• David J. Perrotto

The tiny difference in 0.50% a year makes

Can you imagine something as small as 0.50% making a truly large difference in your life? You goto the store to buy some groceries and it cost 100.50 dollars instead of 100 dollars. You buy a car and instead of it costing 25,000 dollars, it cost 25,125. Not a large difference right? But in reality, when you are investing and with the power of time and compounding interest, the difference in 0.50% a year makes a HUGE difference. The explanation is actually really simple, imagine long-term effects on your portfolio. Many investors have s short-term mentality when it comes to gain's and losses. What did Bonds do THIS YEAR? What did the S&P 500 do THIS YEAR? How did my portfolio compare to the benchmarks THIS YEAR? When we think in terms of what we gain or fall in a short period: a month, a quarter, a year, even a half of a decade, all pale in comparison to 30 to 40 years. And even then, once you do get to retirement, that extra half a percent a year makes a difference for the eventuality of living off your portfolio.

First, let's actually break down what that 0.50% a year looks like if you put 5000 dollars a year in your IRA. We'll start at 25 and end it at 65, so that is 40 years of returns. If I told you that the obviously small difference a year equals almost as much money you contributed to the portfolio in 40 years? As you can see from both charts, a portfolio that grows at 7% a year ends with 1,142,920 dollars, and a portfolio that grows at 7.5% a year ends with 1,311,724 dollars. You would retire with 12.9% more or in dollar terms, 168,804 dollars!

Now let's keep it going. If you take out 75,000 a year while still earning 7% from your portfolio, your estimated total is $1,132,851 after 20 years. Now if you took out 85,000 a year from your 7.5% portfolio, your estimated total is $1,615,043 after 20 years. So imagine just that small difference in returns, would give you almost an extra 12% a year to live! That translates into another 240,000 in your golden years. Money that could be used for healthcare, traveling, and enjoying life.

Now imagine if you didn't touch the money, how large of a difference would it be for your children and grandchildren who inherit your money? At 90 years old, that 7.5% portfolio would be worth $7,999,338. What about the 7% portfolio? $6,203,121. The difference, about $1.8 million. Remember this is just from a half percent difference in return over the life of the portfolio!

So this sounds great, right? Now how could we find a way to get better returns, or cut costs to get a better net return? The first choice to look would be what you are investing in. If you are investing in actively managed equity funds, take a look at what type of share class it is. If it's an A share class, they usually charge you a 12b-1 fee of 0.25% if it's a C share class it usually charges you a 1.00% 12b-1 fee! A better route to go would be a low-cost index fund, or an institutional share class if it is available for you. The next place I would look to get the extra bump is by taking on a little bit more equity, ones that have outperformed the S&P 500 over long periods of time, such as small-cap stocks, and emerging markets. Lastly, if you are paying a professional management fee, call your advisor, tell him you are not happy with the costs, and you want to renegotiate your fee. If you are paying 2.00 a year, getting it down to 1.50% gets you where you want to be. Doing any one of these things, and even a few, could get you that extra 0.50% bump. Don't delay or fret about it, because this could significantly change your financial growth and retirement income.

If you have an advisor that you think is not leading you in the right direction, or have an advisor that is still bringing you A and C share mutual funds and are paying heavy upfront fees, don't be afraid to call me at (718)551-7131.

These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.

Investing in mutual funds is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives.

Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact <rep name> at <rep address and phone number> to obtain a prospectus which should be read carefully before investing or sending money

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