One Simple Switch Could Save Millennials Hundreds Of Thousands Of Dollars

Before you set up your retirement fund, you'll want to read this.

A NerdWallet analysis of retirement investments found that paying just 1 percent in fees could cost a millennial more than $590,000 in lost returns over the course of their savings lifetime.

Time is a double-edged sword for the generation born after 1980, the analysis found. Millennials have the advantage of three to four decades to build their retirement nest egg. But while investment dollars are compounding, investment fees are also growing. Over time, the analysis shows that the impact of fees can shave total retirement savings by more than 25 percent.

NerdWallet’s analysis

The analysis examined scenarios based on a 25-year-old who has $25,000 in a retirement account, adds $10,000 to the account every year, earns a 7 percent average annual return and plans to retire in 40 years.

Fees as small as 1 percent snowball over time as a portfolio grows. In one scenario, a managed mid-cap mutual fund with an expense ratio barely more than 1 percent would earn $1.77 million after 40 years. However, an index-based exchange-traded fund, or ETF, with a similar performance, but a fee of 0.09 percent, would grow to $2.3 million over 40 years, with the lost value related to fees only 2.5 percent — a big improvement from the 25 percent eroded by fees in a managed mid-cap fund.

Fees and 401(k)s

A similar analysis found that a typical target-date fund — a type of fund commonly included in 401(k) plans — with a 0.75 percent fee would grow to $1.9 million in 40 years. With a fee of about half as much, a robo-advisor portfolio — which manages money via computer algorithm, generally investing in low-cost ETFs — would grow to $2.2 million in those four decades.

The analysis looked not just at the amount paid in fees each year, but also examined how fees reduce future overall returns:Every dollar taken out to cover fees is one less dollar left to invest in the portfolio to compound and grow.

To see the full analysis, the data and the methodology used to determine the impact of investing fees on retirement accounts, click here.

NerdWallet is an A Plus content partner providing general news, commentary and coverage about personal finance from around the Web. Its content is produced independently of A Plus.

Kevin Voigt is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @kevinvoigt.

Cover image via Shutterstock.