## How to calculate the effect of expense ratio on retirement savings?

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Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### How to calculate the effect of expense ratio on retirement savings?

I'm new to investing in general and I'm interested in ethical investing. I'm comparing various ESG funds, which generally have higher expense ratios than non-ESG funds. Take the following three funds for example:

VTI: ER=0.03%
ESGV: ER=0.09%
VEGN: ER=0.60%

I'm curious how one might estimate the effect of the various expense ratios on retirement savings. The figure at the top of the Expense ratios wiki article, which is sourced from this article (p. 8 of the PDF), shows a scenario in which an investor gets 10+ extra spending years by reducing expense ratio by 1%.

The description of the figure in the PDF states:
The blue-shaded area shows ending savings with an investment return of
9% assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant
thereafter. Inflation is assumed to be a constant 3%. The tan-shaded area assumes
1% greater return each year
Does this mean that the tan-shaded area shows ending savings with an investment return of 10% at age 25, linearly decreasing to 7% at age 80?

Does this mean that an investor could potentially gain an extra 10 spending years by choosing an index fund with an expense ratio of 1% instead of a fund with an expense ratio of 2%? How might an investor calculate these gains ahead of time? For example, to calculate the effect of expense ratio on time to retirement, could one simply plug in a 1% greater "Annual return on investment" in this Early Retirement Calculator?

I would like to avoid starting a debate on the merits of ethical investing and ESG funds. I would like to focus only on the effect of expense ratio on earnings.

Thank you in advance for any insights you can provide.
retired@50
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Location: Living in the U.S.A.

### Re: How to calculate the effect of expense ratio on retirement savings?

See the wiki page that discusses "How much you lose to annual fees".

Whether the fee comes from an increased expense ratio, or an adviser, the results are similar.

Welcome to the forum.

Regards,
Last edited by retired@50 on Sun Mar 12, 2023 3:07 pm, edited 1 time in total.
This is one person's opinion. Nothing more.
Pops1860
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### Re: How to calculate the effect of expense ratio on retirement savings?

This thread has been moved to the “Personal Investments” forum. OP is evaluating his personal investment strategy. Moderator Pops1860
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw
arcticpineapplecorp.
Posts: 12410
Joined: Tue Mar 06, 2012 8:22 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sat Mar 11, 2023 8:15 pm I'm curious how one might estimate the effect of the various expense ratios on retirement savings. The figure at the top of the Expense ratios wiki article, which is sourced from this article (p. 8 of the PDF), shows a scenario in which an investor gets 10+ extra spending years by reducing expense ratio by 1%.

The description of the figure in the PDF states:
The blue-shaded area shows ending savings with an investment return of
9% assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant
thereafter. Inflation is assumed to be a constant 3%. The tan-shaded area assumes
1% greater return each year
Does this mean that the tan-shaded area shows ending savings with an investment return of 10% at age 25, linearly decreasing to 7% at age 80?

Does this mean that an investor could potentially gain an extra 10 spending years by choosing an index fund with an expense ratio of 1% instead of a fund with an expense ratio of 2%? How might an investor calculate these gains ahead of time? For example, to calculate the effect of expense ratio on time to retirement, could one simply plug in a 1% greater "Annual return on investment" in this Early Retirement Calculator?
yes, that's correct regarding the 10% decreasing to 7% for the tan vs the 9% decreasing to 6% for the blue shaded area.

but regardless, i think the takeaway is (and I think you can see this by that chart) fees matter over the long run and much more later than earlier. You can see they don't matter as much from 25-40 but then start to matter from 45 to 65 and then REALLY matter from 65 to 90 or from 65 to 80 if you miss out on those 10 extra years of spending...because you gave that to your advisor.

and retired@50 shared a good wiki link to help explain it even more granularly.

I happen to like the chart below from Vanguard because it also shows how much of your wealth you give away if you don't control fees. Imagine giving away a third of your ending wealth to your advisor who charged you 1% over 40 years:

source: https://web.archive.org/web/20130509023 ... f-returns/

That's why the Fred Schwed book was called, "Where are the customer's yachts?"

Bogle called it the tyranny of compounding costs. He is credited for coming up with the costs matter hypothesis.
Last edited by arcticpineapplecorp. on Sun Mar 12, 2023 11:44 am, edited 1 time in total.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
dbr
Posts: 44110
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sat Mar 11, 2023 8:15 pm
Does this mean that an investor could potentially gain an extra 10 spending years by choosing an index fund with an expense ratio of 1% instead of a fund with an expense ratio of 2%? How might an investor calculate these gains ahead of time? For example, to calculate the effect of expense ratio on time to retirement, could one simply plug in a 1% greater "Annual return on investment" in this Early Retirement Calculator?
Yes. Another way to account for AUM is to tally it as a withdraw and spend, which it is. If you have a portfolio and were not taking any withdrawals, you have neglected that the advisor is in fact withdrawing 1% of your portfolio every year. If you are taking withdrawals, don't forget to add the AUM to your withdrawals. If you are still saving, you should subtract the AUM that is being removed every year.

To put this in perspective, if a person had a plan to safely withdraw 4% in retirement they have to account for 1% already taken by the advisor and can safely take only 3% for themselves. A 1% AUM is a 25% tax on the retiree income. A 2% AUM is a 50% tax on retiree income. Don't forget that AUM advisors also often place clients in high cost funds. A 1% AUM and 1% in expense ratios puts half of a retirees income in the pocket of the advisor and the fund companies.
aristotelian
Posts: 11255
Joined: Wed Jan 11, 2017 7:05 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Calculate returns based on expected CAGR. Then recalculate the returns based on CAGR minus the expense ratio of the fund or their weighted average.
dbr
Posts: 44110
Joined: Sun Mar 04, 2007 8:50 am

### Re: How to calculate the effect of expense ratio on retirement savings?

Yes, and because CAGR is compound annual growth rate the effect on the end result requires this to be compounded.

1.06^30=5.74
1.05^30=4.32
1.04^30=3.24
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Thank you so much to everyone who took the time to reply. These answers really help to highlight to importance of expense ratio. I will dig more carefully into the math when I have time.
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

retired@50 wrote: Sat Mar 11, 2023 8:25 pm See the wiki page that discusses "How much you lose to an annual fees".

Whether the fee comes from an increased expense ratio, or an adviser, the results are similar.

Welcome to the forum.

Regards,
One thing that I find interesting is that a 1% difference in return on investment makes very little difference in time to retire: for example using this Early Retirement Calculator with a 5% return on investment, time to retire is 12.4 years, but with a 6% return on investment, time to retire is 11.9 years. This initially fooled me into thinking that return on investment doesn't make much difference. But if you look at wealth growth after retirement using the table from the article that you linked, the effect becomes much more obvious.

This raises the question of what someone's goals are for investing. If an investor's only goal is to become financially independent (that is, annual return on investment covers annual expenses), then annual fees wouldn't matter nearly as much, as long as they investor is able to maintain financial independence. But, if an investor also wants to see significant wealth growth after retirement, then obviously annual fees matter significantly.

Would you agree with that conclusion?
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Sat Mar 11, 2023 8:59 pm i think the takeaway is (and I think you can see this by that chart) fees matter over the long run and much more later than earlier. You can see they don't matter as much from 25-40 but then start to matter from 45 to 65 and then REALLY matter from 65 to 90 or from 65 to 80 if you miss out on those 10 extra years of spending...because you gave that to your advisor.
Thank you for your informative reply. I'm curious to hear your thoughts on my conclusion (from my previous post) that annual fees wouldn't matter much to someone whose only goal is financial independence / early retirement, as long as they are able to cover expenses with return on investment. When we refer to "10 extra years of spending", we're assuming that the retiree is not covering their expenses with their return on investment, so their net worth is gradually decreasing to \$0, right? But if a retiree is covering their expenses with return on investment, then their wealth should continue to grow indefinitely, correct? So, if they don't care how quickly their wealth grows, then annual fees wouldn't matter as much, correct?
retired@50
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Location: Living in the U.S.A.

### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sun Mar 12, 2023 2:33 pm
retired@50 wrote: Sat Mar 11, 2023 8:25 pm See the wiki page that discusses "How much you lose to an annual fees".

Whether the fee comes from an increased expense ratio, or an adviser, the results are similar.

Welcome to the forum.

