3) Calculate two individuals total amount of retirement assets after 30 years of investing using the following two examples to display and articulate the effect of compounded fees on two different individuals' retirement accounts with the exact same mutual funds. The two mutual funds have the same before expense rate of return, but one mutual fund charges a higher expense ratio than the other. Describe what effect fees have on the two different individuals' retirement assets: (a) Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return: (8.15%-.15%=8%), Expense Ratio of Mutual Fund:.15%, Periods: 30 years (b) Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return: (8.15%-.65%=7.50%) (It is lower than example (a) due to the increased expense ratio), Expense Ratio of Mutual Fund:.65%, Periods: 30 years

Question

Jaida Fuentes

Business

5 July, 12:09

3) Calculate two individuals total amount of retirement assets after 30 years of investing using the following two examples to display and articulate the effect of compounded fees on two different individuals' retirement accounts with the exact same mutual funds. The two mutual funds have the same before expense rate of return, but one mutual fund charges a higher expense ratio than the other. Describe what effect fees have on the two different individuals' retirement assets: (a) Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return: (8.15%-.15%=8%), Expense Ratio of Mutual Fund:.15%, Periods: 30 years (b) Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return: (8.15%-.65%=7.50%) (It is lower than example (a) due to the increased expense ratio), Expense Ratio of Mutual Fund:.65%, Periods: 30 years

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Answers (1)

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Heaven Howard · Answer 1

Answer: The answer is given below

Explanation:

Based on the explanations and the figures provided on the question, the solution goes thus:

a. Assuming that the inflation rate is also be the rate of growth in savings amount i. e the income of an individual will grow minimum by inflation amount.

r = 8% = 8/100 = 0.08

g = 2% = 2/100 = 0.02

Future value = 15000[ (.08) ^30 - (1.02) ^30) ]/0.06

Fv = 2062250

b) similarly for b as expense ratio of mutual fund is said to be higher, we will get:

r=7.5% = 7.5/100 = 0.075

g = 2% = 2/100 = 0.02

fv = 15000[ (1.075) ^30 - (1.02) ^30) ]/0.055 Future value = 1892454

we can therefore deduce that due to the increase in expense ratio assets in the 2nd scenario, the value are less by:

= 2062250 - 1892454

= 169,796.