Where Should I Invest My Money for Retirement? – Continued

Continued from

The study calculated the average expenses for nearly 17,000 mutual funds and then sorted the funds into two groups: those with expenses below the average and those with above-average expenses. The higher cost funds’ average expense was 2.08% per year, versus 1.06% for the lower cost funds. So if you invest $10,000, you will pay about $100-200 per year in fees. Over time these fees add up.

How well do these funds perform? The study looked at the annualized returns of these funds over 10 years and found that the lower cost funds performed better than the higher cost funds in eight of nine fund categories. The annualized return of the higher cost funds averaged 9.17% while the lower cost funds averaged 10.94%–a difference of 1.77% each year!

This means that a higher cost fund must earn 1.77% more per year than the lower cost fund just to stay even in overall performance. Very few funds can achieve this over a long period of time. Therefore, you should pay close attention to the annual expenses charged by their fund.

You can find what your fund charges in expenses by looking at the prospectus published by each fund. If you didn’t save a copy of your prospectus, you can look for it on the fund’s Web site. Each prospectus must publish a chart that shows how much you would pay in expenses on a $10,000 investment after one, three, five and ten years. Use the ten-year comparison.

For example, the Oakmark Select Fund’s fees over ten years are $1,306 (Class I) whereas the similar fees for the Vanguard S&P 500 Fund are $217 (Investor Shares). This is a significant difference that will continue to grow over time.

Compare with Index Fund Expenses

When you look at the expenses of a fund you own or are considering investing in, make sure you are comparing expenses from similar funds. In other words, if your fund invests primarily in large companies, you should compare expenses with other funds that also invest in large companies.

The mutual funds that will consistently have the lowest expenses are index funds. Index funds follow a passive investment strategy by purchasing stock in companies that represent a benchmark and then holding onto the stock. (Actively managed funds, on the other hand, regularly buy and sell stock from different companies, thus increasing fees for the fund.)

The benchmark can be the S&P 500 (the 500 largest U.S, companies), the Russell 2000 (a representative of the smallest U.S. companies), or the Wilshire 5000 (a representative of all U.S. companies). There are many other types of index funds that track particular industries or other benchmarks. But the S&P 500, the Russell 2000, and the Wilshire 5000 are the most popular benchmarks that index funds track.

Here are some examples of index funds and their expenses as of May 2015 (using as a comparison a $10,000 investment over ten years):

Fidelity (www.fidelity.com)

Spartan 500 Index Fund (S&P 500 Index): $128

Small Cap Enhanced Index Fund (Russell 2000): $847

Spartan Total Market Index Fund (Wilshire 5000): $128

T. Rowe Price (www.troweprice.com)

Equity Index 500 Fund (S&P 500): $343

Small-Cap Stock Fund (Russell 2000): $1,120

Total Equity Market Index Fund (Wilshire 5000): $443

Vanguard (www.vanguard.com)

Large-Cap Index Fund (S&P 500): $217

Small-Cap Value Index Fund (Russell 2000): $293

Total Stock Market Index Fund (Wilshire 5000): $217

Use the above examples to compare against expenses in the stock mutual funds you are currently invested in. If you invest in index funds and pay attention to fund expenses, you will greatly increase your chances of getting a higher return for your money.

A modified version of this article was first produced by Think Small. For additional family child care business publications, contact Think Small’s publishing division, Redleaf Press, at 800-423-8309 or visit www.redleafpress.org.

Image credit: http://www.thedigeratilife.com/blog/beat-index-funds/

Money Management smallFor more information about retirement planning, see my book Family Child Care Money Management and Retirement Guide.

3 replies

  1. My Mother left me some money do I have to report it to the IRS

    • My mother left me some money do I have to report it or invested, On my retiretment , I will like to get the books in Spanish if you have them how do I oder

      • No, money given to you by your mother is a gift and is not taxable, so you don’t have to report it to the IRS. Unfortunately, my books are not in Spanish – sorry!

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