Stop the silent drain of fees and taxes that kill compounding

Compounding is powerful, but so are the forces that undo it. Two of the biggest are fees and taxes. A one percent fee sounds small until it compounds against you, year after year. Economists often use a thought experiment: double a dollar every year for 20 years and you reach over a million. Now skim a third for taxes annually and the ending value collapses to a few tens of thousands. The lesson isn’t that you’ll earn those exact returns; it’s that small, repeated drags crush long horizons.

In practice, many investors pay several layers of cost and don’t know it. The glossy brochure shows an expense ratio, but not the trading costs inside the fund, the plan administrator’s take, or a sales load. One client believed they were paying 1%. Their all-in was near 3.5% once we tallied the plan, funds, and advice. We replaced high-cost funds with broad index choices, kept advice costs honest, and the savings were redirected automatically. A year later, their statements were quieter and the balances higher.

Taxes are the other slow leak. If you think future tax rates will be the same or higher, consider paying tax now in a Roth account so later withdrawals are tax-free. Asset location matters too: put tax-inefficient holdings (like bonds) in tax-advantaged accounts when you can, and keep broad equity indexes in taxable accounts for their tax-efficiency.

Behaviorally, the audit works because it turns hidden costs into visible friction. Once you see the annual dollars you’re giving up, your loss aversion kicks in, but this time it helps you. Compounding then works on your side again, building not just returns, but confidence that you aren’t leaking money in the background.

Lay out every account you own and build a simple list of tickers, names, and visible fees. Then call or use a calculator to estimate the true all-in cost, including plan fees and advisory charges, and assume higher rather than lower. Replace high-cost funds with low-cost broad index options, and keep your total cost targets tight—funds under a quarter percent, advice under about one and a quarter all-in. Shift tax-sensitive assets into tax-advantaged accounts where possible and use Roth options if higher future tax rates seem likely. Finally, redirect the dollars you saved into your Freedom Fund automatically so the gain becomes tangible. Do the list this weekend.