Regards,
One thing that I find interesting is that a 1% difference in return on investment makes very little difference in time to retire: for example using this Early Retirement Calculator with a 5% return on investment, time to retire is 12.4 years, but with a 6% return on investment, time to retire is 11.9 years. This initially fooled me into thinking that return on investment doesn't make much difference. But if you look at wealth growth after retirement using the table from the article that you linked, the effect becomes much more obvious.

This raises the question of what someone's goals are for investing. If an investor's only goal is to become financially independent (that is, annual return on investment covers annual expenses), then annual fees wouldn't matter nearly as much, as long as they investor is able to maintain financial independence. But, if an investor also wants to see significant wealth growth after retirement, then obviously annual fees matter significantly.

Would you agree with that conclusion?
No.

To become financially independent while paying a higher annual fee would require more savings (dollars) committed to the portfolio. This means either working longer or saving a higher percentage of wages while working. So, you have to consider the additional years of work, or reduced standard of living from reduced spending during the accumulation phase.

In my book, every dollar spent on costs is a dollar not available for achieving financial independence sooner, or for enjoying a higher standard of living.

If you happen to wind up with too much money, you can always give some away to charity. I'd rather direct my charitable giving as I see fit, rather than have those dollars spent on costs (either during accumulation or during retirement).

Regards,
This is one person's opinion. Nothing more.
arcticpineapplecorp.
Posts: 12410
Joined: Tue Mar 06, 2012 8:22 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sun Mar 12, 2023 2:39 pm
arcticpineapplecorp. wrote: Sat Mar 11, 2023 8:59 pm i think the takeaway is (and I think you can see this by that chart) fees matter over the long run and much more later than earlier. You can see they don't matter as much from 25-40 but then start to matter from 45 to 65 and then REALLY matter from 65 to 90 or from 65 to 80 if you miss out on those 10 extra years of spending...because you gave that to your advisor.
Thank you for your informative reply. I'm curious to hear your thoughts on my conclusion (from my previous post) that annual fees wouldn't matter much to someone whose only goal is financial independence / early retirement, as long as they are able to cover expenses with return on investment. When we refer to "10 extra years of spending", we're assuming that the retiree is not covering their expenses with their return on investment, so their net worth is gradually decreasing to \$0, right? But if a retiree is covering their expenses with return on investment, then their wealth should continue to grow indefinitely, correct? So, if they don't care how quickly their wealth grows, then annual fees wouldn't matter as much, correct?
the problem with this thinking is:
1. you don't know when you'll die (so it's hard to plan when you'll run to \$0. Better to have 10 extra years of cushion compared to not, right? If you think you'll live to 95 and you live to 105, and I've seen that too many times to count...you're toast).

2. you may have legacy needs (gifting/charitably inclined/inheritance for family/friends)

I also think that assuming you're covering your expenses with return on investment is a dangerous notion in light of sequence of return risk. There may be many years where your investments are not growing, and in fact, losing value. Wouldn't you rather have a 10 year cushion for these events rather than running out of money prematurely because you had to dip into principal for too long, instead of assuming you'd be drawing on growth that didn't materialize as you expected?

I think a simpler way to think about it is:
Why pay a fee if you don't have to?

You're talking/asking about whether it "matters" to pay a fee (over some ill defined time period) but if you don't have to pay a fee, why would you?

I use the analogy if you can buy a candy bar from walmart (or other discount store) for \$1 or pay \$40 for the same candy bar (at an expensive department store) what would you do? You'd be crazy to pay 40 TIMES what it costs for the same candy bar, right?

Look at the most expensive S&P500 index funds (yes, read that again, index fund) compliments of Eric Balchunas's keynote address to the Bogleheads 2022 conference:

source: https://boglecenter.net/wp-content/uplo ... on_-_1.pdf
(page 9 of 76 on the slides)

The first one, Rydex, charges 1.65% vs 0.04% for VTSAX. That's 40X more expensive for the same product. Why would you do that?

So if you don't have to do that, why would you?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

retired@50 wrote: Sun Mar 12, 2023 2:47 pm
Rom wrote: Sun Mar 12, 2023 2:33 pm
retired@50 wrote: Sat Mar 11, 2023 8:25 pm See the wiki page that discusses "How much you lose to an annual fees".

Whether the fee comes from an increased expense ratio, or an adviser, the results are similar.

Welcome to the forum.

Regards,
One thing that I find interesting is that a 1% difference in return on investment makes very little difference in time to retire: for example using this Early Retirement Calculator with a 5% return on investment, time to retire is 12.4 years, but with a 6% return on investment, time to retire is 11.9 years. This initially fooled me into thinking that return on investment doesn't make much difference. But if you look at wealth growth after retirement using the table from the article that you linked, the effect becomes much more obvious.

This raises the question of what someone's goals are for investing. If an investor's only goal is to become financially independent (that is, annual return on investment covers annual expenses), then annual fees wouldn't matter nearly as much, as long as they investor is able to maintain financial independence. But, if an investor also wants to see significant wealth growth after retirement, then obviously annual fees matter significantly.

Would you agree with that conclusion?
No.

To become financially independent while paying a higher annual fee would require more savings (dollars) committed to the portfolio. This means either working longer or saving a higher percentage of wages while working. So, you have to consider the additional years of work, or reduced standard of living from reduced spending during the accumulation phase.

In my book, every dollar spent on costs is a dollar not available for achieving financial independence sooner, or for enjoying a higher standard of living.

If you happen to wind up with too much money, you can always give some away to charity. I'd rather direct my charitable giving as I see fit, rather than have those dollars spent on costs (either during accumulation or during retirement).

Regards,
Hmm, this is where I want to be careful not to turn this into a discussion on the merits of ESG funds. However, if I'm comparing for example VTI (ER=0.03%) and ESGV (ER=0.09%), which has a 0.06% higher expense ratio, then I might compare those expense ratios using a retirement calculator and find that the 0.06% difference in return on investment only requires me to work a few extra months to achieve financial independence. (Of course, the effect becomes greater the longer my timeline to financial independence.) And if I use the chart that you linked to compare, say, 0.05% annual fee vs. 0.10% annual fee, I see that the loss in net worth is only 4% vs. 8% after 80 years. So I might decide that for me personally, the social benefit of investing in ESGV over VTI is worth the modest losses in wealth.

So, isn't it more a question of how much wealth you would be sacrificing and whether the investor can accept that level of loss?
Topic Author
Rom
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Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Sun Mar 12, 2023 2:55 pm I also think that assuming you're covering your expenses with return on investment is a dangerous notion in light of sequence of return risk. There may be many years where your investments are not growing, and in fact, losing value. Wouldn't you rather have a 10 year cushion for these events rather than running out of money prematurely because you had to dip into principal for too long, instead of assuming you'd be drawing on growth that didn't materialize as you expected?
This is a very interesting/important point that I had not considered. Thank you for raising it. Am I right in thinking that sequence risk (e.g. the risk of having to make retirement withdrawals during market decline) is what the Trinity study and the 4% safe withdrawal rule were trying to address?
I think a simpler way to think about it is:
Why pay a fee if you don't have to?

You're talking/asking about whether it "matters" to pay a fee (over some ill defined time period) but if you don't have to pay a fee, why would you?
See my last reply regarding balancing the investor's perceived social benefit of ESG funds vs. the higher cost ratio.
retired@50
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sun Mar 12, 2023 3:21 pm
retired@50 wrote: Sun Mar 12, 2023 2:47 pm
Rom wrote: Sun Mar 12, 2023 2:33 pm
retired@50 wrote: Sat Mar 11, 2023 8:25 pm See the wiki page that discusses "How much you lose to an annual fees".

Whether the fee comes from an increased expense ratio, or an adviser, the results are similar.

Welcome to the forum.

Regards,
One thing that I find interesting is that a 1% difference in return on investment makes very little difference in time to retire: for example using this Early Retirement Calculator with a 5% return on investment, time to retire is 12.4 years, but with a 6% return on investment, time to retire is 11.9 years. This initially fooled me into thinking that return on investment doesn't make much difference. But if you look at wealth growth after retirement using the table from the article that you linked, the effect becomes much more obvious.

This raises the question of what someone's goals are for investing. If an investor's only goal is to become financially independent (that is, annual return on investment covers annual expenses), then annual fees wouldn't matter nearly as much, as long as they investor is able to maintain financial independence. But, if an investor also wants to see significant wealth growth after retirement, then obviously annual fees matter significantly.

Would you agree with that conclusion?
No.

To become financially independent while paying a higher annual fee would require more savings (dollars) committed to the portfolio. This means either working longer or saving a higher percentage of wages while working. So, you have to consider the additional years of work, or reduced standard of living from reduced spending during the accumulation phase.

