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klingel33

Mathmatical Question

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I am not a math guy so I need some help on this one. My current advisor (may be changing shorlty) told me AXA funds he estimates would be 1-1.5% a year more over a 30 year period than that of the funds Vanguard offers. Someone please take these two scenarios and spit me out the results

 

1) $25,000 with company A who charges .25% and the person adds 3k a year for 30 years and the average rate of return in 7.5% how much is this account after the 30 years?

 

2) $22,000 with company B who charges 2.5% in fees and the person adds 3k a year for 30 year and the average rate of return is 9% how much is the account after 30 years?

 

One more thing to take into consideration is scenario 1 is mutual funds and scenario 2 is a variable annuity. I have heard the two have different tax ramifications from the Feds if this is true when someone pulls these funds out 30 years from now what is the difference after the government gets at it.

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Guest Skeptical
I am not a math guy so I need some help on this one. My current advisor (may be changing shorlty) told me AXA funds he estimates would be 1-1.5% a year more over a 30 year period than that of the funds Vanguard offers. Someone please take these two scenarios and spit me out the results

 

1) $25,000 with company A who charges .25% and the person adds 3k a year for 30 years and the average rate of return in 7.5% how much is this account after the 30 years?

 

2) $22,000 with company B who charges 2.5% in fees and the person adds 3k a year for 30 year and the average rate of return is 9% how much is the account after 30 years?

 

One more thing to take into consideration is scenario 1 is mutual funds and scenario 2 is a variable annuity. I have heard the two have different tax ramifications from the Feds if this is true when someone pulls these funds out 30 years from now what is the difference after the government gets at it.

 

Klingel,

 

The math is pretty easy but take a moment to think about your two scenarios:

 

1) 7.5% + .25% expenses= GROSS return of 7.75%

 

2) 9.0% + 2.5% expenses= GROSS return of 11.5%

 

 

 

The second GROSS return is almost 50% higher than the first so which do you think'll win?

 

Cheers,

 

Jim

 

 

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Wouldn't the gross return be:???

 

1) 7.5-.25= 7.25

2) 9.0-2.5= 6.50

 

I am sure 1 is still going to win even though it starts with 3k less to begin with but I want to know by how much. My current situation calls for me to be roughly 3k less than that of what I put in to surrender charges and move my account over and I was told by an advisor to expect AXA to gross 1-1.5% more each year on average than that of the funds of Vanguard. Don't even know if this is accurate because I have yet to find anyone else online say this is true but then again I can't find anyone else who says its wrong either so I do just want to give him the benefit of the doubt and see what the difference is if what he says does indeed hold weight.

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My current situation calls for me to be roughly 3k less than that of what I put in to surrender charges and move my account over and I was told by an advisor to expect AXA to gross 1-1.5% more each year on average than that of the funds of Vanguard.

 

This is so far off that it does not merit any rebuttal. Just consider the source.

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There is no math needed here. The guy is either a flat out liar or can see the future, I think we know which is more likely. There is absolutely no way anyone can say with any certainty that one fund will beat another (technically not true when it comes to index funds and fees) and the probability that a high fee fund will beat its benchmark over a long period is very, very low. You should not hire this person as he is dishonest. Even if 30 years from now he is proven right - he was still dishonest as their is no evidence that AXA funds beat Vanguard funds now, in the past or that they will in the future.

 

If he'd like to demonstrate for us all how exactly he's going to do this, we'd love to hear it.

 

Now, had he said that the extra fees you are paying are too compensate him for his efforts and that the probability of beating the benchmarks is low, but was honest about it - at least you could tell him to leave you alone and know that he was honest.

 

No math needed in this situation.

 

ScottyD

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Here is a link to a google doc spreadsheet I created with the answers:

 

Mathematical Question

 

The one thing that was left out of the question was wether you wanted the information Gross or Net of Fees - so I ran both of them, both ways. Obviously the HC option Gross of fees wins because it has a higher return - but if you add in fees...

 

The best way to run such an equation is to assume that both accounts earn the same Gross return - say 8%, then assume the various fees. I'll add that to the mix as well.

 

ScottyD

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Guest Skeptical
Here is a link to a google doc spreadsheet I created with the answers:

 

Mathematical Question

 

The one thing that was left out of the question was wether you wanted the information Gross or Net of Fees - so I ran both of them, both ways. Obviously the HC option Gross of fees wins because it has a higher return - but if you add in fees...

 

The best way to run such an equation is to assume that both accounts earn the same Gross return - say 8%, then assume the various fees. I'll add that to the mix as well.

 

ScottyD

 

Klingel,

 

Scotty is on the right track here. The best example is the scenario with the same gross return, using expenses as the variable. What I find interesting is that in Scott's calculations:

 

  • Participant contributions = $115,000
  • Investment return = $248,710 (with HIGHER expenses of 2.5%)
  • Investment return = $490,669 (with LOWER expenses of .25%)
An almost 100% improvement!

 

Best of luck!

 

Jim

 

 

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Scotty is on the right track here. The best example is the scenario with the same gross return, using expenses as the variable. What I find interesting is that in Scott's calculations:

  • Participant contributions = $115,000
  • Investment return = $248,710 (with HIGHER expenses of 2.5%)
  • Investment return = $490,669 (with LOWER expenses of .25%)
An almost 100% improvement!

 

But Jim, you are forgetting that the AXA salesman assured his client that AXA will outperform Vanguard by 1-1.5%! You have to factor that in, don't you?

 

:)

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