Expense ratio on long term savings

If you invest regularly for many years, to accumulate savings for your retirement, the amount that you can get on maturity depends on:

* the yield of the underlying assets of the fund (insurance fund or unit trust)
* the charges that are taken away from the earnings

If you invest in a well diversified fund of equities and bonds, you can expect an average return of 5% per annum (during a low interest rate environment).

You have the following options:

* invest in a low-cost unit trust with an expense ratio of 1%
* invest in a low-cost endowment plan with a expense ratio of 1.5%
* invest in a high-cost endowment plan with an expense ratio of 2.5%

An endowment plan has a higher ratio, compared to a unit trust, as it has to provide for the death benefit. I estimate it to be an additional 0.5%.

The difference in expense ratio between a low cost endowment and a high cost endowment is the commission that is paid to the agent. Most endowment plans in the market pays high commission to the agent. I estimate that it will add an additional 1% to the expense ratio.

This is what you can get, by saving $2,000 yearly for 30 years:

Plan                 Expense  Net     Maturity
                      margin  yield     amount
Unit trust             1.0%   4.0%    $136,200
Low cost Endowment     1.5%   3.5%    $105,000
High cost Endowment    2.5%   2.5%    $ 89,000

For a 30 year investment, the difference in the maturity amount is 18% (ie $105,000 compared to $89,000).

Lesson: If you to invest for the long term, look for a unit trust or endowment plan that have a low expense ratio, so that you can earn a better maturity amount.