Your headline return is not your return. See what survives fees, taxes and inflation.
Real annual return
3.25%
After fees, taxes and inflation.
Fund expenses of 0.35%, advisory fees of 0.90% and tax drag of 0.50% reduce your 8% to 6.25%. Inflation at 3% takes it to 3.25% in real terms. That is the number your plan actually runs on, and it is 4.75% below the headline figure.
Without any costs, $250,000 plus $1,500 monthly would reach $2,115,231. With your current cost structure it reaches $1,583,723. The $531,508 difference is 25% of the untaxed, unfeed outcome — and it compounds, which is why the gap widens every year.
Broad-market index funds commonly charge 0.03–0.10%. Moving from your combined 1.25% to 0.05% would leave you with $1,929,689 instead of $1,583,723. If you use an advisor, this is the number to weigh their value against — a flat-fee or hourly planner can deliver the same advice without a percentage of assets that grows every year.
Your 0.50% tax drag disappears entirely inside a 401(k), IRA, Roth or HSA. The standard priority is 401(k) to the employer match, then HSA if eligible, then IRA, then back to the 401(k) up to the annual limit, and only then a taxable brokerage account. For taxable holdings, index funds and ETFs generate far less taxable distribution than actively managed funds.
Plan your contributionsAgainst $610,000 of contributions, that is a real gain of $266,869. Judging a long-horizon plan on the nominal figure consistently overstates how comfortable the outcome will be.
Look up every fund you hold and note its expense ratio, then check your statements for advisory or wrap fees. Most people underestimate their total cost, because fees are deducted from returns automatically and never appear as a line item you pay.
Model a lower-fee portfolioWorked scenarios with the full analysis, so you can see how the numbers move before entering your own.
A typical advised portfolio, showing the compounding cost of a percentage-of-assets fee over twenty years.
Real annual return
3.25%
Fund expenses of 0.35%, advisory fees of 0.90% and tax drag of 0.50% reduce your 8% to 6.25%. Inflation at 3% takes it to 3.25% in real terms. That is the number your plan actually runs on, and it is 4.75% below the headline figure.
Without any costs, $250,000 plus $1,500 monthly would reach $2,115,231. With your current cost structure it reaches $1,583,723. The $531,508 difference is 25% of the untaxed, unfeed outcome — and it compounds, which is why the gap widens every year.
Broad-market index funds commonly charge 0.03–0.10%. Moving from your combined 1.25% to 0.05% would leave you with $1,929,689 instead of $1,583,723. If you use an advisor, this is the number to weigh their value against — a flat-fee or hourly planner can deliver the same advice without a percentage of assets that grows every year.
Identical contributions and returns with index-fund expenses and no advisory fee.
Real annual return
4.45%
Fund expenses of 0.05%, advisory fees of 0% and tax drag of 0.50% reduce your 8% to 7.45%. Inflation at 3% takes it to 4.45% in real terms. That is the number your plan actually runs on, and it is 3.55% below the headline figure.
Without any costs, $250,000 plus $1,500 monthly would reach $2,115,231. With your current cost structure it reaches $1,929,689. The $185,543 difference is 9% of the untaxed, unfeed outcome — and it compounds, which is why the gap widens every year.
Your 0.50% tax drag disappears entirely inside a 401(k), IRA, Roth or HSA. The standard priority is 401(k) to the employer match, then HSA if eligible, then IRA, then back to the 401(k) up to the annual limit, and only then a taxable brokerage account. For taxable holdings, index funds and ETFs generate far less taxable distribution than actively managed funds.
Plan your contributionsThe same holdings inside a 401(k) or IRA, where annual tax drag disappears entirely.
Real annual return
4.95%
Fund expenses of 0.05%, advisory fees of 0% and tax drag of 0% reduce your 8% to 7.95%. Inflation at 3% takes it to 4.95% in real terms. That is the number your plan actually runs on, and it is 3.05% below the headline figure.
Without any costs, $250,000 plus $1,500 monthly would reach $2,115,231. With your current cost structure it reaches $2,097,586. The $17,645 difference is 1% of the untaxed, unfeed outcome — and it compounds, which is why the gap widens every year.
