Author: Ty Druse
Compound interest may be the key to unlocking retirement, by providing an avenue for everyday working people to accumulate wealth through individual retirement accounts (such as 401Ks). But did you know there is a silent killer waiting to pounce on your compound interest growth? Let’s take a step back and review compound interest before addressing the killer in the room.
In a 2014 foundational article by Lusardi and Mitchell, they researched the preparedness of households to make “complex financial decisions” by surveying individuals across the world at various ages and asking three primary questions. Review the first question asked on compound interest.
- Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: [more than $102, exactly $102, less than $102? Do not know, refuse to answer.]
The results of the survey research by Lusardi and Mitchell were astounding. 32.9% did not correctly answer (or did not know/refuse to answer) the question. That is nearing 1/3 of those surveyed. Compound interest allows the initial $100 investment to grow to $110.41 (formula is A = P (1 + r/n)nt) over 5 years. Adding each year’s interest creates a snowball effect, in which the longer an investment is held its value compounds over time.
While having a basic understanding of how money grows is the first step, an even more important step is to develop an awareness of how it can be stolen. How much do fees impact the overall return of a portfolio? Investment account fees of one-half, one, or two percent do not sound like much, but they truly are the silent killer to growth! In 2025, the SEC released an article on this topic. They describe two types of fees: 1) transaction: charges associated with each buy or sell of a stock/mutual fund and 2) ongoing: regular expenses such as annual, advisor, or maintenance fees.
The annual growth rate of the S&P 500 has been approximately 10.5% over the past 50 years (some years better, some worse). The expense ratio for Vanguard’s VOO (S&P 500) is 0.030% or VT (Total World Stock) is 0.060%. Those are incredibly low! Look at the below chart noting the impact of fees on the total portfolio value after 30 years of investing $5000 every year. There is a significant gap between the low fee and high fee portfolio. Over $320,000 is lost with a 2% fee compared to the near $1 million dollar balance associated with 0.030% fees.
Consider the following when reviewing portfolio fees and costs:
- Dig for the Information: Contact your financial company and request a fee summary/schedule or review your statements noting associated fees.
- Fee-Only Financial Provider: If you prefer not to manage your portfolio, consider using a fiduciary fee-only financial provider in which you will simply pay a one-time fee for guidance.
- Low-Cost Brokerages: It is common knowledge that the BIG-3 (Fidelity, Schwab, and Vanguard) brokerages offer 0% to near 0% fees with branded ETFs and have eliminated most transaction fees.
- Beware of Insurance Companies:Insurance companies are typically not fiduciaries and many times have high fees.
Best of luck on wealth accumulation through compound interest, but keep in mind the silent killer lurks. Fees negatively impact wealth building more than any other factor for most individuals.
References: Lusardi, A., & Mitchell, O. S. (2014). The Economic Importance of Financial Literacy: Theory and Evidence. Journal of Economic Literature, 52(1), 5–44.
U.S. Securities and Exchange Commission. (2025). Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio. Office of Investor Education and Advocacy.
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