On MERs, Taxes and Partners 
Malcolm Hamilton, an actuary and pension consultant with William M. Mercer Ltd., in the Introduction to Jonathan Chevreau's The Wealthy Boomer, provides this handy "rule of 40": Take 40. Divide by your mutual fund's MER. And presto, you've got the number of years it takes management expenses to consume onethird of your investment.Warning: Now if you think that's painful then you may not want to read further.
The "rule of 40" is just an approximation^{1} 1  MER = 1  0.02 = 0.98 In the second year you pay 2% on the remaining 98%, leaving 96.04%, i.e. (1  MER) x (1  MER) = (1  0.02) x (1  0.02) In the third year you pay 2% on the remaining 96.04%%, leaving 94.12%, i.e. (1  MER) x (1  MER) x (1  MER) = (1  0.02) x (1  0.02) x (1  0.02) So in general after n years the percentage of your money that you get to keep is: (1  MER)^{n} x 100 See the effect of this erosion graphically courtesy of gummy.
Note from the above formula that the rate of erosion is independent of the fund's rate of return. It doesn't matter if your fund performs well or not  the MERs continue to eat into your portfolio unabated.
But that's not all! And remember, like MERs these extra fees pile up regardless of how your fund performs.
But wait there's more! Here's a calculator that lets you estimate the effects of factors like MERs, returns, inflation and taxes on your fund. But before you go there, another warning: this won't be a pretty picture. For example, in a taxable account at 50% marginal tax rate, assuming an average annual return of 10%, inflation at 3% and an MER of 2.5%, after 25 years you get to keep 36.89% of your money, the fund company 44.62% and the taxman 18.47%.
Ouch!
^{1}Here's a derivation from gummy: After N years, your portfolio is reduced by a factor (1MER)^{N} If the MER consumes 1/3, you're left with 2/3, so (1MER)^{N} = 2/3 Take (natural) logs of each side: N log(1 MER) = log(2/3) = .4 from a table of logs It is intuitively obvious (haven't had a chance to say that in six years!) that log(1  MER) =  MER approximately ... from the Maclaurin series expansion That gives N (MER) = .4, or, if MER is expressed as a percentage, N (MER) = 40 so N = 40/MER.