In my book, every dollar spent on costs is a dollar not available for achieving financial independence sooner, or for enjoying a higher standard of living.

If you happen to wind up with too much money, you can always give some away to charity. I'd rather direct my charitable giving as I see fit, rather than have those dollars spent on costs (either during accumulation or during retirement).

Regards,
Hmm, this is where I want to be careful not to turn this into a discussion on the merits of ESG funds. However, if I'm comparing for example VTI (ER=0.03%) and ESGV (ER=0.09%), which has a 0.06% higher expense ratio, then I might compare those expense ratios using a retirement calculator and find that the 0.06% difference in return on investment only requires me to work a few extra months to achieve financial independence. (Of course, the effect becomes greater the longer my timeline to financial independence.) And if I use the chart that you linked to compare, say, 0.05% annual fee vs. 0.10% annual fee, I see that the loss in net worth is only 4% vs. 8% after 80 years. So I might decide that for me personally, the social benefit of investing in ESGV over VTI is worth the modest losses in wealth.

So, isn't it more a question of how much wealth you would be sacrificing and whether the investor can accept that level of loss?
I agree that a debate on the merits is off topic. If you want to spend 6 additional basis points (or more) that's up to you.

In the end, a tiny expense ratio difference will likely be overwhelmed by the actual (over or under) performance of ESGV vs. VTI over the next 50 years (or however long your investing horizon is). I have no idea which fund will do better.

Regards,
This is one person's opinion. Nothing more.
arcticpineapplecorp.
Posts: 12410
Joined: Tue Mar 06, 2012 8:22 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sun Mar 12, 2023 3:35 pm
arcticpineapplecorp. wrote: Sun Mar 12, 2023 2:55 pm I also think that assuming you're covering your expenses with return on investment is a dangerous notion in light of sequence of return risk. There may be many years where your investments are not growing, and in fact, losing value. Wouldn't you rather have a 10 year cushion for these events rather than running out of money prematurely because you had to dip into principal for too long, instead of assuming you'd be drawing on growth that didn't materialize as you expected?
This is a very interesting/important point that I had not considered. Thank you for raising it. Am I right in thinking that sequence risk (e.g. the risk of having to make retirement withdrawals during market decline) is what the Trinity study and the 4% safe withdrawal rule were trying to address?
I think a simpler way to think about it is:
Why pay a fee if you don't have to?

You're talking/asking about whether it "matters" to pay a fee (over some ill defined time period) but if you don't have to pay a fee, why would you?
See my last reply regarding balancing the investor's perceived social benefit of ESG funds vs. the higher cost ratio.
Yes the trinity study was trying to look at portfolio survival over various time periods with varying allocations and amount of withdrawals. You can see with a 4% swr i believe there was still a 5% chance of failure over 30 years (said in the inverse, a 95% success rate).

In regards to esg I'll refer you to swedroes book on esg. There's a lot of greenwashing in that space and i personally wouldn't pay extra for something i hope to get but might not. Also when you buy a total stock market fund you're not investing in companies you don't agree with. Those companies were already bought before you to wind up in the index.

If you feel strongly i would either:
1. Buy stock directly. This gives you voting rights and a voice at shareholder meetings. That's a better way to influence.
2. Take the share of profits you receive from owning those companies in the index fund and donate that to charity.
3. Refuse to buy the companies' products.

What do you think?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Topic Author
Rom
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Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

retired@50 wrote: Sun Mar 12, 2023 3:38 pm In the end, a tiny expense ratio difference will likely be overwhelmed by the actual (over or under) performance of ESGV vs. VTI over the next 50 years (or however long your investing horizon is). I have no idea which fund will do better.
Thanks for raising that point, which was in the back of my mind as well. And thanks for the informative discussion.
Topic Author
Rom
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Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Sun Mar 12, 2023 4:11 pm Yes the trinity study was trying to look at portfolio survival over various time periods with varying allocations and amount of withdrawals. You can see with a 4% swr i believe there was still a 5% chance of failure over 30 years (said in the inverse, a 95% success rate).
I see, thanks for the clarification.
In regards to esg I'll refer you to swedroes book on esg.
Would that be Your Essential Guide to Sustainable Investing by Larry Swedroe and Samuel Adams, published in 2022?
Also when you buy a total stock market fund you're not investing in companies you don't agree with. Those companies were already bought before you to wind up in the index.
This is something else I've been curious about. I understand that stocks are usually/often bought "second-hand', i.e. the company has already sold their stock and now the stocks are just being traded among investors. But don't index funds also purchase some stocks directly from the companies, so investing in an index fund does in some way help raise capital for those companies?
If you feel strongly i would either:
1. Buy stock directly. This gives you voting rights and a voice at shareholder meetings. That's a better way to influence.
2. Take the share of profits you receive from owning those companies in the index fund and donate that to charity.
3. Refuse to buy the companies' products.

What do you think?
I guess we're starting to discuss the merits of ethical investing, but I suppose I'm fine with that given that we've covered the original topic (expense ratios) pretty well. With regard to those options:

1. I haven't looked into this much yet, but it seems that it is often discouraged given the amount of extra work involved for the investor and the fact that the investor is likely to build a portfolio that under-performs an index fund. Are there ways to automatically build and maintain a portfolio that tracks an index without investing in an index fund?

2. Personally I would rather just not invest in companies that perpetuate suffering, rather than invest in those companies and then try to make up for it after the fact by donating to charity.

3. This is something I would hope everyone tries to do to some extent, regardless of whether they also try to practice ethical investing.

With regard to the problem of greenwashing and not knowing whether an ESG fund is actually more ethical, I've been using the Invest Your Values database to compare various funds.
Uncle Morris
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### Re: How to calculate the effect of expense ratio on retirement savings?

It's not hard to understand that lower fees for the same products mean more money for the investor.

But what about behavioral issues? I had been in a 3-fund portfolio with those nice, super-low fees, and simplified to one balanced fund (AOR), whose expense ratio is 0.15 instead of 0.03 for ITOT, 0.07 of IXUS, and 0.06 for IUSB. I'm assuming that not having to decide when to rebalance has a value. Is that value worth the extra expenses?
dbr
Posts: 44110
Joined: Sun Mar 04, 2007 8:50 am

### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Sun Mar 12, 2023 4:11 pm
Yes the trinity study was trying to look at portfolio survival over various time periods with varying allocations and amount of withdrawals. You can see with a 4% swr i believe there was still a 5% chance of failure over 30 years (said in the inverse, a 95% success rate).
A study like that using a finite and limited number of data points can be 100% successful and is if the withdrawal rate is dropped just a little, maybe 3.8%. But that isn't meaningful. That 0% failure just comes from running out of data. For that reason it may be conventional to arbitrarily set the definition of SWR at 5% failure so that one is actually sampling something that has failures. After all if 3.8% runs out of failures, then what would it mean to say that 2% also has no failures. In a larger data set, such as created in a Monte Carlo model, it can make more sense to portray percentiles of where the statistics fall and compare that to the 5% in a historic periods study.
arcticpineapplecorp.
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Sun Mar 12, 2023 5:57 pm Would that be Your Essential Guide to Sustainable Investing by Larry Swedroe and Samuel Adams, published in 2022?
yes.
Rom wrote: Sun Mar 12, 2023 5:57 pm This is something else I've been curious about. I understand that stocks are usually/often bought "second-hand', i.e. the company has already sold their stock and now the stocks are just being traded among investors. But don't index funds also purchase some stocks directly from the companies, so investing in an index fund does in some way help raise capital for those companies?
not exactly. funds flow in and out daily as people buy shares in the fund and others might sell shares in the fund. the net effect could be zero (in terms of any new shares actually bought by the fund of the underlying stocks that make up the fund), despite the value of stock price rising or falling. when this happens the value of the fund shares changes because the underlying prices of the stocks contained in that fund changed.

does that make sense?
Rom wrote: Sun Mar 12, 2023 5:57 pm I guess we're starting to discuss the merits of ethical investing, but I suppose I'm fine with that given that we've covered the original topic (expense ratios) pretty well. With regard to those options:

1. I haven't looked into this much yet, but it seems that it is often discouraged given the amount of extra work involved for the investor and the fact that the investor is likely to build a portfolio that under-performs an index fund. Are there ways to automatically build and maintain a portfolio that tracks an index without investing in an index fund?

2. Personally I would rather just not invest in companies that perpetuate suffering, rather than invest in those companies and then try to make up for it after the fact by donating to charity.

