The 1% Rule

Making the most of your investments

I learned the 1% rule early in my career, when a business leader reviewed a budget I’d help produce then said “Good, now see if you can achieve just 1% higher revenue or 1% lower expense when implementing the budget over the next year.”  Why, we said?  “Because by achieving 1% more on a budget with 6% net income, you will end up at 7% net income.  That 1% added to 6% produces 17% (1÷6=.167) more net income!”  My mind was blown.

Can the 1% rule be applied to personal finance?  Yes, and here’s how.

Frederick Vettese in his book Retirement Income for Life (1) proposes reduced fees as his first of five enhancements to improve your retirement finances.

Let’s assume you’re averaging 7% annual return on your investments.  That’s after fees and before inflation.  Jason Heath reports typical Canadian Mutual Fund fees are 1.8% (2), in agreement with Vettese.  And the Bank of Canada targets 2% inflation.  Let’s find a net result:

·         You may have grossed 8.8% on your investments less the1.8% fees for the 7% investment return.  Then subtract 2% inflation.  Your actual net is 5%

But if you can reduce your fees by 1% (from 1.8 to 0.8 in our example):

·          You have still grossed 8.8% on your investments less the 0.8% fees for a new 8% investment return.  Then subtract 2% inflation.  Your actual net is now 6%

Adding 1% onto the 5% you were receiving delivers a 20% (1÷5=0.20) gain!  Now your mind should be blown.

Back to Vettese.  He suggests it is reasonable to manage your fees down to 0.6%.  For reference, we pay 0.7%.  So, it’s realistic to do even better than the 20% gain in the example.

How can you Be Prepared?  Review the fees you are paying.  Are you closer to 1.8% or 0.6%?

And remember, just 1% of $1,000,000 savings & investments is $10,000.  Every year!  $250,000 over 25 years!! Reason enough I hope to review your fees.

1.      Retirement Income for Life: Getting More Without Saving More, F Vettese, 3rd Edition, 2023

2.      Advisor Fees, hidden and otherwise …, Jason Heath article in the Financial Post, Feb. 2023