, take future Nik’s advice and pay lower fees.
