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Thread: Comparison of interest on retirement account

  1. #1
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    Comparison of interest on retirement account

    I have been struggling trying to figure out how to plot these on a graphing calculator. I've been out of school for a while and can't even remember for sure which class this was covered in, but I believe it was way back in pre-calculus.
    In comparing IRA options, I'm looking at one with a higher interest rate (5.6%) that is taken out of each contribution as a one-time fee vs. a lower rate (.5%) taken as a compounding fee, ie charged repeatedly on the increasing balance. How do I plot the cost over time of each simultaneously to determine the point at which the lower interest rate costs more?
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  2. #2
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    Re: Comparison of interest on retirement account

    Quote Originally Posted by Babyshark View Post
    In comparing IRA options, I'm looking at one with a higher interest rate (5.6%)
    that is taken out of each contribution as a one-time fee vs. a lower rate (.5%)
    taken as a compounding fee, ie charged repeatedly on the increasing balance.

    How do I plot the cost over time of each simultaneously to determine the point
    at which the lower interest rate costs more?
    That's sure confusing, buddy.
    Do you mean 5.6% annual cpd monthly, thus 5.6/12 = .467% monthly?
    What does "lower rate .5% mean? .5% cpd monthly, which is 6% APR cpd. monthly?

    Can you supply an example? Thanks.
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  3. #3
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    Re: Comparison of interest on retirement account

    I know this is a math forum, but I have to ask about these choices, both of which are bad. You should really be considering an investment for your IRA that charges neither an upfront fee (i.e. load) nor an ongoing account maintenance fee. Both of the options you describe are bad investments. Having said that ... to answer your question with any degree of certainty requires first estimating what the expected rate of return is for both investments, the anticipated term of the investment, and also requires an estimate of the rate of inflation going forward. You can then do a discounted cash flow calculation to determine which alternative has the better net present value. And by the way - this material is typically not taught in math class, but rather is covered in an introductory class in business school.
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    Re: Comparison of interest on retirement account

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