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Smith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 fr

Smith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 from your account, a loss of 63 percent, leaving you with just a little over $36,000. Is this math right? It doesn't seem like this is how the calculation would be done.

3825 14y ago
For people on smartphones, here is what tehwebguy wrote: -- Smith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 from your account, a loss of 63 percent, leaving you with just a little over $36,000. Is this math right? It doesn't seem like this is how the calculation would be done. --
- tehwebguy 14y ago
  Thanks, I shouldn't have used the double space!
  - 3825 14y ago
    You're more than welcome. One of the few good habits I picked up from using reddit on my phone.
kzrdude 14y ago
0.98^50 is 36.4% yes, but it's ignoring potential growth of the invested capital
dragontamer 14y ago
You'd also lose an additional 3% each year to inflation, so the practical worth of your money would be much much less. Most funds gain some money in the long run, but there is no guarantee that you'll net money in the long run (it has just been historically the norm). The main thing however, is that the typical fee is closer to 1.1% or so. They are grossly exaggerating what the typical investor would pay. Nonetheless, compounding returns forces you to think about these things. As I've stated in my other posts, you can get a Vanguard fund with 0.05% fees, or the typical SPY index ETF, which is currently at ~0.09%/year expense ratio. Focus on low-fee funds, and read the fine print on your 401k plans.
codemac 14y ago
future = principal * (1 + interest) ^ periods So some basic math to show how much a 2% yearly fee costs you: In[2]:= 100000 * (1 + 0.07)^50 Out[2]= 2.9457*10^6 In[3]:= 100000 * (1 + 0.05) ^50 Out[3]= 1.14674*10^6 In[4]:= Out[2] - Out[3] Out[4]= 1.79896*10^6 In[5]:= Out[4] / Out[2] Out[5]= 0.610707 So you lose 61.07% of your 401k balance to these yearly fees reducing your effective interest rate. The 100k example isn't accurate, it's just trying to give people a sense of how much they'd be losing.. However - this article doesn't really do the full benefit calculation of company matching, effective interest rates of other types of accounts, etc.

3825 14y ago

For people on smartphones, here is what tehwebguy wrote: -- Smith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 from your account, a loss of 63 percent, leaving you with just a little over $36,000. Is this math right? It doesn't seem like this is how the calculation would be done. --

tehwebguy 14y ago
Thanks, I shouldn't have used the double space!
- 3825 14y ago
  You're more than welcome. One of the few good habits I picked up from using reddit on my phone.

kzrdude 14y ago

0.98^50 is 36.4% yes, but it's ignoring potential growth of the invested capital

dragontamer 14y ago

You'd also lose an additional 3% each year to inflation, so the practical worth of your money would be much much less. Most funds gain some money in the long run, but there is no guarantee that you'll net money in the long run (it has just been historically the norm). The main thing however, is that the typical fee is closer to 1.1% or so. They are grossly exaggerating what the typical investor would pay. Nonetheless, compounding returns forces you to think about these things. As I've stated in my other posts, you can get a Vanguard fund with 0.05% fees, or the typical SPY index ETF, which is currently at ~0.09%/year expense ratio. Focus on low-fee funds, and read the fine print on your 401k plans.

codemac 14y ago

future = principal * (1 + interest) ^ periods So some basic math to show how much a 2% yearly fee costs you: In[2]:= 100000 * (1 + 0.07)^50 Out[2]= 2.9457*10^6 In[3]:= 100000 * (1 + 0.05) ^50 Out[3]= 1.14674*10^6 In[4]:= Out[2] - Out[3] Out[4]= 1.79896*10^6 In[5]:= Out[4] / Out[2] Out[5]= 0.610707 So you lose 61.07% of your 401k balance to these yearly fees reducing your effective interest rate. The 100k example isn't accurate, it's just trying to give people a sense of how much they'd be losing.. However - this article doesn't really do the full benefit calculation of company matching, effective interest rates of other types of accounts, etc.