Planning to retire early? The Wall Street Journal published an interesting study on February 26 indicating that you may be paying enough fees on your investments to involuntarily postpone retirement by over a decade!
The study was truly eye opening for me. I knew that low fee investments such as Vanguard index funds are a better way to go, but had no idea that you could retire early by a full dozen years early if you carefully select your investments just based on the fee factor.
This is particularly important in today’s times when employer pensions have disappeared and the social security promise is in a limbo. Unfortunately for those working, even the successful professionals, spending time evaluating and analyzing investment options is usually not a top priority on their to do list.
Many successful professionals know how to make a lot of money in their profession, but fail to initiate similar diligence when it comes to long term investing and retirement planning. When I was in consulting, almost all my work friends were raking in a six figure salary, yet most never put too much emphasis on their investments.
I am not saying investments were ignored. Everyone invested in their 401K plans and many had IRA accounts. Most had a good asset allocation going as well. But one can get more granular than that by evaluating each holding within the retirement plans.
Some years back when I was consolidating my retirement and investment accounts, I made some changes by bringing in more low-fee funds into the mix. What I have seen over the years is that overall performance (investment value) is better, and a lot of it has to do with a low management fee.
The numbers in the Wall Street Journal research are interesting. I’d be interested in further details to see the methodology through which they arrived at the 12 year horizon. But simplistically speaking, if 2 individuals invest the same amount over the same time horizon, the one who invests in low fee mutual funds will come out 12 years ahead of the one who invests in moderate and high fee funds and therefore can retire early.
In the busy world we live in today, we need to take time out to better understand our investments. After all, this is one avenue where we park our hard earned cash. I know the subject can be boring for some, intimidating for others, or just unfamiliar to many. But that’s why we have a million and one personal finance blogs out there today that we can all take advantage of for free.
Though a personal financial planner can also help, hiring one is not a requirement in my opinion. The fundamentals of basic long term investing don’t need to be rocket science, and we have the educational resources and guidance online to leverage today. Let’s make use of them.
Do you plan to retire early? What is your long term investing style? Do you have a financial planner? How often do you evaluate / revaluate your investments? Any investment advice you can share that has worked well for you? What do you think of the WSJ article?
Here is another one of my posts on quitting the rat race to retire early.Previous: Google Farmer Update – How Was I Impacted and What Does the Change in Google’s Search Algorithm Mean For You