The Tyranny of Compounding Costs

PBS aired an important documentary Tuesday evening examining retirement planning in America and entitled The Retirement Gamble.  One particularly noteworthy comment came from Vanguard founder Jack Bogle on the “tyranny of compounding costs.”  In contrast to the “miracle of compound interest” (often attributed to Albert Einstein, probably falsely, but that doesn’t lessen the import of the concept), which shows how quickly interest can accrue when it is compounded, the tyranny of compounding costs addresses how dramatically returns are diminished on account of excess fees.  Note the chart below from The Journal of Financial Planning.Fees2 As always, fees matter — a lot.