Re: Do you net out investment expenses from your S
Malakito,
Just to expand on Intercst's reply, since this is a key point: all the SWR analyses (pretty much) are assuming you are getting the full return of the asset class over time. You may have an index fund, but the fees mean you get that much less than the actual return of the asset class. That must then be subtracted from the SWR amount -- you need to pay your fund manager first.
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I'm humbled that you guys are getting your average fees down so low. I've been thinking I was doing ok to be at 40 basis points (which includes lots of exotic stuff like overseas, small, value, commodities, real estate etc) but still, that is a big enough difference to make me want to re-think this a bit.
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ESRBob
ESRBob and intercst,
Thanks for the replies. I had to think about it some more to figure out why I consider this a non-issue.
In my case, most of my money is in direct-ownership common stock accounts, which as a buy-and-hold my annual expense ratio is perhaps 1 basis point, or in very low cost index funds. My 401(k) is in a 5 basis point fund, I also own some VFINX, VTSMX, and the biggest expense ratio of them all, VPMCX. As mentioned above, my current expense ratio is around 15 basis points and dropping as I contribute new funds disproportionately to my lower-cost options. I also have to figure in some low balance fees on my kids' college funds as I switch from UTMA accounts to ESA accounts.
As an aside, to give an example of what I alluded to earlier, I just checked Vanguard's website and looked at the 10 year performance of VFINX versus the S&P500: 11.26% versus 11.34%, which is a haircut of 8 basis points whereas they listed their expense ratio as 18 basis points. That's as of 5/31/04, by the way.
In my own spreadsheets, I calculate what my withdrawal rate will be as follows:
1. I take my current nest egg and add in projected future contributions and projected returns.
2. I take my current expenses (monthly average over the last six months) and add in projected inflation.
3. I take #2 and divide it by #1.
I have this projected on a monthly basis from now until 2025, and figure that when the number starts getting close to 4%, I'll look more closely at it.
At any rate, I believe that out in that 202X timeframe, my withdrawal rate will be dropping by around 9 basis points per month. In other words, this discussion only affects my retirement date by one month. One month out of 20 years is not really a big deal. IOW, IMHO, this is down in the noise.
I do agree that for someone whose investment costs run 3-4% annually, it's a much bigger deal. Also, it makes me realize that I need to do something about my VPMCX holdings -- either stop adding to them or convince my wife to move them to a lower cost fund.
malakito.