The high cost of expenses and emotions

But you can make up for it through a low-cost strategy and by avoiding the herd.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Allan Roth, Money Magazine

(Money Magazine) -- You've heard it a million times: Investing expenses and errors can be costly to your long-term gains. But how much do they actually cost you? One way to think about it is in terms of how much money you'll be able to live on in retirement. The difference in your standard of living can be dramatic.

Say you have $1 million in a mix of 50% stocks and 50% bonds. Returns can vary, but such a portfolio can beat inflation by 3.5 percentage points a year on average. Given those numbers, there's a good chance - 90%, in fact - you'll be able to safely pull 4% of your money in the first year of retirement, adjusting that annually for inflation, according to computer models known as Monte Carlo.

What you start with: $40,000

Based on $1 million, you could tap $40,000 in the first year of retirement and boost that 3% annually for inflation (so you get $41,200 in year two, $42,400 in year three and so on).

What you can withdraw after expenses: $31,000

But you won't get to spend the full $40,000. That's because most of us invest through mutual funds. And the average fund investor pays 1.2% annually in stated expenses. On top of that, we lose an additional 0.8% a year in hidden expenses tied to fund trading costs. So you'll have to lower your expected annual returns by around two percentage points. When you do that, your safe withdrawal rate drops by $9,000 that first year.

What you can really spend after investing mistakes: $26,000

Often, extreme bear markets like the one we're in cause investors to flee the market. Then they run back in after stocks recover. It's rarely an effective strategy. Studies show that poor timing decisions lead investors to underperform the market by about 1.5 points a year. So your safe withdrawal rate drops another $5,000.

What you can withdraw just by investing wisely: $39,200

The good news: You don't have to limit your withdrawals to a meager $26,000 a year. With two simple steps, you can boost your withdrawals back up to nearly $40,000. How? By investing in funds like Vanguard Total Stock Market ETF (VTI), you can keep expenses below 0.1%. And by sticking to your long-term plan and simply rebalancing your portfolio regularly, you can recapture 1.5% in lost gains.

To quote Warren Buffett, "Investors should remember that excitement and expenses are their enemies." Avoid them and you'll boost what you can spend in retirement by more than 50%.

Allan Roth is a certified financial planner in Colorado Springs.

Is your mortgage scheduled to reset this year or next? Tell us how it will affect you at makeover@moneymail.com. Include name, age, income, a brief overview of your finances, as well as a recent picture.  To top of page

Send feedback to Money Magazine
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
7 businesses Amazon wants to shake up From industrial supplies to educational software, Amazon is about more than just retail and books. More
Don't miss these Tax Day deals From massages and paper shredding to cookies and queso, celebrate the end of tax season with these Tax Day freebies and discounts. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.