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The costs associated with investing for retirement aren’t always clear—and I don’t like hidden stuff. It gives me the same feeling I get when my car’s been in the shop and it’s time to pay the bill. My stomach feels like it’s tied in knots. You know what I’m talking about.

Now stretch that feeling out over 30 years of retirement investing, and all those unknown costs could cause me a lot of anxiety. But I’ve found that I can avoid that hassle—and a lot of expense—by investing for my retirement mainly through mutual funds that charge an up-front commission. Not only do I know what I’m paying from the get-go, but over the long term, many front-loaded mutual funds are a better deal than the funds that don’t charge a commission at all.

How is that possible? Let’s take a look at how some mutual fund options charge fees and how that can affect the growth of your retirement nest egg.

To Load or Not to Load?

As I mentioned, I invest in front-loaded funds that charge the commission on my initial investment. Others charge the commission when you sell or cash out of the fund. That’s a back-end fund. Mutual funds that don’t charge a commission at all are called no-load funds.

The commission pays your advisor for their work in helping you pull together your retirement savings strategy and compensates them for their ongoing commitment to assist you in keeping that strategy on track over the years.

By paying the commission up front, it has less impact on the overall cost of owning the fund than if you paid the commission on the back end—after it has grown from a few hundred dollars to hundreds of thousands!

“No Commission” Does Not Mean “No Cost”

No-load funds may sound tempting since you don’t have to pay a commission, but there are plenty of ongoing fees that add up, which could make them more expensive than loaded funds. For example, here’s a cost comparison using numbers from two real-life growth funds, one front-load and one no-load, on a one-time $10,000 investment. Assuming both funds grow at the same rate of return, it would take the front-load fund 45 years to reach $1 million. It would take the no-load fund an additional five years to reach the $1 million mark. Why? One reason: fees.

The total cumulative fees you’d pay on the loaded fund come out to about $71,000. For the no-load fund, the total is nearly $213,000! So not only could investing in this no-load fund cause you to delay retirement for five years, you’ll lose $140,000 to fees. Could you find no-load funds that are less expensive than loaded funds? Sure you could. But this example shows that a no-load isn’t automatically a better deal just because you don’t have to pay a commission.

The thing is, you might not realize how much your no-load fund is costing you until you’ve been invested in it for a few years. And you’d only know it then if you were keeping an eye on your costs and comparing them to other funds. That’s just like having your car in the shop and not knowing how much the repair will cost until you pick it up. If you don’t know what you’re dealing with on the front end, you will always be worried about the bill.

More Reasons to Go With Up-Front Fee Funds

I’ve been burned on too many car repair jobs to be okay waiting until the work is done to find how much it will cost. The place I go now tells me how much it will be up front, and they stick to it. Over time—I hold on to cars forever, so I get them fixed a lot—I’ve developed a relationship with the people at this garage. They know me when I come in, and they know the drill. They know not to play games with me on price, and they understand the level of service I expect.

Could I get my car fixed cheaper somewhere else? Maybe, but I keep my cars for so long, cheap isn’t my goal. I want it done correctly at a fair price because I’m going to be driving my family around in that car for a long time.

You have to keep a long-term view with your mutual fund investments as well. Would it be cheaper to invest in a no-load fund versus a front-load fund? Today, yes. It would be cheaper. But in the long run, you can end up paying way more, as our example above shows.

Now, with all that said, a combination of low-cost front-load and no-load funds can reduce your expenses so you can capitalize on your investments’ growth. But there’s more to choosing funds than price. You want a diversified mix of funds with a history of good performance. To achieve that perfect mix and maintain it over time, make sure you’re working with an advisor you can trust—one you’ll want on your team over the decades as you work toward your retirement goal.

Comments

  • brian

    Or you could choose no load AND low expense ratios. It’s not an either/or as this article suggests. I want to build my own legacy, not someone else’s.

    • Adam

      The goal is to pay the lowest fees when considering comparable investments. It is very hard to beat no load, low fee index funds for stock funds. ETF’s are even better due to the tax treatment.