Where Your Retirement Savings Really Goes

Saving enough to retire someday is a tricky enough challenge. Yet as your account balance grows, beware. Money could be leaking out of your accounts unheeded.

Nobody is “stealing” it, per se. Yet the cumulative effects of subpar performance and high fees has exactly the same effect. Your eventual retirement balance is lower than it might otherwise have been, a blow to your own financial security.

So where does the money go? Let’s count the ways:

1. High account level fees

Brokerages often charge a set fee to even handle your IRA money, usually on the order of half of 1 percent or so. They have to do some administrative work, of course, but they should have the scale to drive down costs. If your brokerage isn’t chasing this figure down to nearly zero, consider moving your IRA to a larger, cheaper platform.

2. High mutual fund fees

Besides the account level fee, retirement investors who use actively managed mutual funds must pay another 1% to 3% for each fund, which is the cost of the managers for each one. That easily doubles the cost of a retirement account, a cost which only compounds over time as money is removed from your account to pay the fees.

3. Excessive trading

Trading is not free, in most cases. Your active mutual funds, if they trade often, drive up your costs in the form of commissions. You don’t notice these costs because it shows up as lower-than-benchmark performance. Cost is often the reason mutual funds fail to keep up with the market itself.

4. Emotional mistakes

Freaked out by a drop in your account? If you sell, it will very likely be at or near the market bottom. Those losses are permanent. Likewise, chasing an investment higher usually results in a subsequent crash, then a panic sale. Losses mount.

5. Failure to rebalance

Burton Malkiel, author of A Random Walk Down Wall Street, figures just rebalancing gave investors a 1.5% edge over the S&P 500 over the past 15 years. If you don’t bother to rebalance, you leave money on the table.

Each of these errors, some self-inflicted, might not seem like a huge amount of money in any given year. But every dollar leaving your account leaves it forever and ceases to compound for your eventual retirement.

That adds up to a lot over the typical decades-long working life. That’s why it’s important to minimize these kinds of “money leaks” early and to stay on top of them.