Author Topic: Expense ratio math  (Read 1581 times)

vickx038

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Expense ratio math
« 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?

Fudge102

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Re: Expense ratio math
« Reply #1 on: August 04, 2016, 01:03:27 PM »
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...?

RWD

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Re: Expense ratio math
« Reply #2 on: August 04, 2016, 01:14:47 PM »
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).

dandarc

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Re: Expense ratio math
« Reply #3 on: August 04, 2016, 01:20:23 PM »
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.