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Efficiently Save Toward Retirement with Cheap ETFs

Americans’ retirement portfolios are falling short. However, Investors can utilize cheap, low-cost exchange traded funds to help maximize returns and save toward their golden years.

According to the Federal Reserve’s Survey of Consumer Finances, the typical working family at about 55 to 64 years old only has about $104,000 in retirement savings, reports Eduardo Porter for the New York Times.

The Center for Retirement Research at Boston College calculates that over half of all American households do not have enough retirement income to maintain living standards they are use to, even if people worked until 65, or two years longer than the average retirement age. [Is Your Nest Egg Keeping Pace with Retirement Income Costs?]

Additionally, the Employee Benefit Research Institute estimates that 83% of baby boomers and Generation Xers in the bottom fourth of the income distribution will not have enough saved. Meanwhile, over a quarter of those between the middle income distribution and the 75th percentile will likely run out of money.

Investors can retire comfortably if they begin saving early and utilize cheap investment tools, like index-based funds. According to a recent research paper by John Bogle, retired CEO of the Vanguard Group, many workers who invest in actively managed funds are seeing returns diminished due to the costly fees – active managers charge about a 1.12% expense ratio for the average large-cap blended fund. Furthermore, Bogle points out that active funds pay a penalty for keeping a share of assets in low-yielding cash and estimates total costs could add up to 2.27% per year.

In contrast, the average U.S.-listed passive index-based stock ETF has a 0.56% expense ratio, according to XTF data. [What an All-ETF Portfolio Does for You]

Moreover, some broad stock market ETFs come with dirt cheap fees. For instance, the Schwab U.S. Broad Market ETF (SCHB) is the cheapest offering with a 0.04% expense ratio and Vanguard Total Stock Market ETF (VTI) has a 0.05% expense ratio.

Over time, the low fees would help the investor keep more of his or her money due to compounding. Bogle calculates that a 30-year-old worker who earns $30,000 per year with a 3% annual raise could retire at age 70 with $927,000 if the market returned an average 7% by saving 10% of his or her wages every year in a passive index fund. In contrast, the investor would only generate $561,000 in the same scenario if he or she held a typical actively managed fund.

For more information on investing toward retirement, visit our retirement category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.