By Patricia Uceda, Spring 2015 Graduate Research Assistant
A lot of investments, such as mutual funds, have expense fees that can cut into your investment returns. While you may be getting a 7% annual return on your investment, fees and expenses could be chipping away 0.5 to 1.5% of this each year.
This may not seem like much, but it can add up. For example, if you make a 401(k) contribution of about $7,795 per year for 35 years, you will end up with about $1 million, assuming a 7% annual return and fees and expenses of 0.5%. However, if your fees are 1% higher, or 1.5%, you will need to save $9,690 per year to become a millionaire over 35 years, or about $1,895 extra per year to make up for the higher fees.
Therefore it is very important to always look closely look at the expense ratios of whatever investments you are considering.