Canadians are allowing themselves to be gouged, and losing a great deal of their own retirement income in the process.
Anyone extolling the virtues of saving for your retirement often begins with the theory of compounding interest — that is, money that is invested grows over time, so the sooner there is something to build upon, the better.
It’s why investing early is important, and it's why if you can put a little money away every paycheque, it’s better than investing one lump sum at the end of the year.
Compounding is powerful. Begin saving early enough, and at even the most basic long-term market return of seven per cent a year, your money will grow in a surprising way.
For instance, if you begin saving for retirement when you are 18, you can afford to save five per cent of your salary. If you wait until your 40s to begin, you will need to save up to 20 per cent to achieve the same goal, because you’ve given up all the compounding.
Less often, though, do we talk about the way that fees can erode your savings and sap their power to grow over time.
Fees are a fact of life. It’s impossible to invest money without paying some fees. The service providers who help you invest — even if you do it yourself via an online broker service — need to be paid for their work.
If you have a full-service money manager, you should expect to pay something for it. But if you buy a mutual fund, especially one that is relatively uncomplicated, what is the right fee to pay? The answer to that will vary from fund to fund, but one thing seems clear: Canadians are probably paying too much.
First, the average of mutual fund fees in Canada is among the highest in the world, and well above those paid by Americans. There isn’t a good or obvious reason for that.
Second, we pay little attention to fees, and prices buyers aren’t sensitive to don’t tend to fall. That's the first point that needs to be raised in our awareness.
Fees eat into your investment return, and just like compounded return, they eat into it over time in a way that can be disastrous.
If you pay a two per cent fee on a mutual fund every year, your expected gain of the market average seven per cent has just dropped to five per cent. Throw in a little inflation on top of that, and you may be down to a return of three per cent. That will drastically change when and how you can retire, based on what your investments earn over time.
So, what to do about it?
The answer is pretty simple: First, pay attention. Understand the fees you pay, and more importantly, understand that two per cent of your investment may not seem like a big number, but it’s how it factors in over time that matters.
And second, speak up. Ask about fees, and don’t accept high fees unless you’re satisfied it’s the only way to get that investment. There are a growing number of low-fee products on the market – ask about them.
A rule change about how clearly fees need to be reported to customers has many financial planners quaking. But it should be the beginning of a customer revolution in Canada, one where we demand to stop being fleeced. But only we can make that happen.