Lackluster Performance, Watch Those Fees, Expense Ratio

Welcome to this week's edition of The Trail Report, where we share,

1 Story, where real stories of architects and engineers meet tailored financial strategies,

1 Actionable Tip, to provide actionable insights and guide you towards financial success,

1 Financial Term, to demystify key concepts and empower your decisions.

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1. Story: Susan’s Lackluster Performance

Meet Susan, a successful engineer who has been working in her field for almost 20 years. Susan knew early on that she wanted to prioritize her future, and while she had prioritized contributing to her company’s 401k plan, her planning hadn’t gone much further than that.?

Alarmed at how small of a nest-egg she had accrued over so many years, Susan reached out for help and together we dove in.?

Susan’s goal was to step back from work at 55 (moving down to part time) and she wanted to make sure that she could have a comfortable lifestyle when she did.?

Based on her current lifestyle, and her dreams for retirement, together we came up with a retirement salary around $10,000/month.

At 45 years old, she had accumulated around $500,000 in her 401k plan.

In order to reach her part-time retirement number at 55, she would need approximately $1,250,000.?

Which would then grow to around $2,500,000 by the time she hit 65 where she would fully retire.

There was quite a ways to go to reach the number Susan was going to need in 10 years.?

Here’s the strategy we came up with.?

Double Down on Savings

While Susan was doing a great job contributing to her 401k and capitalizing on her employer's match, the growth of her nest egg was limited by contribution limits. I helped Susan open an IRA account so she could contribute more each paycheck.?

Strategic Investments

Without any real knowledge on investing, and without someone to provide expertise, Susan had selected a Target Date Fund for all of her money to go into, and hadn’t made any changes since. This resulted in lackluster performance and higher than necessary fees.

I helped Susan re-allocate her investments into lower cost funds that more accurately matched her risk tolerance and investment goals.

Planning for the Future

Lastly, Susan and I worked together on an ongoing plan for her finances for her next ten years of working full time. With strategic investing, and a plan to increase her income by 20% in the next 5 years, we were able to bridge the gap between her current retirement savings, and her goal.

2. Actionable Tip: Watch Those Fees

When picking investments it is important to pay attention to fees as they can have a significant impact on your performance over time.?

Buying single stocks typically does not result in any on-going fees, there may be some transaction fees depending on your broker.

Mutual Funds usually have the most fees and should be paid close attention to. There can be fees to buy the security, on-going fees while you hold it, and sometimes also fees to sell it. Oftentimes mutual funds pay a commission to the broker that you buy them from.?

ETFs generally have much lower fees than Mutual Funds and are typically just an on-going fee versus a fee to buy and/or sell the investment.

Minimizing the fees you pay, keeps more money in your investment which results in more compounding over time. Generally, you want to look for funds that have expense ratios less than 0.5%. For more common types of funds, S&P 500 index funds for example, the expense ratio should be even lower since they are more common. As you get into more specialized funds, the fees are going to be higher which makes sense.

Fees are not inherently bad but important to factor into your decision making process.

3. Financial Term: Expense Ratio

An expense ratio is a metric that indicates the percentage of a fund's assets deducted annually to cover management fees, administrative expenses, and other costs.?

Understanding the expense ratio is essential when evaluating mutual funds, ETFs, and other investment options.?

A lower expense ratio typically means more of your investment earns returns rather than being consumed by fees.

Happy Trails,

Ryan

Disclaimer: We employ fictional characters to illustrate financial concepts faced by individuals in the architecture and engineering industry. Any resemblance to real persons, living or dead, is coincidental. While the stories are inspired by our experiences, the specific details, circumstances, and outcomes mentioned are entirely fictional and created for educational purposes only. Real client information is strictly confidential and never disclosed without explicit consent. Our aim is to provide relatable examples for educational purposes, respecting the privacy and confidentiality of our clients.