Do you know how much money you're wasting on fees, paid to your bank or investing firm? If you're like most Americans, you probably have no idea. And it could cost you.
Most people estimate they will pay about $2,244 in investment and banking fees over the course of their lives, according to a survey in June from the personal-finance website NerdWallet. In reality, that number could be closer to $ 369,000, if you are a college graduate, the site found. "Sometimes fees are unavoidable, but you want to make sure you're getting what you pay for," said Justin Sullivan, a certified financial planner at PNC Wealth Management.
Other studies had more conservative estimates of the fees consumers pay over their lifetimes. The average American household will pay $155,000 in financial, bank and investment fees in a lifetime, according to FeeX.com, a site that specializes in identifying hidden fees. Another estimate by The Motley Fool, was slightly higher ($190,000) for someone who invests $10,000 per year.
"Most people who come to me as a client are completely unaware there are any fees associated with their 401(k)," said Elliott Weir, a certified financial planner based in Austin, Texas. "It's extremely common for investors to not be aware of fund expense ratios they're paying." An expense ratio is the total percentage of fund assets that goes towards advertising, administrative and other expenses; you would pay $10 per year for every $1,000 invested for a fund with a 1% expense ratio.)
How the researchers came up with that number
Here's how NerdWallet researchers came up with the latest estimate. They took someone who opened a bank account at age 18 and an investment account at 22 with a life expectancy of 79 years, based on the Center for Disease Control's 2016 life expectancy. The person would retire at age 67, the full Social Security retirement age for people born after 1959.
He or she would make a starting income of $51,022 per year, the average starting salary for the Class of 2017, according to the National Association of Colleges and Employers, a nonprofit based in Bethlehem, Penn., and that salary would increase by 3.5% every year, including inflation and real earnings growth.
The person would contribute 6.2% to a 401(k), and his or her employer would match 50% of that contribution, up to 6%, based on averages from Vanguard's 2017 "How America Saves" report. He or she would then withdraw 4% of their savings starting at age 67. NerdWallet also assumed an expense ratio of 0.48%, an average from the Investment Company Institute.
The analysis also included average IRA fees, the amount the person would spend purchasing three stocks or exchange- traded funds per year (at $5 per trade), one mutual fund purchase per year at $19.99 and assumed returns of 6%. (The estimate also included average maintenance fees at major banks, including overdraft and ATM fees.)
The $369,000 estimate "seems high for the average American" when compared to all of the studies showing how little the average American has saved for retirement, said Billy Lanter, a certified financial planner and fiduciary investment adviser at Unified Trust Company in Lexington, Ky. Regardless of the actual dollar amount, he said, "Investors should do more due diligence to fully understand all of the costs associated with their financial assets."
How to avoid those fees? Here are some steps to take:
Look at how much your 401(k) is charging you
On a paper statement or online, check your "fund fee" or "expense ratio," O'Shea said. If it's above 0.5%, it's likely you could find a cheaper place to put your money. Of course, consider the returns you're getting, too. Some funds are more expensive but could yield better results, and you may be paying for those returns. But if you're seeing average returns, don't pay above-average prices.
One factor working in consumers' advantage, Sullivan said: Companies are competing with one another to lower their fees. "As the landscape becomes more competitive, it will work more in favor of consumers," he said. Lanter adds, "Most importantly, be sure you're working with a fiduciary who fully discloses their fees in a transparent manner and looks for low-cost options."
Check your bank account fees
Are you getting charged a monthly "maintenance" fee? There are many bank accounts at online banks, credit unions or traditional banks that don't cost anything. Personal-finance websites NerdWallet and Bankrate both have their own lists of banks that don't charge fees to keep your money.
Change any behaviors that are within your control
Are you paying a fortune in overdraft fees? Are you constantly visiting out-of-network ATMs and getting charged for it? Carry cash when you can, so that you don't have to visit an out-of-network ATM in a pinch. If you opted into overdraft fees on your bank account, tell your bank you want to opt out. Your card may get rejected at the register, but you won't face overdraft fees when you lose track of how much is in your account.
Investment fees also stack up. "A typical advisory relationship includes fees for the adviser, investment vehicle management expenses, custodian platform fees, trading costs, and more," said Brent Weiss, a certified financial planner and co-founder and head of planning at Facet Wealth in Baltimore, Md. "Often, there is no customization to meet the specific needs of the consumer and they end up paying fees for services they don't need."