Most people understand the benefits of refinancing their home loan or student loan. By lowering the annual interest rate, the owner of the home is able to reduce the loan payments and achieve greater leverage and purchasing power. Over the life of the mortgage, the savings in interest payments can be tremendous.
However, when it comes to investments such as mutual funds and exchange traded funds (ETFs), most people bury their heads in the sand and cringe at the thought of figuring out how to reduce their investment’s annual expenses. This can be a huge mistake.
Here’s why fees really matter
Assuming that an investor invests an average of $20,000 per year in their retirement plan, the $151,049 in lost savings in portfolio 2 would require an extra 7.55 years of work. Assuming the investor’s lost savings were $306,550, as in portfolio 3, it would take that person an extra 15 years of work to make up the difference.
Fees can be the difference between an on-time retirement and a delayed retirement. They can even mean the difference between reaching your financial goals and not reaching them.
Many physicians have experienced large amounts of debt such as mortgages, car loans, practice loans and student loans. The illustrations above show how investment fees are similar to the interest rates on loans.
Much like the interest paid to a banker, mutual fund fees are money you are paying to enrich the mutual fund company and the broker-dealers selling the funds. Lowering your investment fees is similar to lowering your loan interest rates. It means that you will pay less and keep more of your hard-earned money.
Physicians enjoy their careers and love helping their patients. However, there may come a time when the physician would like to do something else, such as change careers, hobbies, travel or philanthropy. Physicians want to know that they have a high likelihood of reaching their target date for retirement and their financial target. The chance of reaching these goals is increased when fees are kept to a minimum. Conversely, the chance of not reaching these goals is heightened by paying higher (unnecessary) investment expenses.