If you’re lucky enough to work somewhere with a 401(k) (I am!) and you’re reading this blog, you’re probably enrolled. The match on the first few percent of money you invest plus the tax savings makes it basically the best possible place for your savings.
My company just switched providers, which meant I had to re-enroll. They automatically sign you up at 4 percent and match 100 percent of that, which is quite nice. They also automatically enroll you in a Target Date Fund based on your age – so I was in the Retirement 2055 bucket (at which point I will be 64 years old. Crazy.)
That’s not a bad fund to be invested in – it’s mostly stocks, since I have a long runway until my old-person years, with the idea that it gets moved more into bonds as you get older. But the expense ratio is .75%
An expense ratio is the annual fee that’s deducted from your account for management fees. When you’re starting out, it’s a small number – there’s less than $2k in my 401(k) right now, so my fee would only be $15 this year. No biggie. But the fee gets bigger every year. Say I eventually have $100k in the account – that year, my fee would be $750. Yuck.
Luckily, the company also offers index funds through Vanguard, where the expense ratio is .05%. That means that at $2k the fee is $1. At $100k, it’s $50. That’s a huge difference.
This calculator shows how much extra you pay with a higher expense ratio. I plugged in an initial investment of $1,000 and contributing 10% of my current paycheck every year (althrough presumably my pay will eventually go up) for 30 years. Over 30 years, the .05% fund would cost me $2,642. The .75% fund would cost $36,974.
Go look at your 401(k) options. It took me two minutes to change my allocation, and if you don’t have two minutes to save $34,000 then you are far wealthier than I.