The surprising way you could be affecting the growth of your retirement savings

When most people think of losing money while investing, they probably think of stock markets crashing or betting big on the wrong company. These things can certainly hurt your portfolio, but smaller, more regular losses can also be tough on your retirement savings over time.

Sometimes you may not even realize how much you’re losing, especially if you focus primarily on an investment’s nominal return — that is, its return before accounting for taxes, inflation, and investment fees. Here’s a closer look at how you could be hurting your savings growth without even knowing it.

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Investments come at a cost

Investing can make you a lot of money, but it can also come with fees. For retirement savers who invest in things like mutual funds or exchange-traded funds, you’ll likely run into what’s called an expense ratio. This is an annual fee you pay to the team that oversees the fund and manages the assets within it. The expense ratio is usually set as a percentage of your assets invested in the fund.

For example, a fund may have an expense ratio of 1%. This means you pay 1% of what you have invested in the fund every year. It might not seem like much at first, but with a $10,000 investment, you’re already paying $100 a year to fund managers.

Now consider how much your investment could grow over the years or decades and how much that can add up in taxes. If your holdings grow to $100,000, you now pay $1,000 a year. And if you get to an even higher level, like $1,000,000, that’s only $10,000 a year in taxes alone.

Investments may have other fees, including sales loads — a kind of fee for the selling broker — and 12b-1 fees, which cover the costs of marketing and distributing the funds. Investment fees like these often come directly out of your portfolio, so you may not realize how much you’re paying over time. But it can definitely add up.

How to minimize your investment fees

There’s no way to avoid fees entirely when investing, but there are things you can do to reduce the amount you owe. The first step is to figure out how much you’re actually paying. Your prospectus should include details of the fees associated with your investments. In some cases, such as expense ratios, these will be a percentage of your assets.

Ideally, you want to keep your expenses at 1% of assets per year or less. If you feel like you’re paying too much now, we recommend moving some of your savings to lower-cost investments.

Index funds are a great choice for most people. These funds mimic a market index with S&P 500 being the most popular. Because the assets in the fund rarely change, there is less work for the fund managers. I pass that on to you in the form of lower fees. Some of the best S&P 500 index funds can have expense ratios as low as 0.03%. That’s just $3 a year for every $10,000 you have invested in the fund. Index funds also diversify your holdings, so the ups and downs of any individual stock won’t affect your portfolio excessively.

Saving money on investment fees today is certainly valuable, but it’s really just the tip of the iceberg. The money you save stays invested so it can grow over time. In the long run, the money you save on taxes could add up to thousands or tens of thousands of dollars that you can use in retirement.