3. This is something I would hope everyone tries to do to some extent, regardless of whether they also try to practice ethical investing.

With regard to the problem of greenwashing and not knowing whether an ESG fund is actually more ethical, I've been using the Invest Your Values database to compare various funds.
#1. not that I know of. This #1 was not to buy companies (directly) that you believe in, but companies you disagree with. The work is in getting those companies to change through investor activism (at shareholder meetings, starting proxy votes, etc) which you can only do if you own stocks directly in companies you want to change.

#2. understood. it's a suggestion often made to balance the scales of justice if you will.

#3. not sure everyone cares to that extent or can afford to care. some people are just barely scraping by. they're concerned with stretching their meager dollars and can't really afford to be righteous, which sometimes, spending according to one's principles costs much more than can be afforded. You can also go pretty far down a rabbit hole and wind up either buying nothing or buying so little because it becomes so costly to live 100% according to one's values. Everybody has to make certain choices, within their budgets and the realities of their income.

There's also tradeoffs in life. For instance, you might not want to buy a particular item because you think someone's not getting a fair shake. But without that income from that sale, they'd be even worse off. It's been said that the only thing worse than being exploited by capitalism is...not being exploited by capitalism. Just some things to consider. Things aren't as black and white as I think people want to believe they are.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
fourwheelcycle
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### Re: How to calculate the effect of expense ratio on retirement savings?

If you want to invest in ESG funds, invest instead in VTSAX. Then take the extra ER amount you would have paid your brokers to curate their ESG funds and donate that amount directly to your favorite ESG charities.
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Sun Mar 12, 2023 9:21 pm
Rom wrote: Sun Mar 12, 2023 5:57 pm This is something else I've been curious about. I understand that stocks are usually/often bought "second-hand', i.e. the company has already sold their stock and now the stocks are just being traded among investors. But don't index funds also purchase some stocks directly from the companies, so investing in an index fund does in some way help raise capital for those companies?
not exactly. funds flow in and out daily as people buy shares in the fund and others might sell shares in the fund. the net effect could be zero (in terms of any new shares actually bought by the fund of the underlying stocks that make up the fund), despite the value of stock price rising or falling. when this happens the value of the fund shares changes because the underlying prices of the stocks contained in that fund changed.

does that make sense?
I think I partially understand, but the fund must still at some point buy shares of the underlying stocks, right? And some of those shares are bought directly from the companies, which helps to raise capital for those companies? And the index fund would not have money to buy shares unless people invest in the index fund. So, the more money you invest in an index fund, the more money the fund has available to buy more of the underlying stocks, no?
arcticpineapplecorp. wrote: Sun Mar 12, 2023 9:21 pm
Rom wrote: Sun Mar 12, 2023 5:57 pm I guess we're starting to discuss the merits of ethical investing, but I suppose I'm fine with that given that we've covered the original topic (expense ratios) pretty well. With regard to those options:

1. I haven't looked into this much yet, but it seems that it is often discouraged given the amount of extra work involved for the investor and the fact that the investor is likely to build a portfolio that under-performs an index fund. Are there ways to automatically build and maintain a portfolio that tracks an index without investing in an index fund?

2. Personally I would rather just not invest in companies that perpetuate suffering, rather than invest in those companies and then try to make up for it after the fact by donating to charity.

3. This is something I would hope everyone tries to do to some extent, regardless of whether they also try to practice ethical investing.

With regard to the problem of greenwashing and not knowing whether an ESG fund is actually more ethical, I've been using the Invest Your Values database to compare various funds.
#1. not that I know of. This #1 was not to buy companies (directly) that you believe in, but companies you disagree with. The work is in getting those companies to change through investor activism (at shareholder meetings, starting proxy votes, etc) which you can only do if you own stocks directly in companies you want to change.

#2. understood. it's a suggestion often made to balance the scales of justice if you will.

#3. not sure everyone cares to that extent or can afford to care. some people are just barely scraping by. they're concerned with stretching their meager dollars and can't really afford to be righteous, which sometimes, spending according to one's principles costs much more than can be afforded. You can also go pretty far down a rabbit hole and wind up either buying nothing or buying so little because it becomes so costly to live 100% according to one's values. Everybody has to make certain choices, within their budgets and the realities of their income.
1. There are some industries and companies that I would rather not exist at all. I would rather not give those companies any extra capital, rather than give them extra capital so that I can vote for them to cause slightly less suffering than they already do. This does sound like a potentially effective activism strategy if enough people buy shares and cooperate to tip the balance of a vote, but I'm not personally interested in engaging in that sort of activism. I'd rather just not contribute any extra capital to those companies in the first place.

3. Agreed, everyone has to choose from the options available to them given their circumstances.

Edit: I forgot to respond to your last point:
There's also tradeoffs in life. For instance, you might not want to buy a particular item because you think someone's not getting a fair shake. But without that income from that sale, they'd be even worse off. It's been said that the only thing worse than being exploited by capitalism is...not being exploited by capitalism. Just some things to consider. Things aren't as black and white as I think people want to believe they are.
My interest in ethical investing isn't specifically related to workers' rights, more avoiding helping to raise capital for industries and companies that I would prefer not exist. However, if you have the choice between two comparable items, and you know that company behind item B treats their workers much better than the company behind item A, then wouldn't you rather buy item B because you know that you will be increasing the demand for that item and giving the company more profit that they can use to expand their business and higher more workers? You're not depriving the workers who produced item A of their compensation, rather you're increasing the demand for item B and making it easier for those workers to find jobs with the second company where they'd be treated more fairly.
retired@50
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Mon Mar 13, 2023 10:59 pm
I think I partially understand, but the fund must still at some point buy shares of the underlying stocks, right? And some of those shares are bought directly from the companies, which helps to raise capital for those companies? And the index fund would not have money to buy shares unless people invest in the index fund.
I think what you describe above is more like an initial public offering (IPO). When a company first sells its stock shares into the wider public markets, that is when a mutual fund would potentially be buying stock "from the company". I'm not really certain if mutual funds participate in buying stocks of IPO companies or not.

While this is sort of activity is at least possible for a "total stock market fund" since they want to own pretty much all the companies that are publicly traded, a different index fund like the S&P 500 fund wouldn't be a likely participant in an IPO, since the S&P 500 has other requirements before a company can be included in that index.
So, the more money you invest in an index fund, the more money the fund has available to buy more of the underlying stocks, no?
Yes, but if the company has already gone public and its shares are available on the market, they are most likely coming from another investor looking to unload some of their shares.

I liken the whole stock shares trading to used cars. GM sells each car once - the initial public offering - but technically, it's probably being purchased by the car dealer. However that car is initially sold, once it's in the marketplace of all used cars, it can be sold 5 or 10 more times (or more) but GM doesn't make a dime off of all those additional sales. Money is changing hands between used car owners and used car buyers. This is how most stock shares are sold or acquired.

Regards,
This is one person's opinion. Nothing more.
Watty
Posts: 26853
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### Re: How to calculate the effect of expense ratio on retirement savings?

How to calculate the effect of expense ratio on retirement savings?
I don't know it it was mentioned year but there is another way to look at the importance of expense ratios AFTER you retire.

There are all sorts of important assumptions and qualifications but academic studies have shown that in the past a 65 year old would be relatively safe starting out with about a 4% "safe withdrawal rate"(SWR). There is a wiki on that.

The problem with that and the expense ratio is that when you are retired the expense ratio needs to come out of that 4% SWR. For example if you had a mutual fund with an expense ratio of 0.6% then you could only spend 3.4% as your SWR instead of 4%.

That 0.6% expense ratio would actually be 15% of your spendable income. (0.6/4)
Jags4186
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### Re: How to calculate the effect of expense ratio on retirement savings?

ESG funds have so far significantly underperformed the broad market. I would be much more concerned about that than the difference between 0.03% and 0.09% expense ratio.
wolf359
Posts: 3012
Joined: Sun Mar 15, 2015 8:47 am

### Re: How to calculate the effect of expense ratio on retirement savings?

retired@50 wrote: Sun Mar 12, 2023 2:47 pm
Rom wrote: Sun Mar 12, 2023 2:33 pm
retired@50 wrote: Sat Mar 11, 2023 8:25 pm See the wiki page that discusses "How much you lose to an annual fees".

Whether the fee comes from an increased expense ratio, or an adviser, the results are similar.

Welcome to the forum.

