How paying 2% more can cost you more than 40%

Most retirement products cost around 3% in fees. 10X never charges more than 1% excluding VAT. “Meh,” you say, “3% doesn’t sound so bad.” But paying it can mean you’ll retire with 40% less money.

An image of a reflecting mountain

We know that sounds incredible. As in, literally, not credible, not believable, and your brain may not even entertain the possibility of its truth or accuracy. Presumably, if you’d told people 100 years ago that a car could go from 0 – 100kph in 10 seconds, they wouldn’t have believed it either. They’d have needed to see the car at a standing start and then accelerate. Of course, in the 21st century, 10 seconds is hardly remarkable because we’re accustomed to cars doing that. And perhaps one day we’ll be as familiar with the real cost of fees. But until then, it’s worth illustrating how investing costs accelerate over time.

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The standing start

Let’s use a nice, simple, round number and assume that you invest R10 000. You don’t add to or withdraw any money for 30 years. Let’s also assume that your money grows at 6% above inflation every year for the 30 years. So after a year, your R10 000 is worth R10 600. Now let’s see what happens to your money when you pay 3% in fees, compared with 1%.

R10 600 – 3% fees (R318) = R10 282 vs R10 600 – 1% fees (R106) = R10 494. Sounds okay, right? At 3%, you’re only about R200 worse off. Even the next four years don’t look so different:

Table describing how much fees cost you in the long run

After 5 years, the more expensive investment is still only around R1200 worse off. But it’s taken five years to get where the lower cost one got in three.

The acceleration

Now look what happens if we check in every five years rather than every year.

After year 20, the more expensive investment is worth R9 000 less than the low cost one. It’s also eight years behind – the low-cost fee got to R17 000 in year 12. Over time, the gap keeps accelerating. And that’s when things start to get really fast. Try not to blink.

After 30 years of paying 3%, your R10 000 investment has grown to R23 000. At the lower cost of 1%, it’s worth R42 000. Paying 2% more has cost you more than 40%.

Don’t stop now

What happens if you’re one of those diligent rarities who stay invested for an entire 40-year working life? You’ll end up with less than half. At 3%, your investment grows to R30 000. At 1%, it grows to R68 000.

Even if you paid 2% in fees for those 40 years, which is much better than paying 3%, you still only end up with R45 000. That’s only about two-thirds of the R68 000 you get paying 1%.

Feeling nauseous?

If high fees aren’t making you sick yet, consider this: although you get R30 000 out at the end, you start off with R10 000. So your money only grew by R20 000. What you don't see is that, over those 40 years, you’ll have paid a total of R23 000 in fees. In other words, you paid more money than you made. Yes: you actually lost money. 

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