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How to earn an extra $26,000 a year in retirement income

by Invisor Last updated on July 29, 2015 Tags: Retire Early, How-Tos

When it comes to investing, many people ask questions such as what company’s stock should I buy, when should I buy, and how much return can I expect. The questions they should be asking are:

  • How do I reach my investment goal?
  • How much risk should I take in my portfolio?
  • How should I diversify my portfolio across different asset classes?
  • How much does it cost me to invest?
  • What are the most important considerations that have long-term implications on a portfolio?

Costs of investing

In addition to portfolio diversification and the proper selection of investments to meet your specific savings goals, the total cost of investing is an extremely important factor, especially in a modest growth, modest return environment that we expect to be in the foreseeable future.

The annual cost savings on fees in percentage terms may seem small, but given the power of compounding it can make a huge difference on the amount of money you will have available in retirement. Future returns cannot be predicted but you can be 100 per cent certain of the benefits of cost savings by reducing your investment fees.

Canada is the most expensive market

A recent Morningstar report on Global Fund Investor Experience shows that among 25 countries, Canada is the most expensive market for investing in mutual funds. An average equity fund in Canada costs 2.35 per cent annually; however, the range is wide with several funds that still have an expense ratio of over 2.5 per cent, and with some large funds the expense ratios are up to 2.9 per cent.

Canadians in particular need to pay attention to investment costs – this is your hard-earned savings you are paying out rather than keeping for your retirement.

What is the impact of high fees?

The difference between a 2.35 per cent annual cost of investing in a mutual fund and an overall 1 per cent total cost of investing using exchange traded funds and F-Class mutual funds may sound trivial, but it can make a huge difference to you in retirement.

Consider this scenario. Let’s assume you are 30 years old, have saved up $50,000 so far, and have 35 years until you retire. Assuming you commit to saving $7,500 every year until you retire, this chart shows the impact of these two cost scenarios.

 

Scenario 1 – 2.35% Cost

Scenario 2 – 1% Cost

Current Value of Investment in your RRSP

$50,000

$50,000

Annual Contribution

$7,500

$7,500

Gross Annual Return

(through an aggressive growth strategy)

8%

8%

Total Cost of Investing

2.35%

1%

Net Annual Return

5.65%

7.00%

Projected Portfolio Value

$1.12 Million

$1.57 Million

Projected Annual Income in Retirement
until the age of 90

(assuming a 3% rate of return in retirement)

$64,000

$90,000

Source for the projections: getsmarteraboutmoney.ca

This chart clearly shows you could have an additional $26,000 of annual income in your retirement simply by cutting your investment costs now.

Key takeaways

  • Pay attention to the fee costs you are incurring. Most of the fees may be buried inside products. Ask your advisor if you are unsure.
  • There may be other cost considerations such as foreign exchange fees, trading fees, and account administration charges that can eat into your nest egg without your knowledge. You need to know what your total costs are – again, ask your investment advisor.
  • In order to lower your total cost of investing, there are alternatives available to you other than going to your bank branch or a traditional advisor, or investing in traditional mutual fund products.
  • The online advice and portfolio management services that are now available to all Canadians could help you lower your total costs of investing to the 1 per cent level. In addition, these services can provide other benefits such as having a personalized investment plan designed for you, the ability to track your journey towards your goals, having your portfolios rebalanced regularly, and most importantly, have all services delivered conveniently online.

The important thing is you need to take action now to make a meaningful difference to your lifestyle when you retire. Get started by completing our “Understanding You” online session.

Invisor offers Canadian investors personalized investment management solutions at a fraction of the cost of traditional advisor models, without requiring any minimum investment amounts. Get started now to tell us a little about yourself and your goals, and we’ll find an investment solution just right for you.

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