Regards,
One thing that I find interesting is that a 1% difference in return on investment makes very little difference in time to retire: for example using this Early Retirement Calculator with a 5% return on investment, time to retire is 12.4 years, but with a 6% return on investment, time to retire is 11.9 years. This initially fooled me into thinking that return on investment doesn't make much difference. But if you look at wealth growth after retirement using the table from the article that you linked, the effect becomes much more obvious.

This raises the question of what someone's goals are for investing. If an investor's only goal is to become financially independent (that is, annual return on investment covers annual expenses), then annual fees wouldn't matter nearly as much, as long as they investor is able to maintain financial independence. But, if an investor also wants to see significant wealth growth after retirement, then obviously annual fees matter significantly.

Would you agree with that conclusion?
No.

To become financially independent while paying a higher annual fee would require more savings (dollars) committed to the portfolio. This means either working longer or saving a higher percentage of wages while working. So, you have to consider the additional years of work, or reduced standard of living from reduced spending during the accumulation phase.

In my book, every dollar spent on costs is a dollar not available for achieving financial independence sooner, or for enjoying a higher standard of living.

If you happen to wind up with too much money, you can always give some away to charity. I'd rather direct my charitable giving as I see fit, rather than have those dollars spent on costs (either during accumulation or during retirement).

Regards,
Some thoughts:

1. Expense ratios are deceptively small numbers. How much difference could 1% or 2% make? The answer is that it shows up when compounding over long periods of time. It's not that big a difference over 10 years. But extend that to 30-40 years or a lifetime of investing and the differences are huge. The reason is compounding.

2. The financial independence calculator is attempting to show the impact of a high savings rate on financial independence. With a 60% savings rate, the target is reached based primarily on savings alone. The high savings rate also reduces the expenses required to support a lifestyle. This is not the appropriate calculator to use to see the effect of expenses on long-term returns. You should use a compound interest calculator, set the timeframe to 40 years, and use two different rates of return.

3. Returns are not promised to you. Sometimes the stock market has great returns. Sometimes it has terrible returns. We can't predict the actual returns in advance. Instead, we're projecting an average for the returns. This is where the discussion of whether or not an ESG fund has a better return than a vanilla index comes in. Does an ESG strategy have a negative or positive impact on returns, and by how much? OP doesn't want to discuss that issue, but the point is that we don't know until the time period has passed what the impact of the strategy choice was.

4. HOWEVER, expenses ARE guaranteed. The people running the fund are not doing it for free. The expenses in the expense ratio are taken out regardless of whether the market is up or down. We can ABSOLUTELY PREDICT what the impact of a 2% expense ratio is. Simply reduce the long-term compounded return by 2%. The question then becomes whether or not the return of the ESG funds will overcome the difference in expense ratios. Or the real question to you (since that's unknowable) is if the difference between the two expense ratios is small enough to be acceptable.

5. Hopefully, one does not achieve early financial independence in 12 years, then immediately keel over and die. The desire is a long and healthy life. In that case, your investment lifetime (before and after achieving FI) could be 40-50 years or more. THAT's the number you should be using to see the impact of the expenses. Having high expenses might be overcome by a 60% savings rate in a 12 year period, but over a 50 year compounding period the reverse is true.

6. There is a point at which expense ratios are small enough that they don't matter. But I believe that's at the level of 0.03% versus 0%, not comparing 0.03% to 2%. Go to the actual ESG fund you're considering, and use that expense ratio for comparison. Despite discussions of 1% and 2% expense ratios being tossed around, I think the actual numbers are smaller. According to ETF.COM,
What is the average ESG fund expense ratio?
With 50 ETFs traded on the U.S. markets, ESG ETFs have total assets under management of \$195.25B. The average expense ratio is 0.41%. ESG ETFs can be found in the following asset classes: Equity.
gatorking
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### Re: How to calculate the effect of expense ratio on retirement savings?

Simple rule of thumb:
difference in ER X number of years invested = % difference in final value.
If you pay 0.53% ER for a SP500 index fund and I pay 0.03% then after 20 years I will have 10% more money than you.
wolf359
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### Re: How to calculate the effect of expense ratio on retirement savings?

Jags4186 wrote: Tue Mar 14, 2023 7:09 am ESG funds have so far significantly underperformed the broad market. I would be much more concerned about that than the difference between 0.03% and 0.09% expense ratio.
I think this is really unknowable, especially when projecting 40-50 years into the future. It's possible that the things that ESG funds are investing in might be the critical new technologies in the next half century. It's also possible that they're wrong.

It is true that ESG funds underperformed in the past.

It is also true that ESG funds recently had a period of better performance (which is why they came back in popularity.)

It is also true that there is no agreement on what the appropriate make up of an ESG should be. Do the selection criteria match your own values? Can you then compare the results to an ESG fund with different values? And it hasn't helped that discussions are getting politicized. In my opinion, if you want to invest in ESG funds, then that's your money, your values, and your choice. It's not realistic to compare one ESG to another, or dismiss all ESGs as irrelevant, or prevent people from investing in them. Are they simply a fad, or an effective long-term strategy? Who knows?

The one constant is the tyranny of expenses. That same expense ratio will be taken out, year after year, regardless of the actual return.
arcticpineapplecorp.
Posts: 12410
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Mon Mar 13, 2023 10:59 pm I think I partially understand, but the fund must still at some point buy shares of the underlying stocks, right? And some of those shares are bought directly from the companies, which helps to raise capital for those companies? And the index fund would not have money to buy shares unless people invest in the index fund. So, the more money you invest in an index fund, the more money the fund has available to buy more of the underlying stocks, no?
only if there are more inflows than outflows. When you buy total stock and I sell total stock (say in retirement) then if we're buying an equal amount of shares nothing need be bought at all. Vanguard is mererly swapping my shares for yours (exchanging my shares in total stock to you who are buying them). And even then (if there are more inflows than outflows), to keep the stocks representative of market cap weighting the fund would be buying all the stocks to maintain that market cap weighting.

Here's an interesting article that shows the tax distributions of total stock market index fund so yes stocks had to be bought in order to generate losses and/or gains:

and here's an interesting thread from a couple days ago that might be of interest:
viewtopic.php?t=399881
Rom wrote: Sun Mar 12, 2023 5:57 pm
1. There are some industries and companies that I would rather not exist at all. I would rather not give those companies any extra capital, rather than give them extra capital so that I can vote for them to cause slightly less suffering than they already do. This does sound like a potentially effective activism strategy if enough people buy shares and cooperate to tip the balance of a vote, but I'm not personally interested in engaging in that sort of activism. I'd rather just not contribute any extra capital to those companies in the first place.
but you're not giving them extra capital because the shares have already been issued by the company previously unless they issue a secondary public offering. If the company issued shares at IPO then the same number of shares exist thereafter. All that is happening is one person is exchanging them with another person. The person who benefits is the person who sold the shares for a higher price than they bought them previously. The company did not benefit from that transaction between two parties. They only benefited from the shares sold initially at IPO when they sold off a part of the company to outside investors.
Rom wrote: Sun Mar 12, 2023 5:57 pm My interest in ethical investing isn't specifically related to workers' rights, more avoiding helping to raise capital for industries and companies that I would prefer not exist. However, if you have the choice between two comparable items, and you know that company behind item B treats their workers much better than the company behind item A, then wouldn't you rather buy item B because you know that you will be increasing the demand for that item and giving the company more profit that they can use to expand their business and higher more workers? You're not depriving the workers who produced item A of their compensation, rather you're increasing the demand for item B and making it easier for those workers to find jobs with the second company where they'd be treated more fairly.
again, you're not raising capital for the companies unless you're buying shares at IPO. You're only helping a private investor benefit if you buy his/her shares that s/he bought previously at a lower price. The company does not benefit from that transaction, except to the extent that their market capitalization may increase if you buy shares from mom/pop investor at a higher price than the stock sold previously. Then the company's market cap would be higher if you bid the price of the stock higher because the market cap is based on the dollar per share X the number of outstanding shares. Market cap reflects the underlying value of the company. Amazon and Facebook and other companies lost 50% of their value last year. That's because investors decided the company isn't worth what it was in the past. The fundamental value will out in the long term. Paraphrasing: "In the short term the stock market is a voting machine, but in the long term it's a weighing machine."--Benjamin Graham.

getting a little philosophical now, the beautiful thing about a free market is that you don't get to decide what companies have a right to exist. The market determines that. If the market doesn't desire the company's products either the company will pivot and provide products people do desire (and are willing to part with their hard earned dollars) or the company will go out of business. At the same time, you are free not to buy those products if you don't want to. But do you have the right to take away other people's right to have what they want? Said in the inverse, how would you like it if others didn't like companies that you believe in? You may find it hard to believe that people might feel that way, but not everyone values the same thing. And again, if one company's product is cheaper people may desire that company's products for no other reason than they're cheaper and they're on a limited income and need to stretch their dollars. Saying these companies who you don't agree with should not exist is not only making it potentially harder for these folks, it's fundamentally taking away others right to choose for themselves.

