Question

You have been a diligent saver and at age 30 you have managed to save $50,000 for your retirement at age 65. You estimate that your invested savings will make on the average $3000 per year. The fund management fees are 1.5% of your investment balance at the end of the year after the investment returns have been added. You pay fees on a percentage of the total investment balance — not on annual investment gains of your hard earned retirement savings. What will be the difference in the retirement savings of $50,000 at age 65 if the fund management fees were 0.5%?
What advice you will have for a potential client who wants independent advice on how to choose funds based on management fees/costs?

Answer 1

If Management Fees is 1.5%

Savings at the age of 65 is $110,386.54, if managment fees is 1.5%

If Management Fees is 0.5%

Savings at the age of 65 is $138,018.53, if managment fees is 0.5%

Therefore if management fees is 0.5% instead of 1.5% then there is increased savings of $27,631.99.

ADVICE

It is advisable to choose a fund where management fees is lower. Lower the management fees, greater is the savings. It is recommended to choose fund with 0.5% management fees.