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The importance of costs

The money you pay to invest has a big effect on what you have left for your retirement. Keep as much as you can.

Understand what you're paying

Make no mistake: Every investment has a cost, even if you don't realize you're paying it.

Mutual funds and ETFs have an expense ratio: a percentage of the amount in your account deducted from your returns to cover the fund's costs.

Why do costs matter?

These costs might not seem like a big deal, but they add up, compounding along with your investments.

Imagine you have $100,000 invested for retirement. If the account earned 6% a year for the next 25 years and had no costs or fees, you'd end up with about $430,000.

If, on the other hand, you paid 2% a year in costs—a measly 2%!—your account balance at the end of 25 years would be about $260,000.

That's right: The 2% you paid every year would wipe out almost 40% of your final account value.

Costs can eat away at the amount you have saved for retirement

A bar chart showing that 2% costs can eat away at money saved for retirement.

This hypothetical illustration doesn't represent any particular investment, nor does it account for inflation. "What you lose to costs" represents both the amount paid in expenses as well as the "opportunity costs"—the amount you lose because the costs you paid are no longer invested. There may be other material differences between investment products that must be considered prior to investing. Numbers are rounded.

What can you do?

You can easily find good investment options that charge only tenths of a percentage point in fees. It seems obvious but it bears stating: You want to pay as little as possible in costs and keep as much as possible in your account. After all, it's your retirement money.

Keep more with Vanguard

We've long been recognized as a leader in the financial industry when it comes to low costs. In fact, our overall average expense ratio is 83% less than the industry's average.* We're passionate about making sure we're the best place to invest for retirement or any other goal.

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Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

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ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.

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Expense ratio

Fees charged to investors to cover operating costs, expressed as a percentage. The money is deducted from investment returns before they're given to investors. For example, if you had $10,000 invested in a fund with an expense ratio of 0.20%, you'd pay about $20 a year out of your investment returns.

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When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $1,600 in the 30th year.

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Costs can eat away at the amount you have saved for retirement

This chart shows how investment costs can eat away at your retirement savings. If you have $100,000 invested for retirement, it could grow to $430,000 without any investment costs. But if you pay only 2% a year in costs, it could grow to only $260,000. You would lose about $170,000 to costs.