The Ultimate Guide to Retirement Investment Options

Investing for retirement is a cornerstone of building long-term wealth, and your nest egg will play a crucial role in securing financial stability for the golden years.

Yet, many investors remain confined to mutual funds that come with high fees and limited choices. In this comprehensive guide, we'll demystify the differences between mutual funds, exchange-traded funds (ETFs), and index funds.

Discover how switching to lower-fee options can significantly boost your retirement savings and pave the way for a more prosperous future.

Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. (And if this sounds like lot of words that don’t mean anything, check out this blog where we break down mutual funds super simple).

They are managed by professional fund managers, who make investment decisions on behalf of investors.

Mutual funds typically charge high management fees (2%+), often referred to as the Management Expense Ratio (MER), which can eat into your returns over time.

For example, let’s look at the TD Bank Mutual Fund called “TD Canadian Equity Fund - I”. It contains stocks from many of the highest-performing companies in Canada and is considered medium risk (higher growth potential typically comes with higher risk). It has a Management Expense Ratio (in other words, the management fee) of 2.16% and over the last 10 years its average return has been 5.77% per year.

Based on this information, if I were to invest $250 each month in this mutual fund for 30 years, I can expect my investments to be worth about $163,400 when I need cash out at retirement.

So, I contributed $90,000 and I made $73,400… not too shabby, right?

Well, if you look a bit closer, you’ll see that I actually paid over $77,000 in fees! The misleading 2.16% fee was charged every single year, which means it actually ate away over 32% of what my investments could’ve been worth. Yikes.

Oh, and this doesn’t even include the fees you’ll be charged when you want to take your money out (called load fees). 

Index Funds

Index funds are a type of mutual fund that tracks a specific market index, such as the S&P/TSX Composite Index or the FTSE Global All Cap Index. They aim to replicate the performance of the index they track, rather than trying to outperform it. Because index funds don't require active management, they often have lower fees than actively managed mutual funds. To learn more about Index Funds, check out this blog.

For example, let’s look at the TD Bank Index Fund called “TD Canadian Index Fund”. Just like the TD Mutual Fund we looked at in the previous section, it contains stocks from many of the highest-performing companies in Canada and is considered medium risk.

It has a Management Expense Ratio of 0.66% (lower fees than the mutual fund because the stocks inside index funds aren’t being shuffled around or analyzed as often) and over the last 10 years its average return has been 6.56% per year (yes, the return has been HIGHER than the equivalent mutual fund, even though it’s managed less often… someone selling mutual funds won’t tell you that because they want the higher mutual fund commission, but it’s quite common!).

Based on this information, if I were to invest $250 each month in this index fund for 30 years, I can expect my investments to grow to be worth $246,800.

Remember, I contributed $90,000 myself (adding $250/mo for 30 years), so this means I earned $156,800! That’s more than DOUBLE what I would’ve made from the mutual fund… mostly thanks to the much lower management fee.

Note: there are sometimes load fees with index funds, so make sure you check this before purchasing.

Exchange Traded Funds (ETFs)

And finally, let’s talk about ETFs! ETFs are similar to mutual funds and index funds in that they represent a basket of securities, but they trade on stock exchanges like individual stocks. ETFs often have lower fees compared to mutual funds because they typically track an index, such as the S&P 500, rather than being actively managed by a fund manager. They also often have lower fees than index funds, but not always. This passive approach tends to result in lower costs for investors. To learn more about ETFs, check out this blog.

For example, an ETF that’s fairly similar to the mutual fund and index fund that we reviewed above is the iShares S&P/TSX 60 Index ETF (the symbol for this is XIU). 

Just like the TD Mutual Fund we looked at in the previous section, it contains stocks from many of the highest-performing companies in Canada and is considered medium risk. It has a Management Expense Ratio of just 0.15% (remember, the mutual fund fee was more than 14 times higher at 2.16%) and over the last 10 years its average return has been 7.67% per year (yes, this is higher than the returns for the mutual fund and the index fund!).

Based on this information, if I were to invest $250 each month in this ETF for 30 years, I can expect my investments to grow to be worth a whopping $334,700!

I contributed $90,000 myself (adding $250/mo for 30 years), so this means I earned $244,700! My investments are worth $170,000+ more than if I had invested my money in the mutual fund, and $88,000 more than the index fund- again, mostly thanks to the much lower management fee.

Final Thoughts

Choosing the right investment options for your retirement fund is crucial to maximizing how you’ll get to live in retirement. By understanding the features and benefits of mutual funds, ETFs, and index funds, you can make informed decisions that align with your financial goals. Transitioning to lower-fee investment options not only reduces costs but also enhances your potential returns over time.

About The Authors

Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.

In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.

With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.