Living in Retirement

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The importance of staying cost-conscious in retirement

September 06, 2013

It makes good sense to keep a close eye on investment costs while you are saving for retirement—but it makes even more sense once you're in retirement and spending those savings.

As Vanguard investors know, you keep more of your return when you choose mutual funds with low expense ratios. Every dollar paid for management fees or trading commissions is simply a dollar less earning potential return.

Over the decades that you're saving for retirement, the compounding of savings can be a powerful force in growing your wealth. Once you retire, compounding still matters, but there's a new reason to be cost-conscious, and it's related to risk.

How Vanguard stacks up

As of December 31, 2012, the average expense ratio for Vanguard mutual funds was 0.19%, while the industry average was 1.11%, according to independent fund rating agency Lipper Inc.

Learn more about how investment costs can erode your returns »

In retirement, most investors are more concerned about avoiding losses than about growing their portfolios. So they switch to a less risky asset allocation to protect their principal and their income stream. Less risk, of course, means less potential return.

With a lower-returning portfolio, costs hit harder. Suppose you held a portfolio of 80% stocks and 20% bonds in your earlier working years but shifted it to 20% stocks and 80% bonds in retirement. The accompanying table shows how the role of costs could escalate.

An added consideration for investors in retirement today is the current low-yield environment. With bond yields hovering near historical lows, returns may be depressed in the years ahead. As of December 31, 2012, the yield was averaging 1.74% for the entire investment-grade U.S. bond market, including Treasuries, mortgages, and investment-grade corporate bonds. Economists expect low yields to persist in the United States for years to come.

The takeaway is clear: When you retire, make sure your portfolio is still working hard for you by keeping costs in check. On a $500,000 portfolio, the difference between annual costs of 1% and, say, 0.25% could be some $3,750 a year, enough to pay for a nice little getaway with your grandchildren.

How costs can take a bigger bite from a more conservative portfolio
(Based on broad market returns for 1926–2012 and a 1% expense ratio.)

Annual return
before costs
Annual return
after costs
Portion of
annual return
lost to costs
80%/20%   9.41%   8.32%   12%
50%/50% 8.25 7.17 13
20%/80% 6.74 5.67 16

Stocks are represented by the Standard & Poor's 90 Index from 1926 to March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; and the MSCI US Broad Market Index thereafter. Bonds are represented by the S&P High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Barclays U.S. Long Credit AA Index from 1973 to 1975; the Barclays U.S. Aggregate Bond Index from 1976 to 2009; and the Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter.


For more information about Vanguard funds, visit, or call 800-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

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