Why small fees grow so large
Investment fees are charged as a percentage of your balance every year, so they compound just like returns do, only against you. A 1% fee does not cost 1% of your money; over decades it costs a large share of the growth, because every dollar taken out is a dollar that can no longer grow.
Ending balance = growth at (return − fee) each year
Starting with $50,000, adding $500 a month for 30 years and earning 7% before fees, a 1% yearly fee leaves about $803,000, while a 0.05% index fund leaves about $1,004,000. The difference is roughly $200,000, a fifth of the money.
Where fees hide
Fund expense ratios, advisory fees, 401(k) plan fees and trading costs all count. Broad index funds from large providers now charge 0.03% to 0.10% a year, while actively managed funds and advisers often charge 0.5% to 1.5% combined. Good advice can be worth paying for, but it helps to know the price in dollars over your lifetime, not just as a small percentage.
Common questions
How much does a 1% fee cost over 30 years?
Often a fifth or more of your final balance compared with a low-cost index fund, depending on how much you invest.
What is a good expense ratio?
For broad index funds, under 0.1% a year is common and considered low.
Are advisory fees worth it?
Sometimes, if the advice changes your behaviour or taxes for the better. Compare the dollar cost here with the value you expect.
This calculator gives estimates for planning. Real returns, rates and prices change, so treat the result as a guide rather than a promise. Read how we build and check our calculators.