Calculating required retirement fund

caveat_emptor

dunstonh wrote:

They are the total charges.
The effect of charges over time is not a charge.

Is this IFA speak? If a charge isn't a charge , what is it?

dunstonh

caveat_emptor wrote:

Is this IFA speak? If a charge isn't a charge , what is it?

Ok, lets look at this again.

A painter charges you £1000 for painting your house. You pay himl £1000. After 10 years did you pay £1000 or did you pay £1200?

Ed would say you paid £1200 and not £1000.

The effect of charges, if not taken and then invested at 7% compound is not a charge. Its a hypothetical calculation that is totally misleading and isnt required in any other retail/sales industry.

Does it matter what figure that £1000 would have grown to 10 years down the road had you not paid him? Whatever it would have grown to, you still only paid £1000.

EdInvestor

The effect of the charges really describes much the same thing as compound interest but in reverse.With compound interest you get interest on the interest, so your actual returns end up being higher than just the flat annual interest rate over a period of years.

With charges, because they reduce the amount of your money being invested every time they are deducted, you make less than you would expect to by just looking at the flat annual charge.

It's true that this phenomenon can't be described entirely accurately as a charge - but it's undoubtedly relevant to your returns, and to leave it out entirely would be quite misleading. IMHO the "effect" of the charges is a reasonably way of putting it.

cheerfulcat

The effect of charges, if not taken and then invested at 7% compound is not a charge. Its a hypothetical calculation that is totally misleading and isnt required in any other retail/sales industry.

No,it is an essential ( and standard ) calculation in investing; it is called opportunity cost and any investor would be ill-advised to ignore it. It may not be a charge but it has the effect of reducing investment returns and must be considered. It is not required to be mentioned in any other industry because in most it's not really applicable.

BTW, if your hypothetical painter came back every year and charged you another £100 for the job he did ten years ago it would add rather a lot to the original cost, would it not?

Pal

BTW, if your hypothetical painter came back every year and charged you another £100 for the job he did ten years ago it would add rather a lot to the original cost, would it not?

BTW, you analogy is flawed. If you paid the painter to initially paint your house and then continue painting it year after year, and they charged you another £100 a year, then yes you are paying more, but you are getting more for it....

So the moral of the story is that if you are investing in anything (whether through an ISA, pension (including a SIPP), unit trust, REIT etc) you need to knock the annual percentage that you expect to pay in charges off the annual amount that you expect your investment to grow at before you put the figures into a simplistic calculator like that linked to by other posters.

Seems entirely sensible to me.

This thread is now off-topic, the original question having been answered. Anyone who wants to discuss investment charges can do so in a seperate thread, although I suggest that it is on the investments board as it is just as applicable over there (pensions being a subset of investments after all).

Debate over. Well done everyone. Thank you for coming. Your host for the evening....