Against $610,000 of contributions, that is a real gain of $551,383. Judging a long-horizon plan on the nominal figure consistently overstates how comfortable the outcome will be.
The return a fund reports is gross of almost everything that reduces what you keep. Four layers sit between that headline and your actual outcome.
Fund expense ratios are deducted automatically before the fund reports its return, so they are already reflected in published figures for that fund — but they still determine which funds you should hold. Advisory fees are charged separately as a percentage of assets. Tax drag applies only in taxable accounts, from dividends and realized capital gains. Inflation is the last and largest, and the only one that affects every account type equally.
A 1% advisory fee on a $500,000 portfolio is $5,000 a year, and it rises automatically as the portfolio grows without any corresponding increase in work. Over twenty years, the compounded cost commonly exceeds $250,000.
That does not make advisors unworthwhile. Behavioral coaching that prevents one panic sale during a downturn can be worth more than a decade of fees. Tax planning, estate coordination and Roth conversion strategy have genuine value. The question is whether you are receiving those services, or paying a percentage of assets for portfolio management that a three-fund index portfolio would replicate. Flat-fee and hourly financial planners provide the advice without the asset-based fee, which for larger portfolios is often dramatically cheaper.
Tax drag comes from distributions you did not choose to take: dividends and, in mutual funds, capital gains distributions generated by the fund's internal trading. You owe tax on these even when you reinvest them.
ETFs and index mutual funds generate far less of this than actively managed funds because they trade less. Asset location helps further — holding bonds and REITs, which produce ordinary-income distributions, inside tax-advantaged accounts while keeping broad equity index funds in the taxable account. Tax-loss harvesting captures realized losses to offset gains, and municipal bonds produce federally tax-exempt interest for high-bracket investors.
Advisory fees, account fees and tax drag frequently exceed the fund expense ratio. Total cost is what matters.
A taxable account and a Roth with identical holdings produce materially different outcomes. Compare after-tax.
One percent of assets sounds modest and consumes roughly a quarter of the final balance over thirty years.
Asset location backwards costs real money. Income-producing assets belong in tax-advantaged accounts.
The tax bill can exceed several years of fee savings. Redirect new contributions instead.
Under 0.20% for any broad-market fund, and under 0.10% is readily available. Major providers offer total-market index funds at 0.03%. Anything above 0.50% needs to justify itself with performance that, on average, actively managed funds do not deliver after fees.
On a $250,000 portfolio with $1,500 monthly contributions over twenty years at 8% gross, moving from 1.25% in combined fees to 0.05% is worth roughly $250,000 in additional final balance. The cost compounds because each year's fee also removes the growth that money would have generated in every subsequent year.
At around 0.25%, robo-advisors cost a quarter of a traditional advisor and provide automatic rebalancing and tax-loss harvesting. For someone who would otherwise not invest, or who would panic-sell in a downturn, that is good value. For someone comfortable holding three index funds and rebalancing annually, it is a fee for something you can do yourself in an hour a year.
Zero in any tax-advantaged account. In a taxable account, roughly 0.3–0.5% for tax-efficient broad-market index ETFs, and 1–1.5% for actively managed funds that distribute capital gains. Your marginal bracket and how much of your return arrives as dividends versus unrealized appreciation both matter.
Inside a tax-advantaged account, switch immediately — there is no tax consequence. In a taxable account, selling triggers capital gains, so weigh the one-time tax cost against the ongoing savings. Often the best approach is to stop adding to the expensive fund, direct all new contributions to a cheaper one, and let the old position sit.
The next calculations that usually follow this one.
See the balance, the split between contributions and growth, and what it actually buys.
Find your target, see the gap, and check whether you are leaving employer money behind.
Your savings rate sets the date far more than your income does. This shows the year.
Translate future dollars into today's purchasing power — the adjustment most plans skip.
One number that tells you whether the whole plan is working — plus what is actually spendable.
Guides that explain the decisions behind these numbers.
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