Fees and Chance Can Ruin Your Retirement

Approaching retirement? Want to avoid running out of money at an inconvenient age?

This column is for you.

The most important decision new retirees make is about how their money is managed when they retire.

Costs Always Matter.

If you have a 401(k) or 403(b) plan, what follows is almost inevitable: Someone in financial sales will offer you a carefree retirement through brilliant management. In fact, the cost of that investment could lead to eking out your last years on Social Security. And nothing else.

I learned this using two tools available to portfoliovisualizer.com subscribers. It is one of the most useful investment data and analysis tools available. Until recently I’ve only used the free tools on the site. I wanted to provide information that readers could duplicate for themselves.

But for $560 a year, I can access another tool, the ability to see the impact of different fee levels on long term results.

A Seemingly Happy Example

Suppose you had retired in January 1995. If you had invested $100,000 in a 60/40 domestic balanced portfolio then and had lived to December 31, 2024, you would have enjoyed a wonderful retirement, ending the period with an incredible $521,873.

What’s not to like? During those 30 years you’d have enjoyed an income that was adjusted for inflation every year. Starting at $4,614 at the end of the first year, your ending income would have been $9,467. (You can, of course, scale income upward for larger initial investment amounts.)

This assumes annual costs of 0.10 percent – that’s triple the cost of the exchange-traded funds currently available but not available in 1995.

If you had chosen a typical money management arrangement at a fee of 1 percent a year, your income would have been the same. But your end value would have been $340,178. That’s $181,695 less, or a stunning 19 years of income.

Had you been sold a variable annuity product with a cost of about 1.5 percent a year, your end value would have been $260,787. That’s $261,086 less. In other words, the insurance-based product would have consumed half of what you would have otherwise had.

Finally, if you had invested in a hedge fund with a typical fee of 2 percent a year – the same funds that many state pension funds commit to – you’d have only $194,056.

Measuring the High Cost of Management Fees

This table shows the impact of management fees over a specific 30-year investment period, 1/1995 to 12/2024. It was one of the best years to retire because of the high returns on stocks in during the early Internet boom.

Source: www.portfoliovisualizer.com 

Do You Really Care?

“So what? I ended up with more money than when I started,” some might say.

That’s true.

But this particular 30-year period was unusual. It was one of the very best in history. It captured the early years of the Internet boom. Early gains carried retirees through later busts. Those who retired in 1999 experienced a major market decline instead. They didn’t do so well.

Ditto those who retired in 2006. (Investment nerds call this “sequence of returns risk.” Retire before a boom and you do well. Retire before a bust and you don’t.)

 The only thing you can control is the fees you pay. We seldom control when we retire. People are most tempted to retire after years of investment gains – likely on the eve of a bust

Taking the Problem to Monte Carlo

Fortunately, portfoliovisualizer offers another tool. It’s called Monte Carlo analysis. Instead of taking data from a specific period, the program calculates the returns of the assets and the variation of those returns. Then it calculates randomly selected returns after withdrawals and rank orders the results for 10,000 iterations.

This gives you an idea of how future results may be distributed.

As you can see from the table below, if future returns are at the median level or higher, your retirement future is still golden. Whatever cost level you choose, your portfolio will survive for 30 years. The only difference: The lowest-cost portfolio will be the largest.

But it’s all a matter of chance.

What if retiring in 2025 is like retiring in 1999?  Or 2006?  Both periods began with stocks that were selling at very high valuations. Subsequent returns were below median values.

If that’s the case and future results are in the bottom 10 percent, only the lowest-cost investment will survive the 30 years. Even it will be gone in the 31^st year.

Higher Fees Mean Lower Portfolio Survival

This table shows how higher money management fees affect the 30-year survival of a traditional 60/40 stock/bond portfolio. The 0.1% fee represents the cost of an ETF-based portfolio. The 1% fee represents a more typical management fee. The 1.5% fee represents typical variable annuity fees. The 2% fee represents hedge fund/private equity fees.

Source: www.portfoliovisualizer.com

If performance is at the bottom 25 percent, the low-cost portfolio survives. But the higher-cost options barely survive. Indeed, the portfolio survival rate drops from 92.5 percent for the lowest-cost option to only 75.48 percent for the highest-cost option.

As I’ve pointed out in other columns, we might accept a 92.5 percent portfolio survival rate over 30 years. Why? Because you’re likely to be dead at age 95 or so. But having a lower portfolio survival rate because you chose a more expensive management cost might give you some angst.

Who Faces the Greatest Danger?

We don’t make investment decisions in a vacuum. We’re influenced by where we work. We’re also influenced by what we are told in our workplace.

That’s why I think the people most likely to make a high-expense mistake are federal government employees. Ditto state and local government employees, particularly schoolteachers. It’s the same for employees of nonprofit hospitals.

The common denominator is 403(b) plans. These usually contain expensive insurance-based products. Worse, they are often sold by older fellow workers who enjoy hefty commission incentives. Federal employees often see a rush of marketing when they are about to retire.

Sadly, none of these workers are likely to hear about low-cost options. Why?

No one gets paid to sell them.

Related columns:

— on actual cash remaining after years of retirement withdrawals:

Scott Burns, “The Pudding Report, 2024: Simplicity Is Freedom,” 3/23/2025: https://scottburns.com/the-pudding-report-2024-simplicity-is-freedom/

Scott Burns, “Index Investing, The Long Haul and Your Life,” 9/23/2024: https://scottburns.com/index-investing-the-long-haul-and-your-life/

Scott Burns, “The Pudding Report, 2022,” 1/29/2023: https://scottburns.com/the-pudding-report-2022/

Scott Burns, “The Pudding Report, 2021: How Much Is That In Dollars?”  2/13/2022: https://scottburns.com/the-pudding-report-2022/

Scott Burns, “The Pudding* Report, 2020,” 1/30/2021: https://scottburns.com/the-pudding-report-2022/

— on the SPIVA report and the ranking of low-cost index funds against professional managers:

Scott Burns, “Critics Abound, But Traditional Balance Triumphs,” 2/9/2025: https://scottburns.com/critics-abound-but-traditional-balance-triumphs/

Scott Burns, “Index Investing, The Long Haul and Your Life,” 9/23/2024: https://scottburns.com/index-investing-the-long-haul-and-your-life/

Scott Burns, “SPIVA: The Investment News That’s No Longer News,” 6/19/2022: https://scottburns.com/index-funds-beat-managed-funds-again-and-again/

Scott Burns, “SPIVA: Again and Again and Again,” 11/9/2019: https://scottburns.com/spiva-again-and-again-and-again/

Sources and References:

SPIVA Reports: https://us.spindices.com/search/?ContentType=SPIVA&_ga=2.110875269.1451908672.1574193387-1522877685.1573679383

Berlinada Liu, “SPIVA U.S. Year-End 2021, 3/16/2021 https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2021.pdf

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

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(c) Scott Burns, 2025