How paying 2% more can cost you more than 40%

Cape Town - Most retirement products cost around 3% in fees and paying this can mean you’ll retire with 40% less money, according to 10X Investments CEO Steven Nathan.

“That 40% difference may sound unbelievable. But if you’d told people 100 years ago that a car could go from 0 to 100kph in 10 seconds, they wouldn’t have believed it either. They’d have needed to see the car at a standing start and then accelerating," explains Nathan.

"Of course, in the 21st century, 10 seconds is hardly remarkable because we’re accustomed to cars doing that. Perhaps one day we’ll be as familiar with the real cost of fees. Until then, it’s worth illustrating how investing costs accelerate over time.”

The standing start

Nathan uses a nice, round number and assumes that you invest R10 000.

“You don’t add to or withdraw any money for 30 years and we will 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,” he says.

“Now let’s see what starts happening 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 only about R200 worse off,” says Nathan.

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. However, it’s important to note that it’s taken five years to get 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 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,” explains Nathan.

Over time the gap keeps accelerating, and this is when things start to change very quickly.

After 30 years of paying 3%, your R10 000 investment has grown to R23 000. At the lower cost of 1%, it’s worth R42 000.

“This is where we see the impact of paying 2% more and how it has cost you more than 40%,” says Nathan.

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 000, while at 1% it grows to R68 000," says Nathan.

"Even if you paid 2% in fees for those 40 years, which is much better than paying 3%, you still only end up with R45 000. That’s only about two thirds of the R68 000 you get paying 1%."

Feeling nauseous?

Nathan says that if high fees aren’t making you sick yet, consider what your fees actually cost you. Over 40 years at 3%, you’ll have paid a total of R23 000 in fees. That’s almost as much as your whole investment is worth.

You also need to remember that although you get R30 000 out at the end, you started off with R10 000, therefore your money only grew by R20 000. Over 40 years, you paid more money than you made – you actually lost money.
 
“At the end of the day it’s not just disciplined saving and smart investing that will result in a better financial outcome. Above all, low fees mean more money in your pocket at retirement. So start off by making the right investment decisions,” concludes Nathan. 

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