Life Stages > The impact of high fees

The impact of high fees

Steve and Barbara are in their 40s. After repaying their mortgage, they decided to start a serious savings programme. They wanted to save $10,000 a year. Their bank was offering term deposits at 7% interest and they calculated that this would give them about $263,000 in today’s dollars after-tax (at 33% and inflation of 2% a year) at the end of 20 years. However, the bank told them that it could not provide that rate for more than two years. After that, there was no guarantee.

Though Steve’s employer offered a superannuation scheme, there was no subsidy, so Steve asked a financial adviser he knew to quote on a personal savings programme. He asked the adviser to work out what they might get in today’s money in 20 years’ time, using the same 7% interest rate the bank had quoted for a long-term deposit.

The adviser explained that, in today’s money, they would only get about $227,000 but that would include his advice and the potential service from the provider. However as it was $36,000 less than the term deposit, Steve and Barbara decided to investigate Steve’s workplace scheme instead. They knew they needed more than just a term deposit if they wanted better long-term returns.

Glossary: interest
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
Glossary: inflation
Inflation - is the rate at which the prices of goods and services increase over time. The effect of this is to reduce the purchasing power of money. For example, if you could buy something with $1000 now, in one years time, you would need $1020 to buy that same thing (assuming 2% inflation).
Glossary: superannuation scheme
Funds specifically designed for people saving for their retirement. They are in the form of retail funds available to all savers, or employer funds available only to employees of the sponsoring employer.
Glossary: adviser
A person who sells financial advice and/or products. They include financial advisers, insurance agents, planners, sharebrokers, mortgage brokers and bank managers or agents. They may be salaried, paid a commission or have an hourly rate.
Glossary: provider
A company such as a bank, finance or insurance company that creates and provides insurance, mortgage, banking, savings or investment products.