How Is That Morning Coffee Delaying Your Retirement By 4 months, 17 days and 9 hours?

I recently came across an article in the Financial Post suggesting the cup of coffee you buy yourself every morning could be delaying your retirement by 4 months, 17 days and 9 hours. The article highlighted an app that has been created and developed allowing you to better understand the true costs of buying something and how it impacts and potentially delays your retirement. Interesting idea, but if you have to worry about a $4 expense every morning, I suggest you're not worrying about the right kind of expenses!

Rather, I think you would be better served focusing on reducing investing expenses. These expenses are significantly larger in dollar value and have a greater impact on your retirement plans. Plus I don't know about you, but I'm not too interested in giving up my daily indulgence of a cup of coffee or a sweet treat.

What investing expenses can you reduce?

If you own mutual funds, something you may not be aware of, are the high fees you pay to have your money managed. The average management expense ratio (MER) of an equity fund in Canada is 2.35%. That is to say, for every $100 you have invested in an equity mutual fund, you pay $2.35 per year to the mutual fund company to manage your money. Put it into perspective for a retirement account of $500,000 - that works out to $11,750 every year of your money being eaten up by fees charged by the mutual fund companies.

There is a better and cheaper way to invest

When it comes to portfolio management, a better and yet cheaper way to have your money managed is through a fee-based account. A fee based account, for non-registered accounts, gives you the ability to deduct any management fees you pay directly against your income, potentially saving you thousands of dollars per year. The proof is in the numbers. Here's the math:

$500,000 portfolio held in non-registered accounts (cash accounts)

Fees paid to mutual fund company: $500,000 x 2.35% = $11,750

Fees paid through fee based account (after taxes*): $500,000 x 2.35% (1-0.47) = $6,227.50

How much you save per year on fees through a fee based account  = $ 5,522.50       

One of the many advantages to our portfolio management service is the tax-deductibility of our management fees against your income. This immediately translates into savings for you, putting you in a better financial position come retirement or towards any financial goals.  

So the next time you have to contemplate between buying that $4 cup of coffee or not - splurge. Knowing that $4 per day is the least of your worries if you own mutual funds.

* calculation for tax-deductions of fee-based account assumes BC resident in top tax-bracket. Assumes fee-based account management fee is equal to mutual fund's MER.