There's a cost to our decisions. If you want to screen out certain companies, that will add an additional layer of costs. You will have to determine if that is worth it to you and what the trade off is (how will that additional cost and removal of companies show up in your net returns?)
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
bloom2708
Posts: 9485
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### Re: How to calculate the effect of expense ratio on retirement savings?

https://www.dinkytown.net/java/compare- ... -fees.html

Give this tool a whirl.

The 30-40 year numbers will be an eye opener.
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

retired@50 wrote: Mon Mar 13, 2023 11:28 pm
Rom wrote: Mon Mar 13, 2023 10:59 pm
I think I partially understand, but the fund must still at some point buy shares of the underlying stocks, right? And some of those shares are bought directly from the companies, which helps to raise capital for those companies? And the index fund would not have money to buy shares unless people invest in the index fund.
I think what you describe above is more like an initial public offering (IPO). When a company first sells its stock shares into the wider public markets, that is when a mutual fund would potentially be buying stock "from the company". I'm not really certain if mutual funds participate in buying stocks of IPO companies or not.

While this is sort of activity is at least possible for a "total stock market fund" since they want to own pretty much all the companies that are publicly traded, a different index fund like the S&P 500 fund wouldn't be a likely participant in an IPO, since the S&P 500 has other requirements before a company can be included in that index.
So, the more money you invest in an index fund, the more money the fund has available to buy more of the underlying stocks, no?
Yes, but if the company has already gone public and its shares are available on the market, they are most likely coming from another investor looking to unload some of their shares.

I liken the whole stock shares trading to used cars. GM sells each car once - the initial public offering - but technically, it's probably being purchased by the car dealer. However that car is initially sold, once it's in the marketplace of all used cars, it can be sold 5 or 10 more times (or more) but GM doesn't make a dime off of all those additional sales. Money is changing hands between used car owners and used car buyers. This is how most stock shares are sold or acquired.

Regards,
That makes sense, but companies can sell more shares after the IPO, right? I'm not sure what that would be called. A "follow-up" public offering? This is something I've been interested to research when I have the time.
Topic Author
Rom
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Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Watty wrote: Mon Mar 13, 2023 11:56 pm
How to calculate the effect of expense ratio on retirement savings?
I don't know it it was mentioned year but there is another way to look at the importance of expense ratios AFTER you retire.

There are all sorts of important assumptions and qualifications but academic studies have shown that in the past a 65 year old would be relatively safe starting out with about a 4% "safe withdrawal rate"(SWR). There is a wiki on that.

The problem with that and the expense ratio is that when you are retired the expense ratio needs to come out of that 4% SWR. For example if you had a mutual fund with an expense ratio of 0.6% then you could only spend 3.4% as your SWR instead of 4%.

That 0.6% expense ratio would actually be 15% of your spendable income. (0.6/4)
I'm not sure I understand. Wouldn't the expense ratio just decrease your return on investment? If you decide to withdraw 4% of your net worth during the first year of retirement, I don't see how the expense ratio would affect that.
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Tue Mar 14, 2023 8:16 pm
Watty wrote: Mon Mar 13, 2023 11:56 pm
How to calculate the effect of expense ratio on retirement savings?
I don't know it it was mentioned year but there is another way to look at the importance of expense ratios AFTER you retire.

There are all sorts of important assumptions and qualifications but academic studies have shown that in the past a 65 year old would be relatively safe starting out with about a 4% "safe withdrawal rate"(SWR). There is a wiki on that.

The problem with that and the expense ratio is that when you are retired the expense ratio needs to come out of that 4% SWR. For example if you had a mutual fund with an expense ratio of 0.6% then you could only spend 3.4% as your SWR instead of 4%.

That 0.6% expense ratio would actually be 15% of your spendable income. (0.6/4)
I'm not sure I understand. Wouldn't the expense ratio just decrease your return on investment? If you decide to withdraw 4% of your net worth during the first year of retirement, I don't see how the expense ratio would affect that.
It impacted things throughout your investing life, and it’s in retirement that the full pain is felt. I find it a nice way to frame the discussion without having to worry about compounding math. If you expect to live on 4%, but have to pay a 1% expense ratio, that is exactly like handing someone 25% of your take home on every payday throughout your career. There are of course nuances in there, but that’s basically it. I have had some success with seeing the light come on in coworkers eyes when attacking from that angle.
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Tue Mar 14, 2023 9:23 am but you're not giving them extra capital because the shares have already been issued by the company previously unless they issue a secondary public offering. If the company issued shares at IPO then the same number of shares exist thereafter. All that is happening is one person is exchanging them with another person. The person who benefits is the person who sold the shares for a higher price than they bought them previously. The company did not benefit from that transaction between two parties. They only benefited from the shares sold initially at IPO when they sold off a part of the company to outside investors.
Right, this is what I'm trying to minimize: the amount of money that I contribute (to the index fund) that then goes toward purchasing shares directly from the company, at IPO or secondary public offering.
arcticpineapplecorp. wrote: Tue Mar 14, 2023 9:23 am
Rom wrote: Sun Mar 12, 2023 5:57 pm My interest in ethical investing isn't specifically related to workers' rights, more avoiding helping to raise capital for industries and companies that I would prefer not exist. However, if you have the choice between two comparable items, and you know that company behind item B treats their workers much better than the company behind item A, then wouldn't you rather buy item B because you know that you will be increasing the demand for that item and giving the company more profit that they can use to expand their business and higher more workers? You're not depriving the workers who produced item A of their compensation, rather you're increasing the demand for item B and making it easier for those workers to find jobs with the second company where they'd be treated more fairly.
again, you're not raising capital for the companies unless you're buying shares at IPO. You're only helping a private investor benefit if you buy his/her shares that s/he bought previously at a lower price. The company does not benefit from that transaction, except to the extent that their market capitalization may increase if you buy shares from mom/pop investor at a higher price than the stock sold previously. Then the company's market cap would be higher if you bid the price of the stock higher because the market cap is based on the dollar per share X the number of outstanding shares. Market cap reflects the underlying value of the company. Amazon and Facebook and other companies lost 50% of their value last year. That's because investors decided the company isn't worth what it was in the past. The fundamental value will out in the long term. Paraphrasing: "In the short term the stock market is a voting machine, but in the long term it's a weighing machine."--Benjamin Graham.
Sorry, I thought we had switched to discussing the merits of avoiding purchasing certain products for ethical reasons. I was no longer talking about investing when I wrote that.
arcticpineapplecorp. wrote: Tue Mar 14, 2023 9:23 am getting a little philosophical now, the beautiful thing about a free market is that you don't get to decide what companies have a right to exist. The market determines that. If the market doesn't desire the company's products either the company will pivot and provide products people do desire (and are willing to part with their hard earned dollars) or the company will go out of business. At the same time, you are free not to buy those products if you don't want to. But do you have the right to take away other people's right to have what they want? Said in the inverse, how would you like it if others didn't like companies that you believe in? You may find it hard to believe that people might feel that way, but not everyone values the same thing. And again, if one company's product is cheaper people may desire that company's products for no other reason than they're cheaper and they're on a limited income and need to stretch their dollars. Saying these companies who you don't agree with should not exist is not only making it potentially harder for these folks, it's fundamentally taking away others right to choose for themselves.
I admit it is not always a clear-cut issue and that ethics are not absolute. However, in my view there are some pretty obvious examples of industries and companies causing massive amounts of suffering to humans and other animals, without providing much value to anyone. I don't really care to debate specific companies or industries here, so just to give one example that I hope we could agree on: chattel slavery in the United States. If I lived during the 1800s, I would want to avoid investing in the slave trade as much as possible. How do you feel about that?
Topic Author
Rom
Posts: 36
Joined: Sat Mar 11, 2023 7:34 pm

### Re: How to calculate the effect of expense ratio on retirement savings?

Silverado wrote: Tue Mar 14, 2023 8:24 pm
Rom wrote: Tue Mar 14, 2023 8:16 pm
Watty wrote: Mon Mar 13, 2023 11:56 pm
How to calculate the effect of expense ratio on retirement savings?
I don't know it it was mentioned year but there is another way to look at the importance of expense ratios AFTER you retire.

