You Might Lose $75,000 in Retirement Unless You Do This

The importance of understanding expense ratios

TL;DR Invest your retirement in Target Date Funds if you want to “set it and forget it”. And make sure it’s an Index Fund, not a Mutual Fund.

This article was originally published in the LearnThenApply newsletter.

How would you like to keep $75,000 of your money by the time you retire?

I’ve followed Ramit Sethi’s advice to invest my retirement accounts (401k and Roth IRA) into “Target Retirement” funds.

Basically, these funds are aggressive when you’re young and then automatically become more conservative as you get closer to your retirement age.

It’s the easiest way I know to “set it and forget it”.

BUT, I forgot about expenses! 🤦🏾‍♂️

Yesterday I realized that I was investing in a target retirement mutual fund instead of an index fund.

Basically:

mutual fund = someone is managing 👨🏾‍💻
index fund = computer is managing 🖥

The main difference for you? The *Expense Ratio*

An expense ratio is a fee that the fund keeps for managing your money. Mutual funds typically have higher expense ratios than an index fund.

The difference for me?

2060 Target Retirement Mutual Fund (SWPRX) = 0.74%
2060 Target Retirement Index Fund (SWYNX) = 0.08%

It seems like a very small amount, but the mutual fund is over 9X more expensive every year! 😱

Putting it into a NerdWallet calculator, the difference by the time I retire in 30 years is $76,651! (and that’s conservative)

Interestingly, the index fund has actually seen better returns since inception than the mutual fund! (12.29% vs. 11.98%)

Not going to say that the index fund will perform better than the mutual fund. But over time, it will probably be close.

The difference will be what you keep. Which is heavily influenced by the expense ratio.