What a yearly fee costs over decades
Drag the solid curve down to raise the yearly fee. Both curves take the same contributions at the same return before fees, so the shaded gap between them is the fee and nothing else. The default run, a 1 percent fee over 30 years against a 7 percent return, ends about 19 percent below the no-fee curve.
Share a 1.00% fee takes
19.1%
What that costs over 30 years
$85,576
No fee, $447,156After the fee, $361,580Drag the solid curve down to raise the fee.
Illustrative arithmetic on the settings you pick, held at one steady return, from an illustrative starting balance of $10,000. The fee is taken off the yearly return, which is how a fund fee is charged. Nothing here is a forecast or advice.
In short
- Drag the solid curve down to raise the yearly fee and open the shaded gap.
- Read the headline: it is the share of the final balance the fee took, not the fee itself.
- Pull the years slider from 5 out to 40 to watch the same fee take much more.
- Set the fee to zero, where the two curves land on top of each other and the gap closes.
Why 1 percent a year is not a 1 percent cost
The fee is charged on the whole balance, every year, which is what a fund states as its expense ratio. The money it takes is money that never compounds again. So the cost is not the fee, it is the fee plus all the growth that fee would have earned. On the default run that comes to roughly 19 percent of the ending balance for a fee of 1 percent a year.
Drag the fee slider and each extra half point costs less than the half point before it, though every one of them still costs a lot. Half a percent a year takes about a tenth of the ending balance. One percent takes about a fifth. Two percent takes about a third, not two fifths, because each extra slice is cut from a balance the earlier slices already made smaller. At the top of the slider, 3 percent, roughly 46 percent of the balance is gone.
Time is what makes a small fee large
Hold the fee at 1 percent and drag the years slider. At 5 years the fee has taken about 3.5 percent of the balance, at 10 years about 6.5 percent, at 20 about 13 percent, at 30 about 19 percent and at 40 about 26 percent. Nothing about the fee changed. It simply had more years to be charged, on a balance that was bigger each time.
This is the same arithmetic that makes compound interest worth starting early, running the other way. A long horizon multiplies whatever rate it is given, and a fee is part of that rate.
Money already invested pays most of it
Pull the monthly amount down to zero, so the run is only the starting balance growing. The share taken jumps to about 26 percent, because that money is charged the fee in every one of the 30 years. Push the monthly amount to the top of its slider instead and the share falls to about 18 percent, since a payment made in the last year is only charged once.
A higher return before fees raises the share a little rather than diluting it: at the same 1 percent fee over 30 years it runs near 17 percent when the return is 3 percent and near 21 percent when the return is 12 percent. The fee is a cut of the growth, so more growth means a bigger cut.
Common questions
How is the fee charged here?
As a percentage of the balance each year, taken off the annual return, which is how a fund expense ratio or a percentage advice fee works. So the after-fee balance compounds at the return minus the fee. A flat charge in cash terms behaves differently: it stays the same size while the balance grows around it.
Why is the share taken so much bigger than the fee itself?
Because the fee is charged every year, not once, and each year it is charged on a larger balance. Every amount it removes also stops earning from that point on, so the shortfall compounds alongside the balance and the gap between the two curves widens with time rather than staying flat.
Are these figures a forecast?
No. They are illustrative arithmetic at one steady return over the years you pick, which is what makes two curves comparable, and no setting here is a prediction about any fund or account. Real returns arrive unevenly and real fee schedules vary. It is educational material, not advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.