There are all sorts of important assumptions and qualifications but academic studies have shown that in the past a 65 year old would be relatively safe starting out with about a 4% "safe withdrawal rate"(SWR). There is a wiki on that.

The problem with that and the expense ratio is that when you are retired the expense ratio needs to come out of that 4% SWR. For example if you had a mutual fund with an expense ratio of 0.6% then you could only spend 3.4% as your SWR instead of 4%.

That 0.6% expense ratio would actually be 15% of your spendable income. (0.6/4)
I'm not sure I understand. Wouldn't the expense ratio just decrease your return on investment? If you decide to withdraw 4% of your net worth during the first year of retirement, I don't see how the expense ratio would affect that.
It impacted things throughout your investing life, and it’s in retirement that the full pain is felt. I find it a nice way to frame the discussion without having to worry about compounding math. If you expect to live on 4%, but have to pay a 1% expense ratio, that is exactly like handing someone 25% of your take home on every payday throughout your career. There are of course nuances in there, but that’s basically it. I have had some success with seeing the light come on in coworkers eyes when attacking from that angle.
I think I see what you're getting at, just as a way to visualize how large a 1% expense ratio is. But, if you're still making a 5% return even after the expense ratio, you can still live on 4%. It's not like you actually subtract the ER from your withdrawal; you subtract it from your return on investment, which hopefully still covers your 4% withdrawals.
arcticpineapplecorp.
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Tue Mar 14, 2023 8:38 pm I admit it is not always a clear-cut issue and that ethics are not absolute. However, in my view there are some pretty obvious examples of industries and companies causing massive amounts of suffering to humans and other animals, without providing much value to anyone. I don't really care to debate specific companies or industries here, so just to give one example that I hope we could agree on: chattel slavery in the United States. If I lived during the 1800s, I would want to avoid investing in the slave trade as much as possible. How do you feel about that?
I'm against slave labor because I believe that in a truly free market, individuals should be free to choose, whether it be where they are employed and/or what products they buy. Slavery is forced/coercion which is the antithesis of freedom and should not be tolerated in a free society.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Watty
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Tue Mar 14, 2023 8:46 pm I think I see what you're getting at, just as a way to visualize how large a 1% expense ratio is. But, if you're still making a 5% return even after the expense ratio, you can still live on 4%. It's not like you actually subtract the ER from your withdrawal; you subtract it from your return on investment, which hopefully still covers your 4% withdrawals.
It is subtracted from your account each year and if you are paying a 1% asset under management fee you will actually see it on your statement.

If it worked that way then we would talk about a 5% SWR not a 4% SWR.
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Tue Mar 14, 2023 8:46 pm
I think I see what you're getting at, just as a way to visualize how large a 1% expense ratio is. But, if you're still making a 5% return even after the expense ratio, you can still live on 4%. It's not like you actually subtract the ER from your withdrawal; you subtract it from your return on investment, which hopefully still covers your 4% withdrawals.
No. If you view it like that “…can still live on 4%,,,” then the framing is perhaps clearer another way. Making 5% in order to live on 4% means you need to make 25% more (4 to 5 is 25% increase) on your investments over your entire career to make it. If any of us had an opportunity to lock in 25% returns over an investment career, this board would cease to exist because we would all be on our yachts.

The point is, the effect of 1%, 0.5%, and maybe even down to 0.25% expense ratio is hard to understand, and is going to be larger than you ever imagined. And when some poor souls are wrapped up with plans with funds that approach 2.5% in fees, it is just simply sad. It is just not obvious to most people what happens over a couple decades.

Topic Author
Rom
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### Re: How to calculate the effect of expense ratio on retirement savings?

arcticpineapplecorp. wrote: Tue Mar 14, 2023 9:26 pm
Rom wrote: Tue Mar 14, 2023 8:38 pm I admit it is not always a clear-cut issue and that ethics are not absolute. However, in my view there are some pretty obvious examples of industries and companies causing massive amounts of suffering to humans and other animals, without providing much value to anyone. I don't really care to debate specific companies or industries here, so just to give one example that I hope we could agree on: chattel slavery in the United States. If I lived during the 1800s, I would want to avoid investing in the slave trade as much as possible. How do you feel about that?
I'm against slave labor because I believe that in a truly free market, individuals should be free to choose, whether it be where they are employed and/or what products they buy. Slavery is forced/coercion which is the antithesis of freedom and should not be tolerated in a free society.
Agreed. And many existing companies and industries cause great harm to people who are not free to choose whether to receive that harm. I would prefer to reduce my investment in those companies and industries if possible, in the same way that I would prefer to reduce my investment in the slave trade if I lived in the 1800s. Ideally people would not choose to harm each other for profit, or we would at least have better laws for preventing harmful business practices. But in the absence of that reality, I feel the least I can do is not to invest in the most obvious examples of harmful business.
Topic Author
Rom
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### Re: How to calculate the effect of expense ratio on retirement savings?

Silverado wrote: Wed Mar 15, 2023 6:35 am
Rom wrote: Tue Mar 14, 2023 8:46 pm
I think I see what you're getting at, just as a way to visualize how large a 1% expense ratio is. But, if you're still making a 5% return even after the expense ratio, you can still live on 4%. It's not like you actually subtract the ER from your withdrawal; you subtract it from your return on investment, which hopefully still covers your 4% withdrawals.
No. If you view it like that “…can still live on 4%,,,” then the framing is perhaps clearer another way. Making 5% in order to live on 4% means you need to make 25% more (4 to 5 is 25% increase) on your investments over your entire career to make it. If any of us had an opportunity to lock in 25% returns over an investment career, this board would cease to exist because we would all be on our yachts.

The point is, the effect of 1%, 0.5%, and maybe even down to 0.25% expense ratio is hard to understand, and is going to be larger than you ever imagined. And when some poor souls are wrapped up with plans with funds that approach 2.5% in fees, it is just simply sad. It is just not obvious to most people what happens over a couple decades.

I think I perhaps do not fully understand the 4% SWR. In my current understanding, you withdraw 4% of your net worth during the first year of retirement, and then ideally your net worth continues to grow faster than inflation during the following years, so your expenses slowly become a smaller and smaller percentage of your net worth, as long as your return on investment remains larger than your expenses. Of course, as others have pointed out in this thread, during market decline your net worth may actually be decreasing, so the greater your safety margin, the better.

As for expense ratio, my current understanding is that expense ratio is identical to a decrease in your return on investment. So if you would have had a 5% return on investment with a 0% expense ratio, then a 0.5% expense ratio would result in a 4.5% return on investment. OR, another way to conceptualize it is that if you would have been able to withdraw 4% with a 0% expense ratio, then you can only withdraw 3.5% with a 0.5% expense ratio. Aren't these just two different ways of conceptualizing expense ratio? You can either see it as being taken out of return on investment, or taken out of your withdrawals?
Topic Author
Rom
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### Re: How to calculate the effect of expense ratio on retirement savings?

Watty wrote: Tue Mar 14, 2023 11:35 pm
Rom wrote: Tue Mar 14, 2023 8:46 pm I think I see what you're getting at, just as a way to visualize how large a 1% expense ratio is. But, if you're still making a 5% return even after the expense ratio, you can still live on 4%. It's not like you actually subtract the ER from your withdrawal; you subtract it from your return on investment, which hopefully still covers your 4% withdrawals.
It is subtracted from your account each year and if you are paying a 1% asset under management fee you will actually see it on your statement.

If it worked that way then we would talk about a 5% SWR not a 4% SWR.
I'm curious to hear your thoughts on how I framed the issue in my previous post (above).
Uncle Morris
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### Re: How to calculate the effect of expense ratio on retirement savings?

bloom2708 wrote: Tue Mar 14, 2023 9:28 am https://www.dinkytown.net/java/compare- ... -fees.html

Give this tool a whirl.

The 30-40 year numbers will be an eye opener.
That is quite the eye-opener! Even when I compare my one-fund portfolio with its expense ratio of 0.15% to its component funds, at 0.03, 0.06, and 0.07, it's not just eye-opening, but more like eye-popping.

I still wonder how to quantify the benefit of having that one fund, i.e. avoiding behavioral mistakes, and automatic rebalancing.
bloom2708
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### Re: How to calculate the effect of expense ratio on retirement savings?

Uncle Morris wrote: Wed Mar 15, 2023 3:09 pm
bloom2708 wrote: Tue Mar 14, 2023 9:28 am https://www.dinkytown.net/java/compare- ... -fees.html

Give this tool a whirl.

