Millennials should be saving for retirement by putting their money into ETFs, not target-date funds, and using a robo-advisor to manage their retirement portfolios.
That’s according to NerdWallet, which ran the numbers to gauge the effect of fees on millennial investors.
Based on its calculations, the online financial site determined that substituting ETFs for higher-priced products and using a robo-advisor instead of a higher-priced option could save millennials as much as $590,000 in additional fees over the 40 years between them and retirement.
Not only do returns in a retirement portfolio compound over time, but so do fees, it pointed out.
Paying avoidable fees, such as management costs, can add up bigtime over the years millennials will be saving toward retirement.
In one investing scenario for a 25-year-old who has $25,000 in a retirement account, adds $10,000 to the account every year, earns a 7 percent average annual return and plans to retire in 40 years, Nerdwallet said that paying just 1 percent in additional fees would cost more than $590,000 in sacrificed returns over 40 years of saving.
A millennial with the option of investing in either of two commonly held funds can save nearly $215,000 in fees, and, “through the magic of compounding, retire nearly $533,000 richer,” by picking a fund with fees that are 0.93 percent lower.
By assembling a low-cost ETF portfolio on his own and rebalancing it once a year, a millennial can retire $345,000 richer than if he uses a target-date mutual fund.
And last but not least, outsourcing portfolio management to a robo-advisor would cost $232,000 in fees over 40 years, about half the $454,000 a target-date mutual fund would cost.
But millennials should be aware of some caveats as well.
For one thing, the assumption of a 7 percent annual return is thought to be too high by a number of experts, including Jack Bogle, founder of Vanguard, and Morningstar, who predict — along with others — that returns will be considerably lower for some time to come.
That could cut the relatively dependable returns experienced by ETFs in recent years, which have been rising steadily right along with the markets.
ETFs are certainly cheaper than many other investments, just as robo-advisors are cheaper than other options. But another concern is the whole debate over robo-advisors; many in the industry would argue that autopilot isn’t necessarily the way to go. Still, one thing seems clear; as adopters of technology, millennials are likely to jump on the robo-advisor bandwagon.
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