Another instance in which the time value of money works against you is when considering advisor fees. Let’s revisit the earlier example in which annual $1,000 investments are made over 30 years. Suppose the market allows a return of 8% annually. From the previous example we know you could accumulate a nest egg of over $120,000 after 30 years. But instead of managing the investments yourself you pay an advisor 2% per year to manage the investments for you. Instead of riding the 8% curve to the $120,000 nest egg, you ride the 6% curve for an aggregated total of $83,000. The $37,000 shortfall (31% loss) ends up in your advisor’s pocket. Even if the advisor fee is “only” 1% annually, over 30 years your shortfall would amount to around 17%.
Fees have an insidious effect on our wealth accumulation. Zealously reduce fees whenever possible!