The single best method to increase your retirement savings (without saving more)

By Scot Herrick | Personal Finance

May 26

Most of us don’t have enough money to last us through retirement. That’s true for those of us close to retirement age — but also true for those just starting their careers.

Yes, we can increase the amount of money that we save into our 401(k) plans — and that really, seriously helps, especially if you are just starting out in your career. The savings you put into your retirement account in your twenties is worth an incredible amount more due to compounding interest over time.

For the privilege of having your 401(k) plan, though, comes the expenses charged from those Wall Street firms that manage those 401(k) accounts. And those expenses also compound over time taking away valuable dollars from your retirement.

It’s a LOT of money:

Assuming an annual market return of 7 percent, he says, a 30-year-old worker who made $30,000 a year and received a 3 percent annual raise could retire at age 70 with $927,000 in the pot by saving 10 percent of her wages every year in a passive index fund. (Such a nest egg, at the standard withdrawal rate of 4 percent, would generate an inflation-adjusted $37,000 a year more or less indefinitely.) If she put it in a typical actively managed fund, she would end up with only $561,000.

That’s because “actively managed” funds have a higher expense ratio — that compounds over time — and actively managed funds also keep a portion of their funds in cash, earning no investment income.

Now, I won’t tell you what you should invest in. What I can tell you is that investing in whatever is a lot less expensive, meaning you keep a lot more of your money, if you invest through an index fund.

Go open up your 401(k) and take a look at what type of fund you are investing with for your choices. If any of them are “active funds” — and you will be able to tell by their expense ratio, typically above 1% — you should look to invest in the equivalent type of investment using an “index” fund. Those expense ratios tend to be in the .5% area.

It’s worth a look — especially since it’s your money in the first place.