The 30-40 year numbers will be an eye opener.
That is quite the eye-opener! Even when I compare my one-fund portfolio with its expense ratio of 0.15% to its component funds, at 0.03, 0.06, and 0.07, it's not just eye-opening, but more like eye-popping.

I still wonder how to quantify the benefit of having that one fund, i.e. avoiding behavioral mistakes, and automatic rebalancing.
Yes. I have our net expense ratio down to .06% at Vanguard. Even going to .03% makes a difference, but at some point good enough.

"Just 1%" or "Just 1.5%" are real eye openers.
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### Re: How to calculate the effect of expense ratio on retirement savings?

Uncle Morris wrote: Wed Mar 15, 2023 3:09 pm
bloom2708 wrote: Tue Mar 14, 2023 9:28 am https://www.dinkytown.net/java/compare- ... -fees.html

Give this tool a whirl.

The 30-40 year numbers will be an eye opener.
That is quite the eye-opener! Even when I compare my one-fund portfolio with its expense ratio of 0.15% to its component funds, at 0.03, 0.06, and 0.07, it's not just eye-opening, but more like eye-popping.

I still wonder how to quantify the benefit of having that one fund, i.e. avoiding behavioral mistakes, and automatic rebalancing.
Avoiding behavioral mistakes is worth a lot, especially if you're prone to make them. According to the Vanguard site for advisors, the advisor's alpha can be anywhere from 0 - 200 basis points for behavioral coaching.

One or two ill-timed blunders or panic selling events could leave a mark on your portfolio for a lifetime. It seems to me that paying an extra few basis points could easily be a good investment.

Regards,
This is one person's opinion. Nothing more.
dogagility
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### Re: How to calculate the effect of expense ratio on retirement savings?

retired@50 wrote: Wed Mar 15, 2023 4:22 pm
Uncle Morris wrote: Wed Mar 15, 2023 3:09 pm
bloom2708 wrote: Tue Mar 14, 2023 9:28 am https://www.dinkytown.net/java/compare- ... -fees.html

Give this tool a whirl.

The 30-40 year numbers will be an eye opener.
That is quite the eye-opener! Even when I compare my one-fund portfolio with its expense ratio of 0.15% to its component funds, at 0.03, 0.06, and 0.07, it's not just eye-opening, but more like eye-popping.

I still wonder how to quantify the benefit of having that one fund, i.e. avoiding behavioral mistakes, and automatic rebalancing.
Avoiding behavioral mistakes is worth a lot, especially if you're prone to make them. According to the Vanguard site for advisors, the advisor's alpha can be anywhere from 0 - 200 basis points for behavioral coaching.
That's an interesting white paper. Looking at the categories of alpha gained from advisors in Figure 1, the Boglehead forum and wiki provides all of that alpha to forum participants for free. I suppose we all knew that already.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel. A penny saved in a storage headache. -- Conor Friedersdorf
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### Re: How to calculate the effect of expense ratio on retirement savings?

Rom wrote: Wed Mar 15, 2023 2:55 pm I think I perhaps do not fully understand the 4% SWR. In my current understanding, you withdraw 4% of your net worth during the first year of retirement, and then ideally your net worth continues to grow faster than inflation during the following years, so your expenses slowly become a smaller and smaller percentage of your net worth, as long as your return on investment remains larger than your expenses. Of course, as others have pointed out in this thread, during market decline your net worth may actually be decreasing, so the greater your safety margin, the better.

As for expense ratio, my current understanding is that expense ratio is identical to a decrease in your return on investment. So if you would have had a 5% return on investment with a 0% expense ratio, then a 0.5% expense ratio would result in a 4.5% return on investment. OR, another way to conceptualize it is that if you would have been able to withdraw 4% with a 0% expense ratio, then you can only withdraw 3.5% with a 0.5% expense ratio. Aren't these just two different ways of conceptualizing expense ratio? You can either see it as being taken out of return on investment, or taken out of your withdrawals?
What your are missing is the compounding effect of fees over the investing lifetime. That 0.5% or greater fee is every year, on the entire balance. I made my first equity purchase at age 22. That little pile of dollars is going to be invested for many years, minimum of 30, since I hit 52 this year and am still working. Getting a 0.5% reduction on that pile makes a difference that is larger than “normal” people can appreciate. And of course, I plan to live another 40+ years. The overall cost of expense ratios above 0.5% or so amount to a decade or more in work needed to get to the same point financially.

I tried to frame it in different ways, but one has to not mix frames of reference. Point remains, like one of the founding statements of this site, fees matter.
Stinky
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### Re: How to calculate the effect of expense ratio on retirement savings?

Silverado wrote: Thu Mar 16, 2023 6:38 am Point remains, like one of the founding statements of this site, fees matter.
Absolutely. Fees matter.

Given the number of folks who are considering moving toward “ESG” investing, I wonder whether that might drive up the prices of those stocks compared to the broad market. If that happens, there might be an opportunity for enhanced returns by minimizing investments in those “ESG” stocks. In other words, there might be investment opportunities for “anti ESG” funds or ETFs.

I did a quick search for “anti ESG”, and found only very small ETFs with relatively high expense charges. So, following my Boglehead training, I’ll not further consider such funds until expenses come down. (And I don’t know if that will ever happen).
Retired life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
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### Re: How to calculate the effect of expense ratio on retirement savings?

Stinky wrote: Thu Mar 16, 2023 8:09 am
Silverado wrote: Thu Mar 16, 2023 6:38 am Point remains, like one of the founding statements of this site, fees matter.
Absolutely. Fees matter.

Given the number of folks who are considering moving toward “ESG” investing, I wonder whether that might drive up the prices of those stocks compared to the broad market. If that happens, there might be an opportunity for enhanced returns by minimizing investments in those “ESG” stocks. In other words, there might be investment opportunities for “anti ESG” funds or ETFs.

I did a quick search for “anti ESG”, and found only very small ETFs with relatively high expense charges. So, following my Boglehead training, I’ll not further consider such funds until expenses come down. (And I don’t know if that will ever happen).
This very issue (prices of "green" assets being driven up) was recently discussed on The Long View Podcast with Christine Benz and Jeff Ptak who were interviewing Lubos Pastor.
https://www.morningstar.com/podcasts/th ... e033be79e2

The Rational Reminder with Cameron Passmore and Ben Felix also discuss climate change versus the stock market.
https://rationalreminder.ca/podcast/156

Regards,
This is one person's opinion. Nothing more.
Topic Author
Rom
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### Re: How to calculate the effect of expense ratio on retirement savings?

Silverado wrote: Thu Mar 16, 2023 6:38 am
Rom wrote: Wed Mar 15, 2023 2:55 pm I think I perhaps do not fully understand the 4% SWR. In my current understanding, you withdraw 4% of your net worth during the first year of retirement, and then ideally your net worth continues to grow faster than inflation during the following years, so your expenses slowly become a smaller and smaller percentage of your net worth, as long as your return on investment remains larger than your expenses. Of course, as others have pointed out in this thread, during market decline your net worth may actually be decreasing, so the greater your safety margin, the better.

As for expense ratio, my current understanding is that expense ratio is identical to a decrease in your return on investment. So if you would have had a 5% return on investment with a 0% expense ratio, then a 0.5% expense ratio would result in a 4.5% return on investment. OR, another way to conceptualize it is that if you would have been able to withdraw 4% with a 0% expense ratio, then you can only withdraw 3.5% with a 0.5% expense ratio. Aren't these just two different ways of conceptualizing expense ratio? You can either see it as being taken out of return on investment, or taken out of your withdrawals?
What your are missing is the compounding effect of fees over the investing lifetime. That 0.5% or greater fee is every year, on the entire balance. I made my first equity purchase at age 22. That little pile of dollars is going to be invested for many years, minimum of 30, since I hit 52 this year and am still working. Getting a 0.5% reduction on that pile makes a difference that is larger than “normal” people can appreciate. And of course, I plan to live another 40+ years. The overall cost of expense ratios above 0.5% or so amount to a decade or more in work needed to get to the same point financially.

I tried to frame it in different ways, but one has to not mix frames of reference. Point remains, like one of the founding statements of this site, fees matter.
I think I actually do understand the compounding effect. Based on replies by others in this thread, and resources such as How much do you lose to annual fees after many years? and https://www.investingfees.com/, I've certainly come to appreciate how much money you can lose over the decades to a slightly higher fee.