How it works
An expense ratio looks harmless because it is quoted as a small annual percentage — but it is charged on the whole balance every single year, and every dollar taken in fees is a dollar that stops compounding for every year that follows. That is why a 1% fee does not cost 1% of the result: over a long horizon it routinely consumes 15-25% of the final balance. The calculator runs two identical investments side by side — one compounding at the full pre-fee return (a near-zero-cost index fund), one at the return minus your fund's expense ratio — and shows both ending balances, the dollar gap between them, and that gap as a share of the final balance. The gap widens fastest in the last decade, because fees scale with the balance and the balance is biggest at the end. The practical use is comparison shopping: run your current fund's expense ratio, then run 0.05% for a broad index fund, and the difference between the two results is the pay rise you give yourself by switching — taken with no extra risk, since the fee is the one input in investing that is both certain and entirely under your control.
Formula
Cost = FV at gross return - FV at (gross return - expense ratio), same contributions
Tips
- A 1% fee costs far more than 1% of the result — the drag compounds with the balance.
- Fees are charged on the whole balance yearly, so the cost grows as you do.
- Dropping from 1.00% to 0.05% is a pay rise with no extra risk.
- Compare the dollar gap, not the percentage — it is the number that funds retirement.
- Fee is the only certain input in investing: returns vary, the fee does not.
Frequently asked questions
- What is an expense ratio?
- The annual fee a fund charges, expressed as a percentage of your balance. A 1% expense ratio means $100 a year per $10,000 invested, deducted automatically from the fund's returns. Index funds run about 0.03-0.20%; actively managed funds often charge 0.5-1.5%.
- How much does a 1% fee really cost?
- Far more than 1% of the result, because every fee dollar stops compounding. Over 30 years on a growing portfolio, a 1% fee typically consumes 15-25% of the final balance — this calculator shows the exact dollar gap for your numbers.
- Why do fees hurt more over long periods?
- Two reasons compound together: the fee is charged on the whole growing balance every year, and each dollar removed loses all its future growth. The gap between a high-fee and low-fee fund therefore widens fastest in the final decade, exactly when the balance is largest.
- What is a good expense ratio?
- For a broad index fund, under 0.10% is excellent and under 0.20% is fine. Above 0.50% demands a clear justification, and above 1% should earn its keep through demonstrated, persistent outperformance — which the evidence shows is rare after fees.
- Does a higher fee buy better performance?
- The evidence says no on average: most actively managed funds underperform their benchmark over long periods precisely because of their fees. The expense ratio is the most reliable predictor of relative fund performance — lower is better, all else equal.