Two people save 3,600 a year for 40 years and earn 7% a year before
costs. One pays 0.15% a year, the other 1.15%. At 65 the first has
738,846 and the second 567,961.
The difference is 170,885 — 23.1% of the pot — and it
is entirely produced by one line of a factsheet.
Where the money goes
Low cost
One point more
Total paid in
144,000
144,000
Annual cost
0.15%
1.15%
Fees paid over the 40 years
13,026
83,343
Value at 65
738,846
567,961
Difference in the final pot
−170,885 (23.1%)
Identical contributions, identical gross return. One line of the factsheet differs.
Note the two numbers that do not match. The higher-cost investor pays
83,343 in fees and ends up 170,885 poorer. Those are
not the same figure, and the gap between them is the whole point: every 1 handed over in extra fees
costs 2.43 of final wealth, because the fee is taken before the money
has finished compounding.
A charge is usually presented as a percentage of assets, which makes it sound like a small
recurring cost. It is better understood as a share of the growth you never see. On these
assumptions, one point of annual charge takes about a quarter of a lifetime's result.
The other illustration, also unnumbered
The same arithmetic settles the argument about starting early. One saver pays in for
10 years from 25 and then stops entirely. The other pays in for 30 years from
35 and never misses one.
Starts
Stops paying in
Years of payments
Total paid in
Value at 65
The early saver
25
35
10
36,000
405,132
The long saver
35
65
30
108,000
363,863
Difference
-20
-72,000
41,269
3,600 a year, 7% a year, no fees on either side. The only difference is when the money goes in.
The early saver puts in 36,000 and finishes with
405,132. The long saver puts in 108,000 — three times as much
— and finishes with 363,863, or -41,269 less. Ten years of payments beat thirty,
by 41,269, on a third of the money.
This is not a trick of the example. It is the shape of compounding: what matters is not how long
you pay in but how long the money is invested, and the early saver's first payment has
40 years to work while the long saver's has 30.
Why the last decade does the work
At age
35
45
55
65
Paid in so far
36,000
72,000
108,000
144,000
Value (low cost)
52,771
155,134
353,693
738,846
Of which growth
16,771
83,134
245,693
594,846
Growth overtakes contributions somewhere in the second decade, and never looks back.
Of the early saver's final 405,132, 49% appears in the last ten
years alone — a decade in which not one further payment is made. That is the part
people abandon, because for the first fifteen years the account looks like a savings account and
behaves like one.
And the number nobody adjusts
738,846 in 40 years is not 738,846 of today's money. At 2.5% inflation it
is about 275,169. The real return — 7% against 2.5%
inflation — is 4.39%, not 7%, and that is the figure that decides
what the pot will buy.
A projection that ignores inflation is not a helpful projection. Both illustrations
above are correct in cash terms and misleading in purchasing terms, and the honest way to present
them is both ways at once.
What to do with this
Compare charges as a share of expected growth, not as a percentage of assets.
1.15% against 0.15% reads as a rounding difference; 23% of the final pot does
not, and they are the same fact.
If you are choosing between starting now at a smaller amount and starting later at a larger one,
the table above is the answer: years in the market dominate. And if you have already started,
the fee line is the only input on the whole page you can change today with certainty.
Every figure here rests on 7% a year, which nobody can promise. That is why the workbook
makes it an input, and why the only honest use of these numbers is to put your own in.
The workbook behind this article
Every figure above is a live formula in the companion file for
Stock Market Investing for Beginners, which also has a blank sheet for
your own contribution, age, return, cost and inflation. It is free, and it needs no account and
no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
This note is drawn from Stock Market Investing for Beginners. The book is on Amazon.
If this book helped — or didn’t — a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.