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Finance & Business · pattern A, Numeric fields

Investment growth, before and after inflation.

Enter an initial investment, rate and term for the nominal value, the real value after inflation, and the effect of fees on the outcome.

Inputs

The formula used

FV = PV(1 + r)ⁿ, with real return ≈ (1 + r) ÷ (1 + i) − 1

Fees are deducted from the annual return before compounding, which is why a 1% fee costs far more than 1% of the final value.

Nominal value

38,696.84

Value after fees
32,071.35
Cost of the fees
6,625.49
Real value in today's money
23,615.56
Real value after fees
19,572.22
Real annual return after fees
3.415 %
Total multiple, nominal
3.870 ×

A fixed annual return is a modelling convenience, not a forecast. Real returns vary year to year and the order in which they arrive changes outcomes for anyone contributing or withdrawing.

A 1% fee is not a 1% cost.

Over twenty years at 7%, a 1% annual fee removes close to a fifth of the final value, because the fee is charged every year on the whole balance and the lost growth compounds too. This is the single largest controllable variable in long-term investing, and it is why fee disclosure is regulated so heavily.

Questions about investment

Why does inflation matter so much over long periods?
Because it compounds too. At 2.5% a year, money loses about 40% of its purchasing power over twenty years.
Is 7% a reasonable assumption?
It is close to long-run average equity returns before inflation and fees, and it is an average over decades with severe variation inside it. Do not treat it as a plan.
What is sequence risk?
The order of returns matters when you are adding or withdrawing money. A poor first decade hurts a retiree far more than a poor last decade.

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