# Avoid Management Fees

Actively managed mutual funds charge an annual management fee. Anywhere from 0.5%–2% of the amount under management is common.

This is absurdly expensive.

Let's suppose that you've invested $100,000 with a mutual fund that averages a 7% rate of return but charges a 1% management fee. Your average net rate of return, then, is 6%. When dealing with exponential returns, 6% is a lot less than 7%. After 30 years at 7%, that will have grown to about$761,000. However, at 6%, you'd only have about $574,000. That's a difference of$187,000! Those fees really add up.

Here's another way to think about. Let's suppose that you've saved up $2,000,000 in low-fee index funds and you're ready to retire. Given a 7% average return, and accounting for taxes and inflation, you can probably indefinitely withdraw about 4% annually, giving you an inflation-adjusted annual income of$80,000.

On the other hand, suppose that you invested that money in actively managed mutual funds with a 1% fee instead. Your 4% would be reduced to 3%, bringing your income down to the \$60,000 per year. That's a quarter of your post-tax inflation-adjusted earnings paid in fees, every year, forever.

Avoid management fees.