A reader recently asked me a question about investing fees over a lifetime. I’ll cut to the chase first, but please see below for more colour on this conversation.

Q: What would the lifetime cost of investing be for a Canadian who consistently saved 10% of their income from age 25 until they retired at 65? Assume they live until 90.

First some caveats: There are many variables that factor into the answer here. I actually put together a spreadsheet for people to input their own particular variables in order to get a rough idea on what the answer might look like. Over 65 years of data, a small change in even one variable will lead to sometimes dramatically different answers. Many thanks to Michael James on Money for helping me put together the final spreadsheet. Before I continue, you should really follow him on Twitter, and check out his blog. Believe me, it’s worth it.

For this sample answer, I’ve used the following assumptions:

1. Income at age 25 starts at $25,000 and increases at a nominal rate of 5% for 20 years, then 3% for the next 20 years.
2. The annual savings rate is 10% for all 40 years.
3. He starts out as an aggressive investor for the first 20 years, pares back on risk for the next 20, and then become even more conservative throughout retirement. The benchmark (before fees) for these three phases are 8%, 6%, and 4% respectively, before inflation.
4. Inflation increases over time. 1% for the first 20 years, 2% for the next 20 years, and 3% throughout retirement.
5. Portfolio costs are 2.25% per year for the first 20 years, decrease to 2.00% for the next 20, and reduce to 1.75% in retirement. This would reflect a lower risk tolerance over time (costs tend to decrease as allocation to fixed income goes up), as well as the ability to get lower fees with a larger portfolio over time.

Answer: $170,578.27

With the above assumptions, this investor would pay $170,578.27 in today’s dollars over their lifetime in investing fees (not including annual account fees or other expenses).

• On a non-inflation adjusted basis, or nominal terms, that is equivalent to $306,713.19.
• If you take the same variables and reduce the costs to be in line with working with an advisor who uses a couch potato portfolio with you, the annual costs may approach 1.25% (cost of advice plus lower cost of product). In that case the lifetime costs, with all other variables being equal, is $40,341.01 less (inflation adjusted), for a total of $130,237.25. The annual income in retirement increases by 27%, and the total income in retirement from age 65-90 increases by $77,526.77 (these are also all inflation adjusted figures).
• Since I’m sure some people would be curious, a completely DIY portfolio at 0.25% cost would only cost $32,142.92 over the lifetime, a reduction of $138,435.35, or 81%. The annual income in retirement would increase from $11,342.57 to $20,525.04 per year, and the total income withdrawn in retirement would increase by a whopping $229,561.81 in today’s dollars (or $604,002.34 before inflation).

I’ve written fairly extensively about fees on this blog, in my columns at The Globe and Mail, and also for MoneySense Magazine. To put it bluntly, the impact of fees should not be dismissed, but if you have that conversation you need to talk about behavioural costs and practical limitations, and you also need to keep in mind that the audience who finds this stuff interesting represent a minority of the overall population. I don’t want to give people the impression that the primary goal for an investor is to minimize fees at all costs (no pun intended) and then see those people end up doing more damage to their nest egg than they were trying to save in costs.

Over the next few posts (which may take weeks given how often I write to this blog these days), I’ll tackle the lifetime costs of investing from a variety of angles including:

• You can lower your costs while still using a professional advisor
• The behavioural costs compared to direct portfolio costs (the former can easily be larger than the latter)
• How advisors can earn more by lowering costs for their clients
• And more

If you would like to download a copy of the spreadsheet to play with, you can do so here.