The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: vickx038 on August 04, 2016, 12:43:52 PM
-
I was calculating expense ratios on my portfolio and happened to run myself into a wall on the math... I'm hoping someone can straighten me out, so I'll use a simple example.
Assume a $1000 portfolio invested in VTSAX, which charges a 0.05% expense ratio. If I wanted to calculate the total paid in expenses after one year, I would calculate $1000*0.0005 (decimal conversion of 0.05%) = $0.50
When I use Vanguard's tool (here: https://personal.vanguard.com/us/insights/retirement/cost-affect-retirement-spending-tool) I get a return of $959 on a $1000 portfolio (see attachment for the #s inputted).
I can't figure out why the calculator is so far off from my calculation, perhaps I'm not thinking about this correctly?
-
Maybe they just round it to the nearest dollar to keep the math simple? Sure big picture it'd be 18 vice 9, but $1 is easier than 50 cents...?
-
I think the difference can be explained by this note on Vanguard's calculator:
"This illustration assumes a fixed rate of return, and that you will take withdrawals adjusted for 4% inflation that will liquidate your entire portfolio over the time horizon you specify above."
So it's subtracting 4% ($40 in this case) in addition to the expense ratio ($0.50 or $10).
-
RWD nailed it - appears the calculator assumes that you're spending at the end of the year, so the 4% inflation adjustment is included, even for a 1-year retirement.